Introductory Info

Date introduced: 24 July 2019
House: House of Representatives
Portfolio: Treasury
Commencement: Schedules 1 to 4 commence on the first 1 January, 1 April, 1 July or 1 October after Royal Assent. Schedules 5 to 7 commence the day after the Act receives Royal Assent.

The Bills Digest at a glance

The Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Bill 2019 (the Bill) contains seven unrelated Schedules.

Summary of the Bill

• Schedule 1 prevents tax exempt entities with concessional loans that become privatised from obtaining an unintended tax deduction under the Taxation of Financial Arrangement (TOFA) rules.
• Schedule 2 prevents partners in a partnership from accessing the CGT small business concessions where there has been an assignment of a non-membership interest.
• Schedule 3 prevents deductions being claimed in respect of vacant land where that land is not being held for the purpose of carrying on a business. However, these changes do not apply to certain entities.[1]
• Schedule 4 extends an existing anti-avoidance rule for trustee beneficiaries to family trusts.
• Schedule 5 seeks to create a legislative framework that decriminalises the disclosure of taxpayer information by a taxation officer where an authorised disclosure is made to a credit reporting bureau.
• Schedule 6 confers on the ATO the function of developing and administering an electronic invoicing system for users in both Australia and foreign countries for the purposes of adopting the Pan-European Public Procurement Online interoperability framework.
• Schedule 7 prevents salary sacrificed superannuation contributions being used to supplement an employer’s super guarantee contribution.

Key Issues

The majority of issues raised by stakeholders to date relate to Schedules 3 and 5 of the Bill.

Schedule 3 — vacant land

A number of stakeholders have expressed concern that the operation of the proposed amendments may unfairly target or disadvantage farmers that do not use a corporate structure and do not have a permanent or substantial structure on their land.

Chartered Accountants Australia and New Zealand (CAANZ) and the ALP have also raised concerns that the definition of vacant land amendment may potentially capture the Opal and Mascot apartments.[2] CPA Australia has raised uncertainty about whether trying to avoid the operation of the proposed amendments by incorporating an entity, will trigger the application of the General Anti-Avoidance Rule contained in Part IVA of the Income Tax Assessment Act 1936.[3]

Further, based on an examination of the relevant legislation it appears that the Bill may not achieve its stated goals of reducing complexity or reducing compliance and administrative costs for the ATO. This is because:

• the legislation introduces a number of new concepts that are not defined in the proposed amendments and
• although the Bill modifies the tax law to deny deductions for certain taxpayers where they are not carrying on a business, the ‘carrying on a business’ test is not a bright line test and requires an analysis of several factors. In particular, it is not clear how the proposed amendments provide non-exempted entities with additional certainty, as the availability of a deduction for non-exempted entities will be decided on a case by case basis.

Schedule 5

Schedule 5 creates a broad legislative framework under which taxpayer debts may be disclosed by a taxation officer to a credit reporting bureau. In particular, the proposed amendment enables the Minister to determine, by way of legislative instrument:

• the class of taxpayers who may be subject to tax debt disclosure and
• to some extent, the procedural requirements that must be met in order for the tax debt to be disclosed.

This raises the question as to whether Parliament should be providing an exception to criminal offences, without knowing the full details of who will be affected and how the regime will be administered.

Purpose and structure of the Bill

The Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Bill 2019 (the Bill) consists of seven unrelated Schedules:

• Schedule 1 amends the Income Tax Assessment Act 1936 (ITAA 1936) to prevent inappropriate tax deductions arising under the Taxation of Financial Arrangement (TOFA) rules in relation to concessional loans held by entities that are subsequently privatised
• Schedule 2 amends the Income Tax Assessment Act 1997 (ITAA 1997) to improve the integrity of the Capital Gains Tax (CGT) small business concessions, by preventing partners in a partnership from accessing the concessions where there has been an assignment of a non-partnership membership interest (that is, the assignee is made entitled to a share of partnership income, but is granted no other rights or interests over the partnership)
• Schedule 3 amends the ITAA 1997 to prevent deductions being claimed by certain taxpayers that relate to vacant land that is not being held in connection with the carrying on a business
• Schedule 4 amends the ITAA 1936 and the Taxation Administration Act 1953 (TAA) to extend an existing anti-avoidance rule to family trusts engaged in circular trust distributions
• Schedule 5 amends the TAA to enable taxation officers to disclose the business tax debt information of a class of taxpayer (determined by way of legislative instrument) to credit reporting bureaus where certain requirements are satisfied
• Schedule 6 amends the TAA to confer on the ATO functions and powers to develop and administer an electronic invoicing system (E-invoicing) for users in both Australia and foreign countries
• Schedule 7 amends the Superannuation Guarantee (Administration) Act 1992 (SGAA) to prevent salary sacrificed superannuation contributions counting towards an employer’s superannuation guarantee contribution (SGC).

Structure of this Bills Digest

As the matters covered by each of the Schedules are independent of one another, the relevant background, stakeholder comments, committee consideration and analysis of the provisions are set out under each Schedule number.

History of Schedule 7 of the Bill

The Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 2) Bill 2017 (2017 Bill) was introduced into the House of Representatives on 14 September 2017 and was passed by the House on 23 October 2017.[4] The 2017 Bill was introduced into the Senate on 13 November 2017 and lapsed on 1 July 2019 at the end of the 45th Parliament.

The present Bill was introduced into the House on 24 July 2019 and was passed unopposed by the House on 1 August 2019.[5] Schedule 7 of the Bill is in the same terms as Schedule 2 of the 2017 Bill, the only material difference is the proposed start date.

A Bills Digest was prepared in respect of the 2017 Bill.[6] Much of the material in this Bills Digest under the heading ‘Schedule 7: superannuation guarantee contribution integrity measure’ has been sourced from that earlier Bills Digest.

Commencement

• Sections 1 to 3 commence on Royal Assent
• Schedules 1 to 4 commence the first 1 January, 1 April, 1 July or 1 October to occur after the day of Royal Assent
• Schedules 5 to 7 commence the day after Royal Assent.[7]

Committee consideration

Senate Economics Legislation Committee

The provisions of the Bill were referred to the Senate Economics Legislation Committee for inquiry and report by 5 September 2019.[8] Details of the inquiry are at the inquiry homepage. Submissions closed on 15 August 2019. The Committee received 23 submissions as well as additional information and answers to questions on notice. The Committee also held a public hearing on 19 August 2019. The Committee delivered its report into the inquiry to the Senate on 4 September 2019.[9]

The Committee recommended that the Bill be passed in its entirety by the Parliament, but encouraged the ATO to issue further public guidance on the operation of Schedule 3[10]and expressed some concerns about the privacy aspects of disclosing tax debts (Schedule 5).[11] The Committee also stated that it would like to see Treasury and the ATO address any unintended consequences of Schedule 3 for property owners where the property is unusable for reasons outside their control.[12]

Australian Labor Party (ALP) and Centre Alliance Senators provided the following additional comments:

• the ALP called on the Government to bring forward the SGC amendments to operate from 1 July 2019. The ALP also stated that Schedule 5 should be amended so as to increase the notice period to 28 days, and tax practitioner representatives to be notified if a client is to have their tax debt information disclosed
• Centre Alliance supported the broad intent of the Bill, but called on Schedule 5 to be amended so as to incorporate the recommendations of the Inspector General of Taxation and Taxation Ombudsman.

Senate Standing Committee for the Scrutiny of Bills

The Senate Standing Committee for the Scrutiny of Bills (Scrutiny of Bills Committee) is concerned with the retrospective application of Schedules 1 and 2 of the Bill.[13] The Scrutiny of Bills Committee’s concerns are discussed further under ‘Schedule 1: concessional loans involving tax exempt entities’ and ‘Schedule 2: enhancing the integrity of the small business CGT concessions’.

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.[14]

The Government considers that Schedules 1, 2, 3, 4, 6 and 7 of the Bill are compatible because they do not engage any of the applicable rights or freedoms. The Government asserts that Schedule 5 of the Bill engages the prohibition on arbitrary or unlawful interference with privacy contained in Article 17 of the International Covenant on Civil and Political Rights. However, the Government concludes that Schedule 5 is consistent with Article 17 ‘on the basis that its engagement of the prohibition on interference with privacy will neither be unlawful ... nor arbitrary’.[15]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights considers that the Bill does not raise human rights concerns.[16]

Schedule 1: concessional loans involving tax exempt entities

Background—explanation of the current law

Taxation of tax exempt entities that are no longer tax exempt

A government owned entity is generally exempt from income tax under Division 1AB of Part III of the ITAA 1936. However, in recognition that the tax status of government owned entities can change (for example where they are privatised),[17] Division 57 of Schedule 2D to the ITAA 1936 contains specific rules dealing with this scenario. Amongst other things, Division 57 of Schedule 2D contains rules that:

• allocate income and expenses against the pre-and-post transition time according to when that income was earned or expense was incurred
• determine the tax cost of assets and liabilities of the entity, including for the purposes of the Taxation of Financial Arrangements (TOFA) rules and
• make balancing adjustments to the values of certain transferred assets and liabilities, including for the purposes of the TOFA rules.

