BILLS DIGEST NO. 22, 2015–16              11 September 2015

Tax and Superannuation Laws Amendment (2015 Measures No. 4) Bill 2015

Leslie Nielson and Kai Swoboda
Economics Section

Date introduced: 20 August 2015

House:  House of Representatives

Portfolio: Treasury

Commencement:  Schedules 1 and 2 commence on Royal Assent. Schedule 3 item 1 commences on 31 December 2015 and item 2 commences on 31 December 2016.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website.

Purpose and structure of the Bill

The purpose of the Bill is to amend both tax and superannuation legislation, to:

•       improving the integrity of the scrip for scrip roll-over relief rules in the Income Tax Assessment Act 1997 (ITAA 1997) following a 2009 decision of the Federal Court (Schedule 1)

•       end the personal income tax exemption of wages, under the provisions Income Tax Assessment Act 1936 (ITAA 1936), earned by some Australian government employees who work overseas for more than 91 days delivering official development assistance (Schedule 2) and

•       increase the superannuation account balance below which small lost superannuation accounts will be required to be transferred to the Commissioner of Taxation under the provision of the Superannuation (Unclaimed Money and Lost Members) Act 1999 (Lost Members Act) (Schedule 3).

Background

This is an omnibus Bill of unrelated tax and superannuation measures with separate backgrounds to each measure.

Scrip for Scrip Roll-over

What is a scrip for scrip roll-over?

It is normal practice for a company, acquiring or merging with another company, to offer its own shares as payment for the acquired company. Normally such an event, which in effect amounts to disposal of shares, would create a capital gains tax (CGT) liability. However, in certain circumstances the entity may be able to defer paying CGT until a later CGT event. This is where a scrip for scrip roll-over becomes a possibility. A scrip for scrip roll-over is the deferral of that liability where:

•       the owner of the asset chooses to take advantage of these provisions

•       the owner acquired its interest in the company being sold on or after 20 September 1985[1]

•       the exchange of shares which results in a capital gain occurs on or after 10 December 1999

•       the exchange of shares results in the purchasing company gaining at least 80 percent of the equity of the target company or trust

•       holders of voting interests in the acquired entity can participate in the merger or takeover on substantially the same terms and

•       the purchase bid does not contravene key provisions in Chapter 6 of the Corporations Act 2001 or

•       if the target entity is a company—it includes a scheme of arrangement approved by a court under Part 5.1 of the Corporations Act.[2]

Similar provisions apply to allow the deferral of CGT, when one trust acquires units in another trust. However, scrip for scrip roll-over CGT relief is not available if a share is exchanged for a unit or other interest in a fixed trust, or if a unit or other interest in a fixed trust is exchanged for a share.[3] Generally, foreign residents for tax purposes cannot take advantage of these provisions.[4]

The AXA case

The origin of the proposed changes in Schedule 1 arise from the decision of the Federal Court in AXA Asia Pacific Holdings Ltd v Commissioner of Taxation in 2009 (AXA). [5] Briefly, this case examined whether two parties were dealing with one another on an ‘arms-length’ basis and whether their arrangements invoked the general anti-avoidance provisions of Part IVA of the ITAA 1936. Neither issue is being addressed by the proposed amendments in Schedule 1, but the decision in this case left open opportunities to unduly avoid capital gains tax.

The revealed mischief

The proposed amendments involve Subdivision 124-M of the ITAA 1997. This Subdivision contains provisions to deny scrip for scrip roll-over relief in circumstances where the same person or company group has influence over both the selling company and the purchasing company.[6] According to the Explanatory Memorandum:

Subdivision 124-M treated the AXA arrangement as a genuine takeover involving a substantial change in ownership rather than as a corporate restructure. As a result, AXA was able to obtain the benefit of a CGT cost base uplift when eventually disposing of one of its subsidiaries. [7]

Establishing the ‘cost base’ of an asset:

…is a fundamental step in determining whether a taxpayer has derived a capital gain or incurred a capital loss following the disposal of an asset. In its simplest form a taxable gain is calculated as the difference between the amount received upon disposal (‘disposal consideration’) and the cost of the asset (‘cost base’), indexed for inflation.[8]

A restructure of an entity that involves a sale of the business into a different entity, such as a sale of a business from a trust to a company, will inevitably result in an uplift to the cost base to the acquiring entity for that asset. For example, Possum Family Trust conducts a successful retail business with goodwill worth around $1.5 million but due to problems with distributions to a corporate beneficiary it decides to dispose of the business to a new company which it establishes. The trust vendor finances the purchase price. Thus the newly created company now has goodwill and a cost base of $1.5 million. The revenue earned by the company can be used for the loan payable to the trust. When the company sells the business it can use a cost base of $1.5 million. However because the parties to the transaction are not at arms-length, an independent valuation of the business asset should be undertaken.[9]

The Explanatory Memorandum notes:

Inappropriate [CGT] deferral could otherwise occur where an acquiring company receives shares in the original company (that is the company being purchased) in exchange for shares in itself and on–sells the original company.[10]

The Explanatory Memorandum notes that the AXA case demonstrates that these integrity provisions can be circumvented. This can occur by ‘temporarily suppressing the ownership rights of a party in a scrip for scrip exchange through the use of [financial] instruments including convertible shares, options and rights.’[11] Later these transactions can be reversed so that a transfer of ownership is accomplished without raising a CGT liability that might otherwise occur. The proposed amendments seek to alter these integrity provisions so that this inappropriate tax relief would not occur.