What are the TOFA rules?

Australia’s TOFA rules are contained in Division 230 in Part 3-10 of the ITAA 1997 and detail how taxpayers should treat gains and losses on financial arrangements for tax purposes. The TOFA rules are highly complex, but the following general points should be noted:

• the TOFA rules are based on the general premise that gains on financial arrangements are assessable and losses are deductible over the life of the arrangement[18]
• the concept of a financial arrangement is central to the TOFA rules and is broadly defined in section 230-5 of the ITAA 1997 as one or more cash settlable legal or equitable rights and/or obligations to receive or provide a financial benefit
• subsection 974-160(1) of the ITAA 1997 defines a financial benefit as anything of economic value, including property or anything prescribed by regulation as being a financial benefit[19]
• the TOFA rules do not apply to all taxpayers—as per section 230-5 of the ITAA 1997, a range of entities will mandatorily be subject to the TOFA rules, including:
  • an authorised deposit-taking institution, a securitisation vehicle or a financial sector entity with an aggregated turnover of $20 million or more
  • a superannuation entity, a managed investment scheme or a similar scheme under a foreign law if the value of the entity's assets is $100 million or more
  • any other entity (except an individual) that has any of the following:    
    • an aggregated turnover of $100 million or more

assets of $300 million or more and

financial assets of $100 million or more

entities that are not mandatorily subject to the TOFA rules may elect to be subject to the TOFA rules.

The Australian Taxation Office’s (ATO) ‘Guide to taxation of financial arrangements (TOFA)‘ provides a good explanation of the TOFA rules in non-complex language.

Interaction between Division 57 and the TOFA rules

Where a tax exempt entity subsequently becomes a taxable entity, Division 57 of Schedule 2D to the ITAA 1936 requires that the value of that entity’s assets and liabilities be set at their market value.[20] As explained in the Explanatory Memorandum, government owned entities may be able to obtain loans on more favourable terms than available in the market place—meaning that for the purposes of Division 57, at the time of transfer, the market value of the loan may be less than its face value.[21]

Where the relevant entity is covered by the TOFA rules, the loan will constitute a financial arrangement and the difference between the face value of the loan and its market value will be considered a ‘financial benefit’. Under the TOFA rules, this difference will be treated as a loss, and entitle the entity to a deduction equal to that difference for each year of the loan-term. Conversely, where the difference between the face value of an asset or liability and its market value gives rise to a gain, that gain will be assessable on that difference for each year of the life of the financial arrangement.[22]

The Explanatory Memorandum to the Bill states that this outcome is not intended and the proposed amendments in Schedule 1 of the Bill are necessary to address this integrity concern and protect the revenue base.[23]

The proposed amendments contained in Schedule 1 of the Bill seek to address this concern, by ensuring that the interaction of Division 57 and the TOFA rules do not give rise to such unintended tax benefits or liabilities by essentially resetting the values of the transferring assets and liabilities to their market values at the time of their transfer.

Background to the proposed amendment

Schedule 1 implements the measure ‘Company tax — Improving the integrity of the tax treatment of concessional loans between tax exempt entities’ announced in the 2018–19 Budget.[24] Following the 2018–19 Budget, Treasury commenced a public consultation from 11 October 2018 to 2 November 2018 on the proposed changes.[25] However, the Government has not published any submissions or the outcomes of that consultation.

Policy position of non-government parties/independents

The position of the non-government parties and independents is not known, however, it appears that this Schedule was broadly supported in the House of Representatives.[26]

Position of major interest groups

The Government has not released the submissions received during the Treasury consultation on this Schedule of the Bill.[27] Of the twenty three submissions received by the Senate Economics Legislation Committee none made substantive comments in relation to Schedule 1.

However, the CPA and Tax Justice Network noted that they were generally supportive of the Bill, while the Council of Small Business Organisations Australia (COSBOA) stated they saw no issue with Schedule 1.[28]

Financial implications

According to the Explanatory Memorandum to the Bill, Schedule 1 is expected to have ‘nil’ financial impact.[29]

Key issues and provisions

As noted above, the effect of the proposed amendments in Schedule 1 is to amend the TOFA balancing adjustment rules to ensure any gain or loss is not attributable to the concessional terms of the TOFA asset or liability.[30]

The operation of the amendments is well explained at pages 12 to 23 of the Explanatory Memorandum to the Bill and includes a number of worked examples.[31]

Application

The proposed amendments made by Schedule 1 of the Bill are retrospective and apply from 7:30pm (ACT time) 8 May 2018. This aligns with the timing of the announced changes in the 2018-19 Budget.[32]

Concluding comments

Schedule 1 appears to be relatively uncontroversial and no significant issues appear to have been raised by stakeholders.

Schedule 2: enhancing the integrity of the small business CGT concessions

Background: small business CGT concessions

Capital Gains Tax

Capital Gains Tax (CGT) is a specific set of tax rules relating to capital assets (for example, real estate or shares). Capital gains tax is generally payable where the proceeds from an asset’s disposal (for example, selling or assigning the asset) exceed the costs of acquiring and maintaining it (known as the cost base). A capital loss occurs when the cost base exceeds the proceeds from the asset’s sale.

Capital gains are added to an individual’s assessable income and taxed at the relevant marginal tax rate. Where a taxpayer has a capital loss, it can only be applied against capital gains—that is, it cannot be used to reduce tax paid on salary and wages or similar earnings.

There are specific rules in Division 152 of the ITAA 1997 which reduce or exempt the capital gains tax paid in respect of CGT events that occur in relation to small businesses.[33]

Eligibility for the small business CGT concessions

Subdivision 152-A of the ITAA 1997 outlines the basic conditions a taxpayer must meet in order to be eligible for the small business CGT concessions. Broadly, the Subdivision provides that in order to access the CGT small business concessions a CGT event must take place in relation to an active asset and one of the following requirements must be satisfied:

• the taxpayer with the CGT event must be carrying on a business that has aggregated turnover[34] in the current or previous year of less than $2 million (known as a CGT small business entity) [35]
• the net value of assets held by the taxpayer, its connected entities, and its affiliates does not exceed $6 million[36]
• the taxpayer is a partner in a partnership that is a CGT small business entity for the income year, and the relevant CGT asset is an interest in an asset of the partnership[37] or
• the taxpayer doesn’t carry on business but the CGT asset is used in a business carried on by a small business entity that is the taxpayer’s affiliate or an entity connected with it (passively held assets).[38]

For the purposes of the small business CGT concessions, an active asset is an asset that is owned by the taxpayer and:

• is used, or is held ready for use in the course of carrying on the business of the taxpayer, their connected entity or affiliates or
• is an intangible asset (for example, goodwill) owned by the taxpayer that is inherently connected with the business of the taxpayer, their connected entity or affiliates[39] or
• is a share in an Australian resident company or an interest in a resident trust, where the share or interest accounts for 80 per cent or more of the market value of all assets held by the company or trust.[40]

Subsection 152-10(2) of the ITAA 1997 also lists some additional basic conditions that must be satisfied if the CGT asset is a share in a company or an interest in a trust.[41]

What are the CGT small business concessions and how do they operate?

Division 152 of the ITAA 1997 creates four CGT concessions for small businesses. These concessions apply in addition to the 50 per cent CGT discount that applies to a CGT asset that has been held for 12 or more months.

While the small business 15-year exemption takes priority over the other CGT small business exemptions, a taxpayer is otherwise able to order and apply as many of the concessions as they are eligible for in order to reduce their liability to nil. The four concessions are summarised in Table 1.

Table 1: CGT small business concessions

CGT Concession	Description
Small business 15-year exemption	Generally, an individual will be able to disregard a capital gain where they continuously owned the CGT asset for 15 years prior to its disposal and they are either: aged over 55 and the CGT event happens in connection with their retirement, or they were permanently incapacitated at the time of the CGT event.[42] A trust or company will also be able to disregard a capital gain where they continuously owned the CGT asset for 15 years prior to its disposal and: there was a ‘significant individual shareholder’ during the 15 year period (that is, a person that has a 20 per cent or greater total direct and indirect interest the company or trust)[43] and the significant individual shareholder was either: aged 55 or over and the CGT event happens in connection with their retirement or they were permanently incapacitated at the time of the CGT event.[44]
Small business 50 per cent active asset reduction	This concession allows an eligible taxpayer to reduce a capital gain on an active asset by 50 per cent. The taxpayer only needs to satisfy the basic conditions outlined above under the heading ‘Eligibility for the small business CGT concessions’.[45] Section 152-200 of the ITAA 1997 lists the following ordering rules: The 15 year exemption takes priority, meaning the 50 per cent reduction does not apply where the gain has already been disregarded under the 15 year exemption.[46] If the general 50 per cent CGT reduction has been applied, the small business reduction will apply to that reduced amount.[47] The capital gain can then be further reduced by the small business retirement exemption and/or small business rollover.[48] A taxpayer may elect to apply the small business retirement exemption and/or small business rollover instead of the 50 per cent small business reduction.[49]
Small business retirement exemption	An individual aged under 55 may over their lifetime disregard $500,000 worth of proceeds from a capital gain where those proceeds are contributed to a complying superfund or retirement savings account.[50] This exemption also applies to the capital gains of a company or trust where it has a significant individual shareholder and it makes a payment to a shareholder that is a significant individual shareholder or the spouse of a significant individual shareholder, provided the spouse has an interest of greater than zero in that company or trust.[51]
Small business rollover exemption	Generally the rollover exemption will apply when an active asset has been sold and a replacement asset has been acquired. The realisation of the capital gain is deferred until the replacement asset is disposed.[52]

Source: Income Tax Assessment Act 1997 and ATO, ‘Small business CGT concessions’, ATO website.