Policy development

This measure was first announced as part of the 2012–13 Budget.[12] Treasury released a consultation paper on this matter on 13 July 2012 and received one submission in response.[13] The current Government announced that it was proceeding with this measure in a press release of 14 December 2013.[14] On 29 April 2015 Treasury released an Exposure Draft of legislation containing the proposed provisions. Submissions closed on 20 May 2015.[15] Treasury has not released submissions received in response to this Exposure Draft.

Date from which proposed changes apply

Item 15 of Schedule 1 applies these particular changes from 8 May 2012 at 7:30 pm in the Australian Capital Territory. It is thus retrospective in its application. This is not unusual for tax legislation and the original announcement in the 2012–13 Budget applied the then proposed change from that time and date.

Removing the exemption of income earned from overseas employment

A double exemption from personal income tax?

Since 1964, under Article 34 of the Vienna Convention on Diplomatic Relations, a ‘diplomatic agent’ is exempt from personal income tax of the host country on income sourced from that agent’s home country.[16] For the purposes of this Convention a diplomatic agent is the head of the mission or a member of the diplomatic staff of the mission.[17] Thus Australian government staff, attached to an Australian diplomatic mission, are exempt from the host country personal income tax where that host country has signed this Convention (and the overwhelming majority of host countries have now signed).

Under section 23AG of the ITAA 1936, the foreign earnings of Australian residents for tax purposes, who have been engaged in foreign service for a continuous period of not less than 91 days, are also exempt from Australian personal income tax.[18] This applies to periods of foreign service arising from:

•       the delivery of Australian official development assistance by the person’s employer

•       the activities of the person’s employer in operating a public fund that is a deductable gift recipient operating internationally

•       the person’s employment by a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident; or is a prescribed institution that has a physical presence in Australia but which incurs its expenditure and pursues its objectives principally outside Australia[19] or

•       the person’s deployment outside Australia as a member of a disciplined force (armed forces or police).[20]

Therefore, those persons attached to Australian diplomatic missions, who are Australian residents for taxation purposes, meeting the requirements of section 23AG of the ITAA 1936, engaged in foreign services for not less than 91 days are exempt from both Australian and host country personal income tax regimes on their foreign income.

Those Australian residents engaged in foreign services, that do not meet the requirements of section 23AG of the ITAA 1936, are subject to Australian personal income tax; for example ordinary Australian diplomatic staff on foreign postings.

The Explanatory Memorandum notes that this exemption under section 23AG was originally provided to avoid double taxation of those engaged in government service.[21]

Statistical background

The overall value of tax exempt foreign employment income has been declining since the 2009–10 tax year (Table 1).

Table 1: Total Value of Exempt Foreign Employment Income

Year

Value ($m)

2009–10

425.1

2010–11

362.4

2011–12

323.6

2012–13

293.7

Source: ATO, Taxation statistics 2012–13, Individuals - Table 1: Selected items for income years 1978–79 to 2012–13, ATO, accessed 25 August 2015.

The number of persons claiming this exempt income has declined over the same period from 8,155 in 2009–10 to 4,730 in 2012–13 (table 2). Interestingly, the average size of the claimant’s exempt income from this source has risen over the same period.

Table 2: Total Value of Exempt Foreign Employment Income

Year

Average value ($)

2009–10

52,124

2010–11

58,785

2011–12

59,589

2012–13

62,093

Source: ATO, Taxation statistics 2012–13, Individuals - Table 1: Selected items for income years 1978–79 to 2012–13, ATO, accessed 25 August 2015.

Lost member small account threshold

As individuals move between jobs it is possible that superannuation payments made on their behalf are paid to different funds. Sometimes this is a deliberate choice made by the individual or is the result of restrictions on moving balances between funds (such as for certain defined benefit schemes). If an individual does not make a choice about their superannuation fund upon commencing employment, it is likely that they will be a member of multiple funds.

The holding of multiple superannuation accounts may disadvantage individuals through the imposition of fixed administration fees. Multiple accounts can also impose additional costs on the superannuation system. However, it is important not to assume that each individual should only have a single account. Multiple accounts may be an active choice that a member makes to obtain certain insurance benefits, to facilitate investment choice or as a transition to retirement arrangement.

Transfer of certain lost accounts to the Commissioner of Taxation

Certain ‘lost’ accounts are required to be identified and transferred biannually from superannuation funds and retirement savings account providers to the Commissioner of Taxation.[22]

While the identification of lost superannuation has been part of superannuation industry arrangements since 1996, requirements for the transfer of these funds to the Commissioner of Taxation first applied from 1 July 2010, after being announced in the 2009–10 Budget.[23] Prior to this, these funds remained with the relevant superannuation fund or were transferred to eligible roll-over funds. At that time, the transfer to the Commissioner of Taxation of these funds was expected to increase net revenue by almost $230 million over the period 2010–11 to 2012–13.[24]

At the time, the Coalition supported the transfer of these funds to the Commissioner of Taxation, noting that this was ‘basically a housekeeping measure which requires superannuation funds to transfer lost member’s superannuation to the Australian Taxation Office’.[25]

The justification for the transfer of such funds—which was already in place for unclaimed bank account and life insurance fund moneys—was that it would improve the efficiency of the superannuation system overall by removing the need for superannuation funds to administer or apply member protection to small accounts that are transferred and improve the equity for other members of the fund that were cross-subsidising the member protection arrangements.[26]

The requirements to be a ‘lost member’ are set out in the Retirement Savings Accounts Regulations 1997 and Superannuation Industry (Supervision) Regulations 1994. These require the account holder to be ‘uncontactable’ or ‘inactive’:

•       the account holder is ‘uncontactable’ if:

–      the provider has never had an address for the account holder or

–      at least one written communication has been sent to the account holder’s last known address and has been returned unclaimed

and the provider has not received a contribution or roll-over in respect of the account holder within the last 12 months

•       the account holder is ‘inactive’ if the account has been held for more than two years and the provider has not received a contribution or roll-over in respect of the account within the last five years.[27]

The regulations provide for account holders to be permanently excluded from being ‘lost’ if they have indicated by some positive act or another contact that they wish to continue with the provider.[28]

There are two strands to a superannuation account being classified as a ‘lost member account’ under the Superannuation (Unclaimed Money and Lost Members) Act 1999:

•       the first relates to ‘small accounts’, which are taken to be the accounts of lost members (as defined by the Regulations above) with an account balance that is less than the specified threshold in paragraph 24B(1)(b) of the Act—currently $2,000

•       the second relates to ‘inactive accounts of unidentifiable members’, which are taken to be the accounts of lost members (as defined by the Regulations above) where:

–      the superannuation provider has not received an amount in respect of the member within the last 12 months and

–      the superannuation provider is satisfied that it will never be possible for the provider, having regard to the information reasonably available to the provider, to pay an amount to the member.[29]

Schedule 3 of this Bill proposes to change the account balance threshold relating to ‘small accounts’ from $2,000 to $4,000 from 31 December 2015 and then to $6,000 from 31 December 2016.

Policy development

When the requirements relating to the payment of small accounts to the Commissioner of Taxation were first established in July 2010, a threshold of $200 applied.[30] The choice of a $200 threshold appears to be related to the threshold that applied—and currently still applies—to the maximum account balance that can be withdrawn under the preservation rules.[31] The Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 noted:

Accounts of less than $200 for lost members who are subsequently found can be cashed tax free from the superannuation system. However, claiming these accounts can be a cumbersome and time consuming process. Many superannuation fund members therefore do not make the effort to claim these accounts.[32]

The Gillard Government increased the threshold from $200 to $2,000 in late 2012 (to be applied from 30 December 2012) as part of a broader package of measures relating to unclaimed and lost money in banking, life insurance and superannuation. Also included as part of these changes was a reduction in the period of inactivity for the accounts of unidentifiable members the before funds are transferred to the Commissioner of Taxation from five years to 12 months.[33]

In April 2013, the Gillard Government announced (as part of a broader superannuation package), that it would further increase the account balance threshold to $2,500 from 31 December 2015, and to $3,000 from 31 December 2016.[34] The financial impact of this policy decision was subsequently included in the forward estimates in the 2013–14 Budget.[35]

On 7 June 2013, the Gillard Government released a discussion paper following its decisions in late 2012 and early 2013 to increase the threshold below which lost superannuation accounts are transferred to the Commissioner of Taxation. The discussion paper set out current initiatives taken to reunite members with their lost superannuation accounts and sought responses on further changes to both reduce the number of lost and unnecessary accounts and prevent the proliferation of these accounts into the future.[36]

In August 2013, the Rudd Government announced that the threshold for small lost accounts would be increased from $2,000 to $4,000 from 31 December 2015, and then to $6,000 from 31 December 2016.[37] At the time, the shadow assistant treasurer stated that the measure was a ‘cash grab’, noting:

These latest cash grabs targeting superannuation come on top of almost $9 billion in increased taxes and charges on superannuation in Labor’s first six budgets … This government cannot be trusted to keep their hands out of the superannuation accounts and the bank accounts of ordinary Australians. Australians simply can’t afford three more years of Labor’s reckless spending and cash grabs.[38]

Following the election, the Coalition Government announced on 6 November 2013 (as part of a broader announcement on outstanding tax and superannuation measures) that it would proceed with implementing the increase in thresholds as announced by the former Government from $2,000 to $4,000 from 31 December 2015, and then to $6,000 from 31 December 2016.[39]

On 16 December 2013, the Treasury released draft legislation relating to the proposal, with submissions due by 3 February 2014.[40]

Committee consideration

The most recent report of the Senate Selection of Bills Committee mentions this particular Bill, but has deferred considering it until its next meeting.[41]

At the time of writing no other parliamentary committee has undertaken to examine this Bill.