Background: Everett assignments

What is an Everett assignment?

As noted above, the CGT small business concession can extend to partners in partnerships. Generally, a partner will pay tax on their share of partnership income,[53] however in some instances, a partner may assign some or all of their interest in a partnership.  The consequence of this is the share of assigned income will be taxable in the hands of the person who has received the assigned income rather than the original partner—this arrangement is known as an ‘Everett assignment’ flowing from the High Court decision of Federal Commissioner of Taxation v Everett.[54]

An Everett assignment may be motivated by tax minimisation purposes. This is because a possible effect of the assignment is to re-allocate income from a taxpayer with a high marginal tax rate to one with a lower marginal tax rate, meaning that the same amount of income now has an overall lower level of tax paid. The operation of an Everett assignment is illustrated by Example 1.

Interaction between the CGT small business concessions and Everett assignments

The assignment of a partnership interest under an Everett assignment will generally attract CGT because the partnership interest is a CGT asset.[56] Furthermore and as noted by the Explanatory Memorandum, Everett assignments fall within the scope of the CGT small business concessions where the relevant taxpayer satisfies the eligibility requirements set out above—that is, the assignment of the partnership interest to another person results in a CGT event, but in some instances the CGT small business concessions can apply and result in a sizeable reduction in the amount of capital gains tax payable.[57]

It is important to recognise that Everett assignments are but one strategy that can be employed to implement income splitting arrangements—although an Everett assignment by itself will generally not be found to be a tax avoidance arrangement, this may vary depending on the facts and circumstances of a given case.

ATO view of Everett assignments

Everett assignments have a long and complex history and have been particularly popular amongst medical practitioners, dentists, lawyers and accountants.[58] The ATO’s attitudes towards their tax efficacy have also varied over time—for example, in ATO Taxation Ruling IT 2330 released in 1986 and ATO Taxation Ruling IT 2501 issued in 1988, the ATO took the view that Everett assignments were generally not tax avoidance arrangements. However, in 2015 the ATO varied its position concluding that an Everett assignment could constitute a tax avoidance arrangement when one of the ATO’s pre-defined benchmarks was not satisfied. The ATO has removed the Guidelines from their website, however Tax & Super Australia has provided the following summary of the ATO’s position:

The ATO says taxpayers will be rated as low risk and not subject to compliance action if they meet one of the following guidelines regarding income from the firm (including salary, partnership or trust distributions, distributions from service entities or dividends from associated entities):

• the practitioner receives assessable income from the firm in their own hands as an appropriate return for the services they provide to the firm. The benchmark for an appropriate level of income will be the remuneration paid to the highest band of professional employees providing equivalent services to the firm, or to a comparable firm
• 50% or more of the income to which the practitioner and their associated entities are collectively entitled (whether directly or indirectly through interposed entities) in the relevant year is assessable in the hands of the practitioner
• the practitioner, and their associated entities, both have an effective tax rate of 30% or higher on the income received from the firm.[59]

In 2017 the ATO announced they were suspending those guidelines on the basis that they were being ‘misinterpreted in relation to arrangements that go beyond the scope of the guidelines’.[60]

Background: government announcement

Following the ATO’s suspension of the aforementioned guidance, the Government announced in the 2018–19 Budget that from 8 May 2018:

partners that alienate their income by creating, assigning or otherwise dealing in rights to the future income of a partnership will no longer be able to access the small business capital gains tax (CGT) concessions in relation to these rights.[61] [emphasis added].

A subsequent public consultation process commenced on 12 October 2018, but to date, the Government has not published the outcomes of the consultation or stakeholder submissions on the Treasury website.[62]

It is not clear whether the ATO’s 2017 decision to suspend the guidelines and the Government’s subsequent budget announcement are related.

Senate Standing Committee for the Scrutiny of Bills

The Scrutiny of Bills Committee is concerned with the fact that the proposed amendments apply retrospectively, that is, the changes apply from the time they were announced on 8 May 2018—specifically, the Committee considers:

• provisions that back-date commencement to the date of the announcement of the Bill ‘challenges a basic value of the rule of law that, in general, laws should only operate prospectively (not retrospectively)’ and
• in the context of tax law, the Committee is ‘concerned that reliance on ministerial announcements and the implicit requirement that persons arrange their affairs in accordance with such announcements, rather than in accordance with the law, tends to undermine the principle that the law is made by Parliament, not by the executive’.[63]

The Committee also notes that the Senate may decide to amend the commencement date of taxation amendments in these circumstances:

Where taxation amendments are not brought before the Parliament within six months of being announced, the bill risks having the commencement date amended by resolution of the Senate (see Senate Resolution No. 45). In this instance, the committee notes that it has been more than 12 months since the Budget announcement.[64]

The Committee has requested the Assistant Treasurer’s advice as to:

• how many individuals will be detrimentally affected by the retrospective application of the legislation, and the extent of their detriment and
• the extent to which the Bill as introduced is consistent with the measures announced on 8 May 2018.[65]

At the time of writing, the Committee has received the Assistant Treasurer’s response, but the response has not yet been published.[66]

Policy position of non-government parties/independents

The position of the non-government parties and independents is not known, however, it appears that Schedule 2 was broadly supported in the House of Representatives.[67]

Position of major interest groups

In its submission to the Senate Economics Legislation Committee, CPA Australia stated that it did not support the retrospective nature of the amendments.[68] CPA Australia also expressed concern that the amendments did not address the more significant issue of service trust arrangements, stating that:

Issues relating to partnership assignments, service trusts and professional services firms are not wholly resolved by the amendment to the small business CGT concessions and further legislative and administrative guidance is required to provide clarity and certainty to the industry...

The bigger issue for practitioners is in relation to service trusts, as there is great uncertainty in the industry following both the ATO’s withdrawal of its previous guidance and the delay(s) in issuing new guidance.[69]

Financial implications

According to the Explanatory Memorandum, the measure is ‘estimated to result in a small but unquantifiable gain to revenue over the forward estimates period’.[70]

Key provisions

Item 2 of Schedule 2 inserts proposed sub-section 152-10(2C) into the ITAA 1997. Proposed sub-section 152-10(2C) will create a new basic condition that must be satisfied in order to access the small business CGT concessions—namely:

where a CGT event arises in relation to the creation, transfer, variation or cessation of a right or interest that would entitle an entity to:

• an amount of the income or capital of a partnership or
• an amount calculated with reference to a partner’s entitlement to an amount of income or capital of the partnership

the CGT small business concessions will only be available where that right or interest is a membership interest in the partnership.

The effect of this is that the assignment of non-membership interests in partnerships will not be eligible for the small business CGT concessions.

Application

The amendments made by Schedule 2 of the Bill will apply retrospectively from 7:30 pm (ACT time), 8 May 2018 to align with the timing of the 2018-19 Budget announcement.[71] According to the Explanatory Memorandum to the Bill:

Retrospective application is necessary as the amendments are an important integrity measures to prevent inappropriate access to the CGT small business concessions for arrangements undertaken to reduce partner’s tax liabilities. If the amendments did not apply from announcement, partners would be able to enter into such arrangements during the period between announcement and the passage of legislation and avoid the operation of the measure.[72]

Concluding comments

Schedule 2 appears to be relatively uncontroversial and no significant issues appear to have been raised by stakeholders.

Schedule 3: limiting deductions for vacant land

Background: legislative requirements

General deduction provisions

Expenses relating to vacant land are generally covered by the general deduction provision contained in section 8-1 of the ITAA 1997 (the general deduction provision). Section 8-1 of the ITAA 1997 provides that a taxpayer will be entitled to a tax deduction where:

• the relevant expense or outgoing was incurred in gaining or producing income, or
• it was a necessary expense related to carrying on a business.[73]

However, an expense is not deductible under the general deduction provision where it is:

• capital, private or domestic in nature
• related to producing exempt or non-assessable income or
• specifically prohibited by the tax law.[74]

For example, interest repayments made in respect to a rental property will be tax deductible as the interest repayment was made in connection with deriving rental income. Conversely, interest repayments made in respect of a taxpayer’s main residence will not be deductible as the interest repayments are for a private or domestic purpose.