Policy position of non-government parties/independents

At the time of writing the ALP, minor parties and independent Members or Senators have not expressed a view on the changes in this Bill. However, the policy development process and previous legislative history may suggest the ALP’s position on the current proposals as discussed below.

Scrip for Scrip roll-over

As noted above, the then ALP Government announced this particular measure in the 2012–13 Budget, so the current ALP opposition may support these particular measures.

Removing the exemption of income earned from overseas employment

In May 2009, the Rudd Government introduced the Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 into Parliament.[42] Item 1 of Schedule 1 of that Bill specifically provided for the foreign income of those delivering official development assistance, where they were doing so overseas for not less than 91 days, to be exempt from Australian personal income tax. This Bill received Royal Assent on 29 June 2009. This may indicate that the current ALP opposition may oppose this particular measure.

Lost member small account threshold

At the time of writing, the ALP has not publicly commented on whether it supports Schedule 3 of the Bill relating to increasing the lost member small account threshold. However, given the measure implements a policy announced by the Rudd Government in August 2013, it could be expected that the ALP will support this part of the Bill.

Position of major interest groups

As at the time of writing there has been little comment from major interest groups on the measures included in Schedules 1 and 2 of the Bill.

However, various superannuation industry groups have expressed views about the measure proposed in Schedule 3 to increase the lost member small account threshold. When the proposed increase in the threshold to $4,000 from 31 December 2015 and $6,000 from 31 December 2016 was first announced in August 2013, the Financial Services Council (FSC) opposed the measure, with the FSC chief executive officer noting that ‘[g]overnments should be consolidating peoples’ [sic] superannuation, not putting it into consolidated revenue’.[43]

Several superannuation industry groups commented on the Gillard Government’s June 2013 discussion paper but there was no specific comment on the proposed threshold changes.

•       The FSC did not did not specifically address the threshold changes but instead argued for policy stability to implement recent changes:

[U]pcoming initiatives to reunite individuals with their lost superannuation should be given sufficient opportunity to have a measure impact on the pool of lost money held by the ATO and superannuation funds.

The FSC also notes that superannuation funds are currently subject to significant and costly reforms that have severely diminished the capacity to consider or implement new initiatives to reunite members with lost superannuation monies. The FSC would oppose policies that require additional compliance or reporting by funds.[44]

•       The need for policy stability was also supported by the Association of Superannuation Funds, which noted that ‘the current proposed suite of reforms should be implemented, allowed to settle in and then their effectiveness reviewed prior to any further changes being contemplated or implemented’.[45]

•       The Australian Institute of Superannuation Trustees considered that a range of additional strategies should be considered including awareness campaigns of current tools to enable people to locate lost superannuation as well as a tax file number declaration ‘app’ which could send the employee’s essential information to their new employer without their having to complete hard copy forms.[46]

Financial implications

The Explanatory Memorandum notes the financial implications associated with each schedule of the Bill:

•       scrip for Scrip roll-over (Schedule 1)—‘an unquantifiable but potentially large revenue protection associated with these amendments’

•       removing the tax exemption of income earned from overseas employment (Schedule 2)—a saving of about $6.7 million over the period 2015–16 to 2018–19 and

•       small lost member accounts threshold (Schedule 3)—the total estimated net impact from this measure is a revenue gain of $483.9 million over the period between 2014–15 and 2018–19.[47] This total includes funding for the Australian Taxation Office of $4.6 million to administer the changes as announced in the 2013–14 Budget and an amount relating to interest payments on the additional transferred funds.[48]

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 all three schedules of the Bill are compatible.[49]

The Parliamentary Joint Committee on Human Rights considers that the Bill does not raise human rights concerns.[50]

Key issues and provisions

Schedule 1—Scrip for Scrip Rollover

The proposed methods for dealing with the potential tax loopholes in Subdivision 124M of the ITAA 1997 are:

•       to include any interests involved in a scrip for scrip rollover that are convertible shares, options, rights or similar interests in the calculations of equity interests involved in a scrip for scrip roll-over between the parties in these arrangements

•       where debt is involved the proposed solution is to remove the debt sheltering opportunity arising from the current disregarding of a capital gain arising on the settlement of a debt owed, as part of a scrip for scrip acquisition, by an acquiring company to its ultimate holding company and

•       where trusts are involved in a scrip for scrip roll-over, the proposed solution is to extend the operation of the new provisions so that they apply to trusts as well as to companies.

The following shows how the proposed changes achieve the above ends.

Equity provisions

Item 4 of Schedule 1 amends section 127-780 of the ITAA 1997 to add a new condition for a scrip for scrip roll-over to apply.[51] This new condition is that where a purchasing entity is part of a wholly owned group, no member of that group may issue equity (other than the necessary replacement equity), or owe new debt:

•       to an entity that is not a member of that wholly owned group and

•       in relation to the issue of a replacement interest as part of that purchasing arrangement. This prevents other members of a wholly owned group from issuing unnecessary debt or equity to third parties that can be used to avoid CGT obligations.

Under section 124-780 only an original interest holder can obtain a roll-over of share interests. Under section 124-781 only an original interest holder can obtain a roll-over of trust interests. The transfer of a cost base for the purposes of a scrip for scrip roll-over can, under section 124-782, only be applied to the holder of an ‘original interest’ in an entity who is either a significant stake holder or a common stake holder. This makes the definitions of the terms ‘significant stake’ and ‘common stake’ critical for the functioning of the scrip for scrip roll-over provisions. Both terms are defined at section 124-783 and apply where the entities involved are not ‘widely-held’—that is they have less than 300 shareholders (if they are a company) or beneficiaries (if they are a trust).[52]

An entity has a ‘significant stake’ in a company if it and its associates own shares with 30 per cent or more of the voting rights, or the right to receive 30 per cent or more of any dividends or capital distributions (subsection 124-783(6)).

An entity has, or two or more entities have, a ‘common stake’ if they and their associates own shares with 80 per cent or more of the voting rights, or the right to receive 80 per cent or more of any dividends or capital distributions (subsection 124-783(9)).

Equivalent tests are applied to trusts (subsections 124-783(7) and (10)).

Item 8 repeals section 124-784 and inserts proposed sections 124-783A and 124-784 into the ITAA 1997. The first proposed section provides:

•       an entity has a ‘significant stake’ in another entity if that first entity has one or more ‘stake options’ in the second entity and if it exercised those options it would have a ‘significant stake’ according to the definition in section 124-783 (that is, it would have at least 30 per cent of the voting rights or entitlements to dividends or capital distributions)

•       an entity, or two or more entities have a ‘common stake’ in the original entity or the replacement entity if they have one or more ‘stake options’ in that entity and if they exercised those options they would have a ‘common stake’ according to the definition in section 124-783 (that is, they would have at least 80 per cent of the voting rights or entitlements to dividends or capital distributions).

The importance of these proposed provisions lies in the definition of the various terms used. Item 14 alters subsection 955-1(1) of the ITAA 1997 to insert new definitions of the terms ‘stake interest’ and ‘stake option’ into the Dictionary to the Act. The substance of the definitions is set out at proposed subsection 124-783A(3). A ‘stake option’ an entity has in another entity is a right to acquire the following ‘stake interests’:

•       voting rights in a company

•       right to receive any part of any dividends

•       right to receive any part of any capital distributions and

•       if the other entity is a trust - the right to receive any part of any distribution to beneficiaries of the trust income or capital distributions of that trust.

The use of the term ‘rights’ to acquire these stake interests goes beyond acquiring shares in a company or units in a trust. Under the proposed changes an original interest holder is one who has either a significant stake or a common stake in the company being acquired. The definition of their interest is expanded to include not only shares or units in a trust they may hold, but also includes any of the above rights they may have, irrespective of the financial instrument used to provide those rights. The Explanatory Memorandum adds that these rights are assessed as if they had been realised.[53] These proposed changes apply to an arrangement where the relevant interest could be realised before the end of a five year period after that arrangement was completed.

The Explanatory Memorandum provides the following example:

An original interest holder owns all of the ordinary shares and voting rights in a company (the target company). The original interest holder enters into a scrip for scrip arrangement with an acquiring entity. Under the arrangement, the acquiring entity acquires all of the shares in the target company. In return, the acquiring entity issues convertible preference shares in itself to the original interest holder.

The replacement shares currently carry 15 per cent of the voting rights in the acquiring entity. The shares are capable of converting after 12 months. Following the conversion of the shares, the shares will carry 40 per cent of the voting rights in the acquiring entity.

Under the current law, the original interest holder does not have a significant stake (30 per cent) in the acquiring entity after the arrangement. Under the amendments, the original interest holder is treated as having converted its shares and it will have a significant stake.[54]

Debt provisions

As noted above, item 4 restricts the issuance of debt in relation to a scrip for scrip roll-over. In order for an arrangement to qualify for roll-over relief, all debt and equity interests issued in relation to a scrip for scrip roll-over arrangement would, under the proposed amendments, be required to be contained within members of a wholly owned group. This is important for the functioning of the proposed rules governing the apportionment of debt and equity interests issued as part of such arrangements (see further comments on items 8 and 11 below).

Also as noted above, item 8 repeals section 124-784 and replaces it with new text. Existing subsection 124-784(3) of the ITAA 1997 states:

Any capital gain of the ultimate holding company from the repayment of new debt owed by an acquiring entity under the arrangement is disregarded to the extent that it relates to the difference between the part of the cost base transferred or allocated under section 124-782 and the market value of the debt just after the arrangement was completed.

Where there is no difference between the value of the debt repaid and the cost base transferred, CGT is not payable on the repayment of that debt. The repeal of existing section 124-784 removes this potential problem. Item 11 repeals section 124-784C and replaces it with new text and achieves a similar outcome. Thus debt owed within a wholly owned group will, under the proposed changes, be unable to be used to eliminate a CGT liability.