‘Carrying on a business’

Whether an asset is held in the course of carrying on a business is a question of fact and degree—as stated by Justice Hill in Evans v Commissioner of Taxation ‘[t]he question of whether a particular activity constitutes a business is often a difficult one involving as it does questions of fact and degree’.[75]

The question of whether an asset is held for the purpose of producing assessable income or in the course of carrying on a business can become considerably more complex where the asset is vacant land held by an individual. In Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business (Taxation Ruling 2019/1) the ATO has stated that the derivation of passive income (such as rent from property) by an individual does not give rise to a presumption that an individual is carrying on a business, whereas it would if those same activities are undertaken by a company.[76]

Specific deduction provisions

In addition to the general deduction provisions, section 8-5 of the ITAA 1997 allows a taxpayer to claim a deduction for certain things specifically provided for under the tax laws—these are known as ‘specific deductions’ and are listed at section 12-5 of the ITAA 1997.[77]

Where an outgoing or expense is deductible under both the general and specific deduction provisions, the taxpayer can deduct only under the provision that is most appropriate (this means the specific deduction provision will generally take priority).[78] The proposed amendment in Schedule 3 creates a new specific deduction provision which limits the circumstances in which expenses or losses associated with holding vacant land may be deducted, thereby over-riding the general deduction provisions that currently apply.

Background: Policy rationale and drivers for the proposed amendments

The Government announced in the 2018–19 Budget that from 1 July 2019, certain deductions would be denied for expenses associated with holding vacant land.[79] It appears that the changes in the Bill are driven by three primary considerations.

Land banking

The first consideration was raised in the Budget announcement, which explicitly stated that this measure would reduce the incentives for land banking practices that deny the use of land for housing or other development.[80] However, the second reading speech and Explanatory Materials do not mention land banking and the Bill has a large number of exemptions that may ultimately limit its effectiveness at curbing land banking (as it excludes corporate tax entities, super plans and managed investment trusts). Following the Budget announcement some commentators labelled the measures, a new ‘land banking tax’, including the Domain Group.[81]

However, the Property Council of Australia did not share these concerns, with chief executive Ken Morrison stating that he clarified the Bill’s operation with the Treasurer’s office, and that in the vast majority of cases development companies will not be affected by the announcement and it will not be the ‘big bogey man for the industry that some have speculated’.[82]

Inappropriate deductions

The second consideration is the Government’s assertion that some taxpayers have been claiming deductions associated with holding vacant land when they were not genuinely holding that land for the purpose of gaining or producing assessable income or in the course of carrying on a business.[83] This concern was also specifically raised in the 2018–19 Budget, where it was stated that deductions were being improperly claimed for expenses, such as interest costs, related to holding vacant land where the land was not genuinely held for the purpose of earning assessable income.[84]

ATO administrative difficulties

On introduction of the Bill into Parliament an additional consideration appears to have been noted—namely, compliance and administrative difficulties faced by the ATO in denying the inappropriate deductions for vacant land. As explained in the Explanatory Memorandum:

As the land is vacant, there is often limited evidence about the taxpayer’s intent other than statements by the taxpayer. The reliance on a taxpayer’s assertion about their current intention leads to compliance and administrative difficulties.[85]

As discussed in more detail under the heading ‘Key issues and provisions’, it is not clear the proposed amendments will address the above concerns. In particular, it is not expected that compliance and administrative difficulties will be reduced for the following reasons:

• a significant amount of businesses and taxpayers are exempted from the new changes, meaning the existing, difficult to administer law continues to operate for this class of taxpayers
• the new carrying on a business test is not necessarily clearer than the current tests, particularly in the context of individuals (to whom the proposed new rules will apply) and
• as noted by some stakeholders, some of the proposed amendments may increase uncertainty and result in new and additional compliance and administrative difficulties.

Policy position of non-government parties/independents

The position of the non-government parties and independents is not known, however, it appears that Schedule 3 was broadly supported in the House of Representatives.[86]

Position of major interest groups

The Government has not released the submissions received during the Treasury consultation on Schedule 3 of the Bill.[87] Of the twenty three submissions received by the Senate Economics Legislation Committee, a small number directly discuss Schedule 3.[88] Some of the issues raised in submissions to the Senate Economics Legislation Committee are discussed in more detail below.

The amendment may deny deductions earned in the course of deriving passive assessable income

CPA Australia has raised concerns that there may be situations where income is being earned by an individual from vacant land but they are not carrying on a business. As discussed in Taxation Ruling 2019/1 the derivation of rent from property by an individual does not give rise to a presumption that an individual is carrying on a business. This demonstrates the challenges with relying on the ‘carrying on a business’ test in the proposed amendments and highlights how the objectives of the proposed amendment may be undermined – namely:

• reducing compliance and administrative complexities and
• preventing inappropriate deductions by targeting the amendment only to arrangements that do not generate assessable income.

On this second point, CPA Australia set out a number of situations where a non-exempted entity can earn passive income from vacant land from unrelated third-parties, but be precluded from claiming a tax deduction in respect of that income, including:

• an agistment on vacant land
• allowing cars to park on vacant land and
• a retired farmer leasing land to a third party.[89]

CPA Australia also raised concerns that deductions may be denied where a farmer owns land over two titles and due to drought leaves one of the land titles vacant as it is not economical to use that land.[90] These views were also echoed by CAANZ, the Australian Small Business Family Enterprise Ombudsman (ASBFEO) and MC Tax Advisors.[91]

CAANZ notes that it previously raised concerns with Treasury that the proposed amendments should exclude any land that is used by a third-party under a commercial arm’s-length lease arrangement. CAANZ notes this will cover a range of situations, including farmers who have leased vacant land without a permanent structure, such as land used for agistment or certain car parking lots.[92] The Explanatory Memorandum states one of the purposes of the amendment is to deal with vacant land that is not genuinely held for the purpose of deriving income; CAANZ notes that given this is the case it is not clear why deductions can be denied for arm’s-length third-party arrangements.[93]

Impact on farmers and small businesses

The ASBFEO specifically notes that the proposed amendment preferences corporate structures and arbitrarily denies tax deductions for non-corporate small businesses and self-managed super funds—according to ASBFEO, almost two-thirds of small business are conducted via non-corporate structures.[94]

In their submissions, CAANZ, CPA Australia, MC Tax Advisors and the ASBFEO also raise concerns that the proposed amendments may unfairly target or disadvantage farmers that do not use corporate structures, or derive passive income from land that does not have a permanent structure. CPA Australia has also flagged that if a non-exempted entity does seek to become an exempted entity by incorporating into a company to carry out the activities, the ATO may seek to apply the General Anti-Avoidance Rule in Part IVA of the ITAA 1936. [95] That is, the ATO may take the position that the arrangement was entered into for the sole or dominant purpose of obtaining a tax benefit.

It is important to also recognise that this amendment may have broader impacts than just on farmers—that is, any non-exempted entity that is using vacant land to derive income (be it passive or otherwise) and who is not considered to be ‘carrying on a business’ may no longer be entitled to deductions. For example, as reported by The Age in 2013, the ATO launched a ‘crack down’ into whether thoroughbred horse breeders were carrying on a business and/or have non-commercial losses. In the situation where the breeders are deemed to not be carrying on a business and they have vacant land, deductions incurred in relation to holding that vacant land (including for the purpose of grazing or training) will not be deductible against any income derived.[96]

Financial implications

According to the Explanatory Memorandum, as at the 2018–19 Budget, in the forward estimates period the proposed measure was expected to result in a gain to revenue of $25 million in each of 2020–21 and 2021–22.[97]

Key issues and provisions

Summary

Item 3 of Schedule 3 inserts proposed section 26-102 in to the ITAA 1997. The provision limits the circumstances in which a taxpayer can claim a deduction for expenses incurred in connection with holding vacant land. Broadly, expenses for holding vacant land will not be deductible unless:

• the land is in use or available for use in ‘carrying on a business’ or
• the taxpayer is a type of entity excluded by the changes.

Proposed section 26-102 does not apply to:

• land that is not ‘vacant’
• vacant land which is held in connection with ‘carrying on a business’ and
• certain kinds of entities.

Special provision is also made for exclusion of residential premises where they can be lawfully occupied and available for lease.

The ATO provided a flow chart to the Senate Economics Legislation illustrating the operation of the changes—the flowchart is reproduced as an Appendix.

What is vacant land?

Proposed section 26-102 of the ITAA 1997 limits the availability of deductions for losses or outgoings relating to holding land if there is no:

• substantial and permanent structure in use or available for use on the land which has a purpose independent of, and not incidental to, the purpose of any other structure or proposed structure or
• residential premises that is lawfully able to be occupied and is either leased, hired or licensed, or available for lease, hire or licence.[98]

Substantial and permanent structure

The terms ‘substantial’ and ‘permanent’ structure are not defined in the proposed amendment and take their ordinary meaning. The Explanatory Memorandum seeks to provide guidance on what is meant by these terms. For example, the Explanatory Memorandum states that to be:

• substantial, a building needs to be significant in size, value or some other criteria of importance in the context of the relevant property—this is not stated in the proposed amendments but rather inferred from the ordinary meaning of substantial and
• permanent, a structure needs to be fixed and enduring—again, this is not explicitly contained in the proposed amendments.[99]

Further, the Explanatory Memorandum notes that whether a structure has an independent purpose that is not incidental to the purpose of another structure is a question of fact:

It needs to be considered in the context of the structure, the land on which it is located and the other structures (if any) that have been, are in the process of being or may be expected to be constructed on that land.[100]

As such, what constitutes substantial, permanent, incidental or independent is likely to be determined on a case-by-case basis and ultimately a matter of interpretation for the courts. This is likely to create further uncertainty around the application of the proposed amendments, undermining one of the objectives of the proposed amendments.