A second effect of the repeal of sections 124-784 and 124-784C is to ensure that the debt and equity interests issued as part of the arrangements by the purchasing company are allocated across all members of a wholly owned group, and not just to the parent company of that group, as is currently the case (see comments on item 4 above).

Trust provisions

In addition to the inclusion of trust interests in the provisions already mentioned, the proposed amendments will assess trusts in the same way as companies for the purposes of the scrip for scrip roll-over provisions.

The Explanatory Memorandum notes that the amendments in items 5 and 7, inserting the term ‘replacement entity’ into subparagraphs 124-781(1)(a)(i) and(ii) and subsections 124-783(9) and (10) ensure that trusts are assessed in the same way as companies for the purposes of the scrip for scrip roll-over rules. However, there is no separate definition of the term ‘replacement entity’ in either the Explanatory Memorandum or the definitions subsection of the ITAA 1997 (subsection 995-1). The Explanatory Memorandum argues that the placement of this term in these parts of subdivision 124M standardises the use of this term across companies and trusts.[55] The definition of the term ‘entity’ at section 960-100 ITAA 1997 includes trusts in its ambit.

Section 124-784A of the ITAA 1997 sets out the rules for determining when an arrangement is regarded as a restructure. The section currently applies where (amongst other requirements) roll-over relief has been or will be obtained under section 124-780. As set out above, section 124-780 relates to a roll-over of share interests. Item 9 amends section 124-784A so that it will also refer to section 124-781, which relates to a roll-over of trust interests. This effectively ensures that restructuring of trusts is treated in the same way as the restructuring of companies for these purposes.

Another aspect of the test contained in section 124-784A for determining when an arrangement is regarded as a restructure, is a calculation that relies on the market value of shares (and rights to acquire those shares). Item 10 amends this calculation (which is in subsection 124-784A(2)) to include references to units in trusts and options and right to acquire those units. As with item 9, this amendment will treat restructuring of trusts in the same way as restructuring of companies.

Comment

These are preventative measures, and an undesirable tax practice forestalled means additional revenue kept in the government’s hands.

Schedule 2—Removing the exemption of income earned from overseas employment

As set out above, under section 23AG of the ITAA 1936, the foreign earnings of Australian residents for tax purposes, who have been engaged in specified foreign service for a continuous period of not less than 91 days, are also exempt from Australian personal income tax.[56] The particular types of foreign service covered by the exemption are set out in subsection 23AG(1AA). One of the specified types of service is ‘the delivery of Australian official development assistance by the person’s employer’ (paragraph 23AG(1AA)(a)). Item 1 of Schedule 2 amends paragraph 23AG(1AA)(a) of the ITAA 1936 so that it will provide that foreign earnings are exempt from Australian tax if they are directly attributable to:

(a) the delivery of Australian official development assistance by the person’s employer (except if that employer is an Australian government agency (within the meaning of the Income Tax Assessment Act 1997)).

To avoid situations where income is not subject to tax in either the foreign country or Australia, subsection 23AG(2) of the ITAA 1936 makes it clear that Australian personal income taxes will still apply where the income earnt overseas is tax free due to:

•       a law of the foreign country giving effect to a double tax agreement

•       a double tax agreement

•       provisions of a law of the foreign country under which income covered by any of the following categories is generally exempt from income tax:

–      income derived in the capacity of an employee

–      income from personal services or

–      similar income

•       a law of the foreign country corresponding to the International Organisations (Privileges and Immunities) Act 1963 or to the regulations under that Act or

•       an international agreement to which Australia is a party that deals with

–      diplomatic or consular privileges and immunities and

–      privileges and immunities in relation to persons connected with international organisations.

Thus, although the amendment only applies to Australian government employees, if an employee of another organisation providing official aid assistance, or assistance as part of a non-government program, should receive tax free income under a particular host country’s personal income tax rules, they are assessable under Australian personal income tax rules, as are other Australian tax residents otherwise receiving tax free income overseas.

Comment

This proposed change will put employees delivering official aid assistance, working out of Australian government missions overseas, on the same tax basis with other embassy staff, with whom they often closely work.

Schedule 3—Lost member small account threshold

As discussed above, certain superannuation an retirement savings accounts that are considered to be ‘lost’ to their holders are required to be transferred to the ATO on a biannual basis. Currently lost member accounts with a balance of less than $2,000 are required to be transferred. Item 1 of Schedule 3 amends paragraph 24B(1)(b) of the Superannuation (Unclaimed Money and Lost Members) Act 1999 to replace the value $2,000 with the value $4,000 with effect from 31 December 2015.[57] Item 2 amends the same paragraph with effect from 31 December 2016 to lift the value of the threshold to $6,000.

The key rationale for the transfer of lost superannuation to the ATO is that it better facilitates the consolidation of lost superannuation accounts by individuals and funds and, with the payment of interest at the rate of the consumer price index (CPI), it can protect the erosion of account balances through the imposition of fees.

The value of the threshold is important as it can affect whether an individual who is eventually reunited with their superannuation is better or worse off in having their small lost account transferred to the ATO.

•       On the one hand, accounts transferred to the ATO have no fees deducted and are to receive interest paid at the rate of the CPI, with this interest being tax-free.[58] However, any insurance cover provided by the account would likely be discontinued.

•       On the other hand, accounts retained by the fund may continue to provide insurance cover and earn interest at the relevant rate (less 15 per cent tax), less any relevant administration and investment fees.

Leaving the issue of insurance cover aside, in general the smaller the account balance, the more likely that accounts transferred to the ATO will be better preserved, as annual administration fees will likely offset the usually higher than CPI investment earnings. However, for larger account balances, the reverse is likely to be the case, as the annual fees offset a higher level of investment earnings.

In evidence to the Senate Economics Committee in late 2012 in relation to the changes to the threshold from $200 to $2,000, the Treasury noted:

On accounts up to $2,000—possibly beyond but certainly up to $2,000—we typically would expect that the fees and charges that are being taken out of that account would exceed the likely earnings for that account. An account up to an amount like $2,000, if it is an account that is not having contributions made to it, would typically be going backwards. Part of the rationale for the measure is to protect small accounts, in particular small, inactive accounts, from that erosion and to instead put them with the tax office and with the CPI interest.[59]

In early 2014, the Association of Superannuation Funds of Australia considered that the breakeven point is also likely to be around $2,000, noting:

While the aim of protecting account balances may be appropriate for account balances under $2,000, there is far less certainty about the need for such protection of the members’ accounts under the proposed higher thresholds.

While acknowledging that interest will be paid at the CPI rate on amounts held by the ATO, for a member invested in a fund’s default investment option, based on long term average investment returns, it is probable that for account balances greater than $2,000 the member would be significantly better off financially were the account balance to remain invested with the fund.[60]

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[1].              This is the date after which assets acquired became liable to capital gains tax.

[2].              Australian Taxation Office (ATO), ‘Takeovers and mergers, scrip for scrip rollover’, ATO website, 29 June 2015, accessed 24 August 2015.

[3].              Ibid.

[4].              Income Tax Assessment Act 1997, section 124-795, accessed 2 September 2015.

[5].              AXA Asia Pacific Holdings Ltd v Commissioner of Taxation (2009) 77 ATR 829; [2009] FCA 1427, accessed 9 September 2015.

[6].              These provisions are sections 124–782 and 124–784 of the Income Tax Assessment Act 1997.

[7].              Explanatory Memorandum, Tax and Superannuation Laws Amendment (2015 Measures No. 4) Bill 2015, p. 11 accessed 4 September 2015.

[8].              G Thring, ‘How to maximise CGT cost bases’, Television Education Network, transcript, March 1998, accessed 8 September 2015.

[9].              ATO, ‘What ‘market value’ means’, ATO website, 1 July 2015, accessed 8 September 2015.

[10].              Explanatory Memorandum, op. cit., p. 9.

[11].              Ibid., p. 11.

[12].              Australian Government, Budget measures: budget paper no. 2: 2012–13, p. 21, accessed 2 September 2015.

[13].              Treasury, ‘Strengthening certain integrity provisions in the scrip for scrip roll-over’, Treasury website, accessed 24 August 2015.

[14].              A Sinodinos (Assistant Treasurer), Integrity restored to Australia’s taxation system, media release, 14 December 2013, accessed 2 September 2015.

[15].              Treasury, ‘Reforms to the scrip for scrip roll-over—Exposure Draft’, Treasury website, accessed 24 August 2015.

[16].              Vienna Convention on Diplomatic Relations, done at New York 18 April 1961, [1968] ATS 3 (entered into force for Australia 25 February 1968), accessed 9 September 2015. Diplomats are not exempt from all of a host country’s taxes and rates. For example they are not, under this treaty, exempt from host country indirect taxes.

[17].              Article 1 of the Convention and Diplomatic Privileges and Immunities Act 1967, section 4, accessed 2 September 2015.

[18].              Income Tax Assessment Act 1936, accessed 2 September 2015.

[19].              Refers to a prescribed charitable or religious institution operating outside Australia.

[20].              Income Tax Assessment Act 1936, subsection 23AG(1AA), accessed 2 September 2015.

[21] 

[22].              Superannuation (Unclaimed Money and Lost Members) Act 1999, sections 16 and 17, accessed 2 September 2015.

[23].              Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009, Schedule 3, accessed 2 September 2015.

[24].              Explanatory Memorandum, Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009, p. 9, accessed 2 September 2015.

[25].              H Coonan, ‘Second reading speech: Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009’, Senate, Debates, 30 November 2009, p. 9612, accessed 2 September 2015.

[26].              Explanatory Memorandum, Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009, op. cit., p. 114.

[27].              Retirement Savings Accounts Regulations 1997, regulation 1.06; Superannuation Industry (Supervision) Regulations 1994, regulation 1.03A, accessed 2 September 2015.

[28].              Ibid.

[29].              Accounts that support a defined benefit interest are excluded from the definition of small accounts and inactive accounts of unidentifiable members.

[30].              Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009, Schedule 3, accessed 2 September 2015.