Who can deduct expenses for vacant land?

Proposed section 26-102 of the ITAA 1997 enables a taxpayer to deduct a loss or outgoing incurred for vacate land if:

• the land is in use or available for use in ‘carrying on a business’ or
• the taxpayer is a particular type of entity, irrespective of whether they are using the land in carrying on a business.[101]

A taxpayer who uses the land to carrying on a business

Proposed subsections 26-102(1) and (2) of the ITAA 1997 state that an outgoing or loss in respect of land can only be deducted to the extent that the land is in use, or available for use, in carrying on a business for the purpose of gaining or producing assessable income by the taxpayer or:

• their affiliates
• their spouse
• their children aged under 18 or
• any connected entities.  

For taxpayers that are not excluded under proposed subsection 26-102(5), it does not matter that they may be using vacant land to produce assessable income and incur expenses—they will not be entitled to a deduction unless they can demonstrate the land is in use or available for use in carrying on a business.

Kinds of taxpayers who can continue to deduct expenses as a general deduction

Proposed subsection 26-102(5) of the ITAA 1997 specifically excludes the following taxpayers from the proposed amendment (excluded entities):

• corporate tax entities
• superannuation plans that are not self-managed superannuation funds
• managed investment trusts
• public unit trading trusts or
• unit trusts or partnerships where each member is one of the above listed entities.

While these taxpayers are excluded from the operation of proposed subsection 26-102(1), they must still satisfy the general deduction provision in section 8-1 of the ITAA 1997—namely, that the loss or outgoing incurred in connection with holding vacant land is:

• incurred in gaining or producing assessable income or
• necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.[102]

Key issue: does Schedule 3 achieve its objectives?

As discussed above, the primary issue with the proposed amendments is whether Schedule 3 actually achieves its primary purposes. The main purposes of Schedule 3 appear to be to:

• prevent land-banking practices
• increase certainty and
• reduce compliance and administrative costs for the ATO.

Preventing land banking

It is unclear how the amendment addresses the issue of land-banking. For instance, the topic of land banking has not been discussed in the Explanatory Memorandum and a Regulatory Impact Statement has not been included. As such, there is no available information in the Bill or its explanatory materials as to the number and kinds of taxpayers engaging in land banking and whether they will be captured by the proposed amendments.

Increasing certainty and reducing compliance and administrative challenges for the ATO

As discussed above, and as raised by stakeholders, it does not appear that the proposed amendment will increase certainty or reduce the compliance challenges for the ATO. The reasons for this are:

• The legislation introduces a number of new concepts that have not been clearly defined in the proposed amendments. For example, it is not clear when a structure on land will be ‘substantial’, or ‘have an incidental or independent purpose’.
• The carrying on a business test is not a bright line test. As noted by the Courts and Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?, no single factor is decisive—in fact many factors overlap, and many go to a taxpayer’s subjective intention.[103] In many instances, there may be limited evidence about a taxpayer’s intention other than statements by the taxpayer, a situation that the amendments are seeking to expressly address.
• TR 2019/1 also creates additional uncertainty as it contains the ATO’s view that the derivation of rental income by an individual does not necessarily mean a business is being carried on. In many instances vacant land will be generating passive rental income—it is not clear how the proposed amendments provide non-exempted entities with additional certainty. If anything, it may lead to increased compliance costs and administrative burden as in each case the ATO and taxpayers will need to consider whether a business is being carried on before making/disallowing a deduction against passive rental income. Where the deduction is denied, the taxpayer will need to consider whether the expense can be added to their CGT cost base (adding another layer of complexity).
• As raised by CPA Australia, there is doubt as to whether incorporating an entity to hold vacant land may trigger the application of the General Anti-Avoidance Rule in Part IVA of the ITAA 1936.

Application

The amendments apply to losses or outgoings incurred from 1 July 2019, regardless of whether land was first held prior to this date.[104]

Concluding comments

Schedule 3 appears to be relatively controversial and it is questionable whether it achieves its stated objectives of reducing land banking, increasing taxpayer compliance and providing administrative certainty.

Schedule 4: extending anti-avoidance rules to circular trusts

Background

What is a circular trust distribution?

This proposed measure was announced by the Government in the 2018–19 Budget as a tax integrity measure. The proposed amendments extend the operation of particular anti-avoidance rules to family trusts which currently apply to other closely held trusts. ATO Deputy Commissioner Jeremy Hirschhorn describes the mischief the measure seeks to remedy as follows:

This provision addresses a particular problem. I might explain the problem. If people have some investments or some earnings in a trust, the trust does not pay tax on that income if it distributes it to somebody else. It would distribute it to another trust and that trust would not pay tax on that income as long as it distributes it to somebody else. But somewhere along the line it starts the circle again. The argument of this perhaps too-clever-by-half idea was that the money would keep spiralling and nobody would ever pay tax on that income. This makes more comprehensive a previous avoidance provision to stop that problem. It applies to the type of scheme that involves a family trust. The previous measure did not apply where it was a family trust... In the real world of cases, we have seen this used rarely. But when somebody uses it, they use it for significant dollars.[105]

Diagram 1 illustrates how a circular trust distribution operates.

Diagram 1: circular trust distribution

Source: Parliamentary Library

In the above example, all of the trusts are closely held and the trustee of Trust A is made presently entitled to $5,000 of Trust C’s trust income.[106] The $5,000 is directly attributable to the trust income of Trust A. As noted by the ATO Tax Avoidance Taskforce, there may be a number of reasons for Trust A redirecting income to the Trustee of Trust A through a circular trust distribution, including:

• making it difficult for the ATO to identify who is the actual recipient of a distribution (including the identification of who to impose tax on)
• directing the distribution to a low taxed or preferentially taxed entity that then redirects that income to the target beneficiary in a tax effective manner—that is, a closely held entity with a tax loss (i.e. no tax liability) may pass on a trust distribution in the form of an interest free loan to the target beneficiary or
• directing the distribution to an entity that can re-characterise that income—for example, income may be re-characterised as capital, so that a target beneficiary with a capital gains loss may use that loss to reduce tax payable on a distribution. [107]

What is trustee non-disclosure beneficiary tax?

The trustee non-disclosure beneficiary tax is a specific anti-avoidance rule that applies to certain circular trust distributions. The rules relating to the trustee non-disclosure beneficiary tax are contained in Division 6D in Part III of the ITAA 1936 and apply a higher penalty tax (marginal tax rate plus the Medicare levy) where:

• there is a circular trust distribution involving closely held trusts and
• there is a trustee beneficiary that is presently entitled to a share of net income[108] or
• the trustee fails to notify the ATO that a trustee beneficiary has included a share of net income in their assessable income where that share of net income includes an untaxed part.[109]

A closely held trust is defined as either:

• trusts in which up to 20 individuals have a fixed entitlement to 75 per cent or more of the income or capital of the trust or
• a discretionary trust.[110]

The trustee non-disclosure beneficiary tax does not apply to excluded entities, which are currently defined to include family trusts.[111]

Key provisions

Item 2 of Schedule 4 removes the following entities from the definition of excluded entities:

• family trusts
• trusts for which an interposed entity election has been made[112] and
• a trust that is part of a family group as per section 272-90 of Schedule 2F to the ITAA 1936.[113]

The effect of this is that these trusts will be liable to pay tax on the untaxed amount of a share of the net income of a trustee beneficiary associated with a circular trust distribution.[114]

Items 3 and 4 of Schedule 4 insert proposed paragraphs 102UK(1)(ca) and 102UT(1)(c) into the ITAA 1936. The effect of these amendments is that the above listed entities are exempt from the requirement to lodge a trustee beneficiary statement with the Commissioner. According to the Explanatory Memorandum to the Bill the amendments ‘do not require a trustee of a family trust to lodge a trustee beneficiary statement because it is considered that such reporting would impose unnecessary compliance costs on family trusts’.[115]

Additional information about this amendment can be found at pages 45 to 48 of the Explanatory Memorandum.

Policy position of non-government parties/independents

The position of the non-government parties and independents is not known, however, it appears that Schedule 4 was broadly supported in the House of Representatives.[116]

Position of major interest groups

The Government has not published the submissions received during the Treasury consultation on this Schedule of the Bill.[117] Of the twenty three submissions received by the Senate Economics Legislation Committee only the Tax Justice Network made substantive comments in relation to Schedule 4. While commending the Government on their willingness to extend the application of the provisions to family trust, the Tax Justice Network:

... would have preferred that a trustee of a family trust be required to lodge a trustee beneficiary statement with the Commissioner of Taxation as applies to other trustees. The TJN-Aus is concerned that without this requirement, how easy it will be for the ATO to detect round robin arrangements involving family trusts.[118]

Application

The amendments in Schedule 4 apply in relation to income years starting from 1 July 2019.[119]

Financial implications

According to the Explanatory Memorandum, as at the 2018–19 Budget, the measure was estimated to result in a gain to revenue of $10 million in each of 2020–21 and 2021–22.[120]

Concluding comments

Schedule 4 appears to be relatively uncontroversial and no significant issues appear to have been raised by stakeholders.

Schedule 5: disclosure of business tax debts

Background: current legislative requirements

Section 355-25 of Schedule 1 to the TAA makes it a criminal offence for a taxation officer to make a record of or disclose protected information. Section 355-155 makes it a criminal offence for an entity (other than a taxation officer) to pass on, record or disclose protected information acquired from a taxation officer. Protected information means information that:

• was disclosed or obtained under or for the purposes of a taxation law
• relates to the affairs of an entity and
• identifies, or is reasonably capable of being used to identify, the entity.[121]

The maximum penalty for these offences is two years imprisonment.[122]

There are however a number of exceptions to these offences, including, but not limited to:

• where the disclosed information was already available to the public[123]
• disclosure was made by a tax officer in the course of performing their duties as a tax officer[124]  or
• the disclosure was made to certain Government agencies and officials in the circumstances listed in sections 355-55 to 355-65 in Schedule 1 of the TAA.[125]

Background: policy rationale

Schedule 5 seeks to implement the 2016-17 Mid-Year Economic and Fiscal Outlook announcement that the Government would allow taxation officers to disclose to credit reporting bureaus the tax debt information of businesses that do not effectively engage with the ATO to manage their tax debts.[126]According to the announcement, the measure was initially going to apply to businesses with tax debts of more than $10,000 that were at least 90 days overdue—the Government considered that measure would result in businesses paying ‘taxation debts in a more timely manner to avoid affecting their credit rating’.[127]

The Explanatory Memorandum explains the rationale for the proposed amendment is to increase taxpayer engagement with the ATO, noting that the amendments will:

• allow tax debts to be placed on a similar footing as other debts, thereby increasing the incentives for businesses to pay their debts in a timely manner
• incentivise business to engage with the ATO as failure to do so will mean their tax debt could be disclosed, thereby adversely impacting their credit rating
• reduce unfair advantages enjoyed by businesses that do not pay their tax debts and
• contribute to more informed decision making by the business community by enabling other businesses and credit providers to more accurately assess a business’s credit worthiness.[128]

Schedule 5 proposes to achieve this by amending the TAA so that it is no longer a criminal offence for taxation officers to disclose the tax debt information of taxpayers to credit rating bureaus in certain circumstances. However, it is important to understand that the proposed amendments only create a legislative framework—that is, they do not comprise a full set of rules and exceptions. Rather, the mechanism that will determine whether a debt is disclosable or not will be a legislative instrument issued by the Minister.[129] As such, the proposed amendments do not expressly require that:

• the disclosure exception only apply to entities with tax debts in excess of $100,000
• taxpayers engaging with the ATO will not have their debts disclosed and
• debts can only be disclosed where they are more than 90 days overdue.[130]

However, the Assistant Treasurer’s second reading speech indicates that the Government intends for the scheme to operate within these parameters.[131]

Number of taxpayers affected

The ATO has advised the Senate Economics Legislation Committee in an answer to a question on notice that based on the current proposed exposure draft legislative instrument, around 5,000 businesses could potentially have their tax debts reported to credit reporting bureaus.[132]

Key provisions

Item 2 of Schedule 5 to the Bill inserts an exception to the offence under section 355-25 of Schedule 1 to the TAA. Proposed subsection 355-72 of Schedule 1 to the TAA states that section 355-25 will not apply where:

• a taxation officer makes a record for, or disclosure to a credit reporting bureau
• the disclosure is made in relation to the tax debt of an entity that belongs to a class of entities declared by legislative instrument by the Minister made under proposed subsection 355-72(5)
• the disclosure is made for the purpose of enabling a credit reporting bureau to prepare, issue, update, correct or confirm an entity’s credit worthiness—a credit reporting bureau is defined in proposed subsection 355-72(7) as an entity recognised by the Commissioner as an entity that prepares and issues credit worthiness reports in respect of other entities[133] and
• where the disclosure is made for a purpose other than updating, correcting or confirming previously disclosed information, both:
  • the Inspector-General of Taxation (IGT) has been consulted and
  • 21 days have passed since the entity was given notice of the proposed disclosure.

Proposed subsections 355-72(2) and (3) of Schedule 1 to the TAA require the Commissioner to notify an entity in writing that the ATO intends to make a disclosure. The notice must also explain what information will be disclosed, the amount of outstanding tax debt and how the taxpayer can make a complaint about the information being disclosed. Further, proposed paragraph 355-72(3)(e) requires notice to be served on the entity.[134]

What debts are covered?

‘Tax debts’ is a defined term and includes the following:

• any amount due to the Commonwealth directly under a taxation law, including any such amount that is not yet payable (known as primary tax debts) and
• an amount that is not a primary tax debt, but is due to the Commonwealth in connection with a primary tax debt.[135]

On this point, the Explanatory Memorandum states that:

The information that may be disclosed must relate to a taxpayer’s tax debt within the meaning of section 8AAZA of the TAA 1953. This includes primary tax debts such as income tax debts, activity statement debts, superannuation debts and penalties and interest charge debts, and secondary tax debts such as amounts due under a court order.[136]

Which entities are covered?

Proposed subsection 355-72(5) of Schedule 1 to the TAA allows the Minister to declare one or more classes of entities as being able to have their tax debt information disclosed. Proposed subsection 355-72(6) creates two pre-conditions on the Minister prior to issuing a legislative instrument— namely that the Minister must:

• consult with the Information Commissioner in relation to matters that relate to the privacy functions (within the meaning of the Australian Information Commissioner Act 2010) and would be affected by the proposed instrument and
• consider any submissions made by the Information Commissioner because of that consultation.

It is important to note that the Minister is only required to consult with and consider the recommendations of the Information Commissioner. As such, there is no legislative obligation to follow the Information Commissioner’s recommendations.

While the Bill does not ultimately define those taxpayers who may be subject to tax debt disclosure, the legislative instrument which deems such future classes of taxpayers will be a disallowable instrument and in this respect, there will be a level of Parliamentary scrutiny.[137] The Explanatory Memorandum to the Bill provides the following justification for providing the Minster with such a power:

Specifying the class of entity in a legislative instrument provides the Government with flexibility to update the criteria promptly to ensure it delivers the right policy outcome. It also provides an appropriate level of Parliamentary scrutiny around the criteria as the instrument will be disallowable.[138]

What is the proposed class of taxpayers captured?

Proposed class of taxpayers

On 24 July 2019, the Government released the Taxation Administration (Tax Debt Information Disclosure) Declaration 2019 as an Exposure Draft (the Exposure Draft Instrument).[139] Under the Exposure Draft Instrument, the class of taxpayers captured is broadly defined as taxpayers carrying on a business or similar venture with total tax debts exceeding $100,000 that have been due for more than 90 days.

Specifically, proposed subsection 6(1) of the Exposure Draft Instrument states that an entity must meet the following criteria to be within the declared class of entities under proposed subsection 355-72(5) of Schedule 1 to the TAA:

• the entity is registered in the Australian Business Register and is not a Deductible Gift Recipient, complying superannuation fund, registered charity or government entity
• the entity has one or more tax debts, the total of which is at least $100,000, that have been due and payable for more than 90 days and
• the entity satisfies either of the following:
  • the entity does not have an active complaint with the IGT concerning the disclosure of tax debt information of the entity that is, or could be, the subject of an investigation under paragraph 7(1)(a) of the Inspector-General of Taxation Act 2003
  • the entity has an active complaint with the IGT, but after taking reasonable steps to confirm whether the IGT has such a complaint, the Commissioner does not become aware of the complaint.[140]

Consultation closed on 21 August 2019, however, it is not clear whether the outcomes of consultation will be released before the Senate considers the Bill. The proposed amendments were previously released for consultation by Treasury in January 2018.[141] At that time, the tax debt threshold defining the class of entities who could be subject to disclosure was much lower, at $10,000.[142]

Non-disclosable debts

Proposed subsection 6(2) of the Exposure Draft Instrument seeks to exclude certain debts from counting towards the $100,000 debt amount. These include debts in respect of which a taxpayer has:

• entered into a payment arrangement under section 255-15 of Schedule 1 to the TAA and the taxpayer is complying with that arrangement
• lodged a taxation objection and the commissioner has not made an objection decision
• applied to the Administrative Appeals Tribunal (AAT) for review of, or appealed to the Federal Court against an objection decision and proceedings have not been finalised
• requested a reconsideration of a reviewable decision under the Superannuation Industry (Supervision) Act 1993 (SIS Act) in relation to the tax debt and the decision has not been confirmed, revoked or varied
• applied to the AAT under the SIS Act for review of a decision in relation to the tax debt and proceedings have not been finalised or
• an active complaint with the IGT in relation to the tax debt that is, or could be, the subject of an investigation by the IGT and the Commissioner becomes aware of the complaint.[143]

What safeguards exist?