[31].              Superannuation Industry (Supervision) Regulations 1994, Part 1, accessed 8 September 2015.

[32].              Explanatory Memorandum, Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009, op. cit., p. 114.

[33].              These changes included reducing the time period for the transfer of unclaimed bank account and life insurance policy moneys to the Commonwealth from seven years to three years and the transfer of superannuation accounts of unidentifiable members after five years of inactivity to the Commonwealth to 12 months of inactivity. In addition, balances transferred to the Commonwealth would be credited with interest at the rate of the consumer price index from 1 July 2013. These changes were implemented by the Treasury Legislation Amendment (Unclaimed Money and Other Measures) Act 2012, accessed 9 September 2015. The Government recently reversed the period for the transfer of unclaimed money for bank accounts and life insurance policy moneys through the Banking Laws Amendment (Unclaimed Money) Bill 2015, which passed the Parliament on 9 September 2015.

[34].              W Swan (Treasurer) and B Shorten (Minister for Financial Services and Superannuation), Reforms to make the superannuation system fairer, joint media release, 5 April 2013, accessed 7 September 2015.

[35].              Australian Government, Budget measures: budget paper no. 2: 2013–14, p. 42, accessed 8 September 2015.

[36].              Treasury, Lost and unclaimed superannuation money, Discussion paper, The Treasury, Canberra, 7 June 2013, accessed 31 August 2015.

[37].              C Bowen (Treasurer) and P Wong (Minister for Finance and Deregulation), Economic statement, August 2013, p. 34, accessed 3 September 2015.

[38].              M Cormann (Shadow Minister for Financial Services and Superannuation), Labor breaks super pledge with $582m cash grab, media release, 2 August 2013, accessed 31 August 2015.

[39].              J Hockey (Treasurer) and A Sinodinos (Assistant Treasurer), Restoring integrity in the Australian tax system, joint media release, 6 November 2013, accessed 7 September 2015.

[40].              Treasury, ‘Tax and Superannuation Laws Amendment (2014 Measures No. 2) Bill 2014: lost member small account threshold’, Treasury website, accessed 7 September 2015.

[41].              Senate Standing Committee for the Selection of Bills, Report, 10, 2015, The Senate, 20 August 2015, p. 3, accessed 3 September 2015.

[42].              Parliament of Australia, ‘Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 homepage’, Australian Parliament website, accessed 25 August 2015.

[43].              Financial Services Council (FSC), FSC says governments should be consolidating superannuation not taking it, media release, 2 August 2013, accessed 1 September 2015.

[44].              FSC, Submission to Treasury, Lost and unclaimed superannuation money—Discussion paper, 2 July 2013, p. 2, accessed 1 September 2015.

[45].              Association of Superannuation Funds of Australia (ASFA), Submission to Treasury, Lost and unclaimed superannuation money—Discussion paper, 3 July 2013, p. 2, accessed 1 September 2015.

[46].              Australian Institute of Superannuation Trustees (AIST), Submission to Treasury, Lost and unclaimed superannuation money—Discussion paper, June 2013, pp. 4–5, accessed 1 September 2015.

[47].              Explanatory Memorandum, Tax and Superannuation Laws Amendment (2015 Measures No. 4) Bill 2015, op. cit., pp. 7–8.

[48].              Australian Government, Budget measures: budget paper no. 2: 2013–14, op. cit., p. 42.

[49].              The Statement of Compatibility with Human Rights for each measure can be found at pages 23 (Scrip for Scrip Roll-over), 27 (Removing exemption for foreign employment income) and 33 (lost member small account threshold) respectively of the Explanatory Memorandum to the Bill.

[50].              Parliamentary Joint Committee on Human Rights, Twenty-seventh report of the 44th Parliament, The Senate, Canberra, 8 September 2015, accessed 9 September 2015.

[51].              Income Tax Assessment Act 1997 (ITAA 1997), accessed 2 September 2015.

[52].              Subsections 127-783(4) and (8) and definition of member of an entity at section 960-130 of the ITAA 1997.

[53].              Explanatory Memorandum, Tax and Superannuation Laws Amendment (2015 Measures No. 4) Bill 2015, op. cit., p. 15.

[54].              Ibid., p. 16.

[55].              Ibid., p. 21.

[56].              Income Tax Assessment Act 1936, accessed 2 September 2015.

[57].              Superannuation (Unclaimed Money and Lost Members) Act 1999, accessed 2 September 2015.

[58].              These changes were implemented by Tax and Superannuation Laws Amendment (2013 Measures No. 1) Act 2013 (Schedule 1), accessed 3 September 2015.

[59].              P Tilley (Treasury), Evidence to Senate Economics Legislation Committee, Inquiry into the Treasury Legislation Amendment (Unclaimed Money and Other Measures) Bill 2012, 12 November 2012, p. 13, accessed 4 February 2014.

[60].              Association of Superannuation Funds of Australia (ASFA), Submission to Treasury, Tax and Superannuation Laws Amendment (2014 Measures No. 2) Bill 2014: lost member small account threshold—Discussion paper, 3 February 2014, p. 3, accessed 1 September 2015.