As noted above, the proposed amendments seek to create a number of safeguards to limit the circumstances in which a disclosure can be made.

Notice required to be provided to the taxpayer

Before the ATO makes the initial disclosure, the entity must be served with written notice by the Commissioner, which:

• explains the type of information that is proposed to be disclosed to the credit reporting bureau
• sets out the amount of any tax debts payable by the entity at the time the notice is given by the Commissioner and
• explains how the primary entity may make a complaint in relation to the proposed disclosure of the entity’s information.[144]

Commissioner must consult with the IGT

Proposed paragraph 355-72(1)(e) of Schedule 1 to the TAA requires the Commissioner to consult with the IGT prior to making a disclosure of information (other than a disclosure which merely updates or corrects a previous disclosure).

This requirement is intended to operate as a safeguard to ensure that the Commissioner does not disclose the tax debt information of an entity inappropriately.[145] However, Schedule 5 does not contain any further information about consultation—it merely requires the Commissioner to consult. On this point, the Explanatory Memorandum to the Bill states that Minster’s legislative instrument may impose further requirements regarding the IGT’s involvement in the process:

For example, the legislative instrument may only permit a disclosure where the Inspector-General of Taxation has not advised that it is conducting such an investigation relating to the taxpayer’s tax debt or the Commissioner’s intention to disclose the taxpayer’s tax debt information. In order to rely on the exception to the offence protecting the confidentiality of tax information, taxation officers will be required to take reasonable steps to confirm that such an investigation is not underway before making the disclosure.[146]

While the EM considers that this provided operational flexibility, it is questionable why fundamental safeguards are not included in the Bill.

Policy position of non-government parties/independents

The position of the non-government parties and independents is not known, however, it appears that this Schedule was broadly supported in the House of Representatives.[147]

Position of major interest groups

The majority of submissions to the Senate Economics Legislation Committee focussed on Schedule 5 of the Bill. In particular, the IGT was particularly critical, raising twelve issues with the proposed amendments, and a further five issues with the Exposure Draft Instrument.[148]

A number of stakeholders broadly support the measure, including; the Institute of Certified Bookkeepers, CPA Australia, the Council of Small Business Organisations Australia, Tax Justice Network, Institute of Public Accountants and CAANZ. Further, CAANZ notes that similar measures put in place in New Zealand have seen an increase in the level of engagement with the New Zealand Department of Inland Revenue, and that such measures are ‘necessary to help rein-in worrying and growing levels of aged, unpaid and undisputed levels of tax debt’.[149]

Some of the key themes and issues raised by stakeholders are:

• there is general concern that much of the operative provisions are being dealt with through a legislative instrument rather than enshrined in legislation.[150] On this point, the Australian Small Business and Family Enterprise Ombudsman notes the absence of legislative rules dealing with expunging previously reported data, and contends that:

...the issue of expungement of previously reported data is so fundamental that it should not be to a future instrument or otherwise through Commissioner and credit reporting bureau guidance or practice.[151]

• that the proposed legislation should provide more detail on the obligation on the Commissioner to consult with the IGT, including the relevant process and the effect of any recommendations made during that consultation process[152]
• that the timeframe for notifying taxpayers should be increased to at least 28 days, the ASBFEO stating this should be increased to 45 days[153]
• the notification obligations should be extended so that the ATO must not only notify a taxpayer, but also their registered tax agent[154]
• creating a right to compensation when it has been identified that harm has resulted due to an incorrect disclosure[155]
• the legislation should create an obligation on credit reporting bureau’s to remove information once instructed by the ATO.[156]

Financial implications

According to the Explanatory Memorandum:

The measure is estimated to result in a gain to the budget of $30 million in underlying cash balance terms over the forward estimates period. This includes an estimated increase in goods and services tax receipts of $10 million, paid to the States and Territories. There is no revenue impact in fiscal balance terms as the tax liabilities have already been recognised. [emphasis added].[157]

Application

The amendments made by Schedule 5 of the Bill apply in relation to records and disclosures of information made on or after the commencement of Schedule 5. Schedule 5 is due to commence on the day after Royal Assent.[158] Information acquired before commencement is able to be disclosed.

Concluding comments

Schedule 5 of the Bill gives rise to a number of key issues and considerations.

The most significant issue underlying most available submissions goes to the central point of whether decriminalising disclosure of taxpayer information should be delivered through a broad legislative framework, which is then narrowed through legislative instruments (as is proposed) or whether it should be conclusively enshrined in legislation considered and approved by the Parliament.

In particular, some stakeholders seem somewhat uncomfortable with the proposed approach, given that most of the detail about who will be subject to the framework, proposed safeguards, the administrative processes to be adopted by the ATO and how credit reporting bureaus will deal with reported information is in a draft legislative instrument and not enshrined in legislation. In particular, the IGT has raised concerns that there is no guidance or detail in the proposed Bill about how the ATO is to consult and engage with the IGT.[159]

Schedule 6: electronic invoicing implementation

Background

Schedule 6 seeks to confer on the Commissioner of Taxation, the functions and powers to administer a framework or system for electronic invoicing.[160]  The conferral of these powers is necessary in order for Australia to develop a trans-Tasman electronic invoicing framework as part of Australia and New Zealand’s intention to adopt the Pan-European Public Procurement Online interoperability framework. As explained in the Explanatory Memorandum to the Bill:

The Australian and New Zealand governments are working together to pursue common approaches to electronic invoicing as part of the Single Economic Market agenda. In March 2018, the Australian and New Zealand Prime Ministers agreed to a trans-Tasman approach to electronic invoicing. On 22 February 2019, the Prime Minister jointly announced with the New Zealand Prime Minister the two countries’ intention to adopt the Pan-European Public Procurement Online interoperability framework for trans-Tasman electronic invoicing.

The Pan-European Public Procurement Online interoperability framework is a secure network that enables government organisations and private enterprises to exchange business documents, such as invoices, electronically. The Pan-European Public Procurement Online interoperability framework connects different electronic procurement and invoicing systems by establishing a set of common business processes and technical standards. This provides a seamless exchange of information between trading partners who use different software applications. The Pan-European Public Procurement Online interoperability framework is currently used in over 30 countries across Europe, Asia and North America. It is proposed that the Commissioner become the Australian local Pan-European Public Procurement Online Authority due to the skills and experience the Commissioner has with similar projects. However, the Commissioner does not currently have specific functions and powers related to electronic invoicing.[161]

Additional information about Schedule 6 can be found in the Explanatory Memorandum at pages 67 to 70. Information about the Trans-Tasman Electronic Invoicing Arrangement has been provided by Treasury and the ATO has also produced ‘E-invoicing’, which provides guidance for stakeholders.

Policy position of non-government parties/independents

The position of the non-government parties and independents is not known, however, it appears that this Schedule was broadly supported in the House of Representatives.[162]

Position of major interest groups

Of the twenty three submissions received by the Senate Economics Legislation Committee only CAANZ and the Institute of Certified Bookkeepers made substantive comments on Schedule 6.[163] Although both supported the proposed amendment, the Institute of Certified Bookkeepers recommended including a legislative requirement for the ATO to liaise with the Australian Business and Software communities to develop an acceptable approach.[164]

Financial implications

According to the Explanatory Memorandum, Schedule 6 is expected to have ‘nil’ financial impact.[165]

As stated by Treasury and paragraph 6.2 of the Explanatory Memorandum, Deloitte Access Economics has estimated that e-Invoicing could result in benefits to the Australian economy of $28 billion over ten years.[166]

Key Provisions

Item 2 of Schedule 6 of the Bill inserts proposed section 3G into Part IA of the TAA. Proposed section 3G confers on the Commissioner:

• the function to develop and/or administering a framework or system for electronic invoicing (including by adopting a system developed outside of Australia) and
• powers to do all things necessary or convenient to be done for or in connection with the performance of those functions.
  

Schedule 7: superannuation guarantee contribution integrity measure

Background

The superannuation framework obliges employers to contribute 9.5 per cent of the ordinary time earnings (OTE) of their eligible employees as a superannuation contribution.[167] In general, OTE is salary and wages paid less bonuses, overtime and termination payments related to unused annual leave.

Where employers fail to pay compulsory superannuation contributions on time they are liable to pay the SG Charge, which is the mechanism to require employers to pay superannuation guarantee contributions direct to an employee’s superannuation fund.[168]

In December 2016 Industry Super Australia (ISA) released a report entitled Overdue: Time for Action on Unpaid Super which estimated that 2.4 million Australians are being underpaid SG of at least $3.6 billion.[169] That report highlighted, amongst other things, that if an employee makes voluntary contributions, a loophole allows their employer to count this towards SG obligations.[170]

Superannuation Guarantee Cross‑Agency Working Group

In December 2016 the Minister for Revenue and Financial Services requested that a Cross Agency Working Group be formed to report on the incidence and nature of non-compliance for superannuation guarantee.[171]

The interim report of the Cross Agency Working Group dated January 2017 considered the methodology and data used in the ISA report and did not support all of ISA’s conclusions.[172] However, it was satisfied:

... a small number of employers are using their employees’ salary sacrifice arrangements to satisfy their superannuation guarantee obligation. ATO compliance data does not indicate the practice is widespread [and the problem] ... can be resolved with straightforward legislation that would address anomalies.[173]

The final report to the Minister for Revenue and Financial Services by the Cross Agency Working Group dated March 2017 states, amongst other things:

The Working Group considers that the Government should clarify the law on how salary sacrifice agreements affect an employer's superannuation guarantee obligations. In particular to, firstly, ensure that employers cannot use an amount an employee's salary sacrifices to superannuation to satisfy the employer's superannuation guarantee obligation; and secondly, to ensure that the ordinary time earnings base used to calculate an employer's superannuation guarantee obligation includes those salary or wages sacrificed to superannuation. This will ensure that employees receive the full benefit of voluntary contributions.[174]

Senate Economics References Committee

Also in response to the ISA report, on 1 December 2016, the Senate referred an inquiry into the Superannuation Guarantee to the Senate Economics References Committee (Economics References Committee) for report by 22 March 2017.[175] The Economics References Committee noted that a 2006 ATO ruling (SGD 2006/2) on the SGAA states that it is allowable for an employee's voluntary salary sacrifice contributions to firstly, reduce the employee’s OTE base on which SG is calculated; and secondly, be counted towards their employer's compulsory SG obligation.

Numerous submitters raised concerns with this arrangement and emphasised it could be exploited by unscrupulous employers to the detriment of employees.[176]

The Economics References Committee stated its belief:

... that the SG must be a guaranteed minimum contribution to employees' retirement savings. When employees voluntarily contribute extra funds to their own superannuation savings they should be assured that these amounts are genuinely additional to the SG and not simply reducing their employers SG obligation. Without this assurance, employees may be disinclined to make adequate provision to their retirement through voluntary contributions.[177]

Accordingly, it recommended that the SGAA be amended to ensure that an employee’s voluntary salary sacrificed superannuation contributions cannot count towards the employer’s compulsory SG obligation, nor reduce the OTE base upon which SG is calculated.[178]

The amendments in Schedule 7 to the Bill give effect to that recommendation.

What is salary sacrificing and why is it used?

Salary sacrificing, or salary packaging refers to an arrangement between an employer and employee where the employee agrees to forego part of their salary in exchange for the provision of a good or service of similar value.[179] For example, an employee may forego part of their salary in exchange for their employer providing a novated car lease, portable computing device, on-site child care facilities or superannuation contributions.

Although the employee will not pay income tax on the amount of salary sacrificed, the employer will generally be subject to Fringe Benefits Tax (FBT). Nonetheless, salary sacrificing can be beneficial for both employees and employers.

As salary sacrificing results in a reduction of an employee’s pre-tax income they may be able to obtain a good or benefit for an amount that would be less than if they were to pay for that benefit from their post-tax income. Typically salary sacrificing will be more advantageous to taxpayers in higher marginal tax brackets.

Similarly, salary sacrificing may also benefit employers. This will typically arise where the cost of providing the good or benefit is less than the cost of providing the foregone or ‘sacrificed’ salary amount. This will typically occur where the benefit is either exempt from FBT or concessionally taxed under the FBT rules. This can be particularly useful for FBT-exempt employers, as it allows them to offer more lucrative employment conditions.

The availability and scope of salary sacrificing arrangements will vary from employer to employer.

Policy position of non-government parties/independents

At the time the 2017 Bill was considered by Senate Economics Legislation Committee, the position of Labor Senators was clear from their additional comments—whilst the closure of the salary sacrifice loophole is welcome, ‘it is only one important small step in taking significant action on unpaid super’.[180]  Labor supported the passage of the Bill in the House and called ‘on the Government to do more to combat superannuation theft and ensure that workers receive their rightful superannuation entitlements in full’.[181]

Position of major interest groups

In 2017 very few submitters commented on this measure—except to state that it was welcome[182] and would be likely to enhance the integrity of the superannuation system.[183] However, some submitters were concerned that the Bill does not go far enough to address other identified problems in relation to unpaid superannuation contributions.[184]

In its submission to the Senate Economics Legislation Committee’s inquiry into the provisions of the Bill, the Financial Services Council expressed its support for the measures submitting:

The loophole is an unjustifiable arrangement that may leave employees materially worse off by retirement, and is inconsistent with the idea of salary sacrifice for superannuation – salary sacrifice should be for the benefit of employees, not employers. The passage of a legislative fix for this issue is long overdue.[185]

Financial implications

The Explanatory Memorandum states that the proposed amendments have a small but unquantifiable impact on the fiscal and underlying cash balances.[186]

Key issues and provisions

Defining a salary sacrifice arrangement

Item 2 of Schedule 7 to the Bill inserts proposed section 15A into the SGAA to provide a description of a salary sacrifice arrangement being an arrangement under which a contribution is, or is to be, made to a complying superannuation fund or a retirement savings account (RSA) by an employer for the benefit of an employee—provided that the employee agreed for the contribution to be made and in return, for either or both of the following amounts to be reduced (including to nil):

• the ordinary time earnings of the employee
• the salary or wages of the employee.[187]

Two new definitions are inserted to support this description:

• a sacrificed ordinary time earnings amount of the employee for the quarter arises if ordinary time earnings are reduced and
• a sacrificed salary or wages amount of the employee for the quarter arises if salary or wages are reduced.[188]

Amounts that would otherwise be excluded from salary or wages (under sections 27 and 28 of the SGAA) are not taken into account when working out the amount of a reduction under a salary sacrifice arrangement.[189]

Formula for calculating SG shortfall

Employers are liable for the SG charge for a quarter if they have a shortfall for the quarter.[190] An employer will not have a shortfall for a quarter if they contribute at least 9.5 per cent of an employee’s ordinary time earnings (OTE) base for the quarter. An employer’s shortfall is calculated by reference to the SG charge percentage—currently 9.5 per cent.[191]

Existing subsection 19(1) of the SGAA sets out the formula for calculating an employer’s individual superannuation guarantee shortfall. That formula is based on the total salary or wages paid by the employer to the employee. Item 3 of Schedule 7 to the Bill repeals and replaces the formula so that under proposed subsection 19(1) the formula will take into account the quarterly salary or wages base, for an employer in respect of an employee being the sum of:

• the total salary or wages paid by the employer to the employee for the quarter and
• any sacrificed salary or wages amounts of the employee for the quarter in respect of the employer.[192]

The effect of this amendment is that the inclusion of sacrificed salary or wages amounts ‘ensures that the shortfall and charge is calculated on the pre-salary sacrifice base and that employers cannot calculate their superannuation guarantee obligations on reduced salary and wages’.[193]

Item 5 of Schedule 7 to the Bill repeals existing subsection 19(3) and inserts proposed subsections 19(3) and (4) into the SGAA. For the purposes of calculating the quarterly salary or wages base, where sacrificed salary or wages amounts are taken into account for one quarter but not actually contributed to the fund in that quarter the amount will be counted in the quarter to which the salary sacrifice arrangement relates.

Reduction of SG charge percentage

Under existing section 23 of the SGAA, the SG charge percentage of an employer in relation to an employee is reduced if the employer makes a contribution (other than a sacrificed contribution) to an RSA or to a superannuation fund that is not a defined benefit fund. The amount of the reduction is worked out using the formula in subsection 23(2) of the SGAA which is based on ordinary time earnings.

Item 7 of Schedule 7 to the Bill amends that formula so that it refers to the ordinary time earnings base. Item 9 inserts the new definition of ordinary time earnings base being the number of dollars in the sum of:

• the ordinary time earnings of the employee for the quarter in respect of the employer and
• any sacrificed ordinary time earnings amounts, of the employee for the quarter in respect of the employer.

These amendments operate to ensure that employer contributions that reduce the SG charge are calculated on a pre-salary sacrifice base.

Item 10 of Schedule 7 to the Bill inserts proposed subsection 23(7A) into the SGAA to provide that sacrificed ordinary time earnings amounts that are taken into account in a quarter are not to be taken into account for any other quarter.

Application

The amendments made by Schedule 7 to the Bill apply in relation to working out an employer’s superannuation guarantee shortfall for quarters beginning on or after 1 July 2020.[194]

Appendix: application of proposed section 26-102 of the ITAA 1997

Source: Senate Economics Legislation Committee, Answers to Questions on Notice, Australian Taxation Office, Treasury Laws Amendment (2019 Tax Integrity And Other Measures No. 1) Bill 2019 [Provisions], 19 August 2019, p. 4.