Introductory Info

Date introduced:  9 February 2022
House:  House of Representatives
Portfolio: Treasury
Commencement: Various dates as set out in the main body of the digest.

Purpose of the Bills

The purpose of the Treasury Laws Amendment (Enhancing Tax Integrity and Supporting Business Investment) Bill 2022 (the Bill) is to:

• amend the Competition and Consumer Act 2010 (CCA), including the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (the ASIC Act) to:
• strengthen and clarify the existing unfair contract terms (UCT) regime to reduce the prevalence of unfair contract terms in consumer and small business standard form contracts
• introduce a civil penalty regime prohibiting the use of and reliance on UCTs in standard form contracts
• expand the class of contracts that are covered by the UCT provisions[1]
• clarify the power of courts to make orders to void, vary or refuse to enforce part or all of a contract containing UCTs
• amend the Taxation Administration Act 1953 (the TAA 1953) to allow the Commissioner of the Australian Tax Office (ATO) (the Commissioner) to direct an entity to complete an approved record-keeping course (a tax-records education direction)
• amend the Income Tax Assessment Act 1997 (the ITAA 1997) and the Income Tax Assessment Act 1936 (ITAA 1936) to provide income tax and withholding tax exemptions to Fédération Internationale de Football Association (FIFA) and its wholly owned subsidiary FWWC2023 Pty Ltd for activities associated with the 2023 FIFA Women’s World Cup
• amend the ITAA 1997 to provide taxpayers the choice to self-assess the effective life of certain intangible depreciating assets implementing the ‘Digital Economy Strategy — self-assessing the effective life of intangible assets’ measure from the 2021–22 Budget[2]
• amend the ITAA 1997 to make certain grants received in relation to Cyclone Seroja non-assessable and non-exempt income (NANE income), implementing ‘Cyclone Seroja — tax treatment of qualify grants’ measure from the 2021–22 Mid-Year Economic and Fiscal Outlook (MYEFO)[3]
• make various minor and technical amendments to other legislation, including to the Fringe Benefits Tax Assessment Act 1986 (FBTA Act) to:
• address unintended consequences and restore access to FBT exemptions for certain tax exempt not-for-profit societies and associations inadvertently excluded under amendments made by the Tax Laws Amendment (2013 Measures No 2) Act 2013 and
• prevent overlap between employees covered by the $30,000 exemption cap and those covered by $17,000 exemption cap under the FBTA Act.

The Income Tax Amendment (Labour Mobility Program) Bill 2022 (Labour Mobility Bill) was introduced with the Treasury Laws Amendment (Enhancing Tax Integrity and Supporting Business Investment) Bill 2022 (the Bill). The Labour Mobility Bill and Schedule 6 of the Bill will:

• amend the ITAA 1997, the ITAA 1936 and other tax laws to reduce the tax on certain income earned by foreign resident workers participating in the Australian Agriculture Worker Program or the Pacific Australia Labour Mobility scheme from 32.5 per cent to 15 per cent by providing a tax offset designed to ensure a 15% tax rate effectively applies to their first $45,000 of program income after deductions
• amend the Income Tax (Seasonal Labour Mobility Program Withholding Tax) Act 2012to amend the title of the Act to the Income Tax (Labour Mobility Program Withholding Tax) Act 2012.  

Structure of the Bill

The Bill is divided into seven schedules:

• Schedule 1 deals with directions by the Commissioner to complete an approved tax record- keeping course
• Schedule 2 deals with the proposed income and withholding tax exemptions related to the 2023 FIFA Women’s World Cup
• Schedule 3 deals with the measures related to intangible asset depreciation
• Schedule 4 deals with the proposed UCT regime reforms
• Schedule 5 deals with grants received in relation to Cyclone Seroja
• Schedule 6 and the Labour Mobility Bill deal with the proposed tax offset to reduce the effective tax rate on certain income earned by foreign resident workers participating in specified programs and
• Schedule 7 deals with various minor and technical amendments.

Background to the measures

As the Bill deals with several separate measures, a brief background is provided in relation to each measure.

Unfair Contract Term reforms

Schedule 4 will amend the UCT regime in the CCA, (including the ACL, which is set out in Schedule  2 to the CCA) and the ASIC Act with the aim of reducing the prevalence of unfair contract terms in consumer and small business standard form contracts. The existing Commonwealth UCT protections were first introduced in July 2010.[4] Currently:

• ACL provisions address UCTs in relation to goods, services and the sale or grant of an interest in land[5] and
• the equivalent ASIC Act UCTs provisions address UCTs for financial products and services.[6]

Since the introduction of UCT Commonwealth legislation in 2010 further developments have happened in this policy space:

• in November 2016, the UCT was extended to certain standard form small business contracts[7]
• in November 2018, the Government released the Review of Unfair Contract Term Protections for Small Business: Discussion Paper (2018 review).[8] Having considered the submissions to the 2018 review, the Government announced in March 2019 its intention to strengthen the UCT protections[9]
• on 5 April 2021 the UCT regime was further extended to apply to insurance contracts regulated by the ASIC Act, addressing Recommendation 4.7 – application of unfair contract terms provisions to insurance contracts – of the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry[10]
• in December 2019 Treasury released the Consultation Regulation Impact Statement on enhancements to UCT protections, with consultation (which included receiving submissions and stakeholder roundtable meetings) concluding in March 2020[11]
• in November 2020, at a meeting of the Legislative and Governance Forum on Consumer Affairs, ministers considered a Decision Regulation Impact Statement and agreed that reforms were necessary to better protect consumers and small businesses from UCTs[12] and
• an Exposure Draft Bill was subsequently released for public consultation in August 2021.[13]

Tax-records education directions

Schedule 1 will amend the TAA 1953 and other legislation to allow the Commissioner of the ATO (the Commissioner) to direct an entity to complete an approved record-keeping course (a tax-records education direction).

The Black Economy Taskforce (the Taskforce) was established in 2016 to develop a policy response to combat the ‘black economy’ in Australia: activities which take place outside the tax and regulatory systems, such as demanding cash payment to avoid tax obligations and not reporting or under-reporting income.[14] The report recognised that such issues cannot be effectively tackled by traditional law enforcement measures alone.[15]

The Taskforce’s Final Report (the Report) found that some businesses have genuine difficulty complying with their record-keeping obligations, resulting in omitted income being added to the black economy. The Report recommended:

• the requirements for tax-related record-keeping obligations should be clear and simple for entities carrying on businesses[16] and
• penalties for breaches of these rules should be designed so that the ATO has a range of administrative sanctions available at its discretion.[17]

In response to the Taskforce’s Report, the Government agreed that the requirements for tax record-keeping should be clear and simple, and that entities carrying on businesses should adhere to strong record-keeping practices.[18] The measure Black Economy – assisting businesses to meet their reporting obligations was announced in the 2019-20 MYEFO.[19]

Proposed tax exemptions for the 2023 FIFA Women’s World Cup

The provision of various tax exemptions is a common feature of successful bids for major international sporting events.[20] The Commonwealth has previously provided similar tax exemptions to those proposed in the Bill, including in relation to the 2006 Commonwealth Games in Melbourne[21] and the International Cricket Council for the T20 World Cup.[22]

As part of Australia’s bid to co-host the 2023 FIFA Women’s World Cup, the Government committed to providing FIFA and a locally established Australian subsidiary (FWWC2023 Pty Ltd) with certain tax exemptions for activities associated with the 2023 FIFA Women’s World Cup.[23]

Schedule 2 to the Bill gives effect to those commitments.

Intangible asset depreciation

The cost of depreciating assets (including certain intangible assets) is generally of a capital nature and hence is not immediately deductable as an ordinary business expense. However, in some circumstances deductions are available for the decline of the value of depreciating assets (including certain intangible assets) to the extent that the asset is used for a taxable purpose.[24]

Division 40 of the ITAA 1997 creates a uniform capital allowance system that, among other things, deals with deductions for the decline in the value of depreciating assets. Currently the tax law recognises a number of different types of intellectual property and other intangible assets as depreciating assets and provides special rules for their effective life.[25]

Schedule 2 to the Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill 2017 as introduced unsuccessfully sought to reform the rules relating to the effective life of intangible assets to ensure that they ‘reflected the period of time that the assets provide economic benefits to the taxpayer’.[26] Schedule 2 was removed from the Bill in Government amendments introduced in the Senate.[27]

In the 2021-22 Budget, the Government announced the Digital Economy Strategy, which included ‘measures to empower businesses to grow investment in digital technologies’.[28] Schedule 3 to the Bill gives effect to the commitment to provide taxpayers the option to self-assess the effective life of certain intangible depreciating assets rather than using the statutory effective to work out the decline in value.

Tax treatment of certain grants made in relation to Cyclone Seroja

Grant payments made to businesses are generally assessable income for income tax purposes. However, certain grant payments related to natural disasters may be exempt or non-assessable non-exempt (NANE) income under Divisions 51, 52 and 59 of the ITAA 1997.

Recent examples include payments for disaster recovery assistance in relation to the 2020 bushfires, Cyclone Yasi and the 2019 floods.[29]

In the 2021-2022 MYEFO, the Government committed to making certain grants related to Cyclone Seroja NANE income for income tax purposes.[30] Schedule 5 to the Bill gives effect to that commitment.

Proposed tax offset for certain foreign workers

Generally, individuals who are not residents of Australia for tax purposes do not receive the tax-free threshold that Australian tax residents receive and hence are currently taxed at 32.5 per cent from their first dollar of income.

Under the ITAA 1997 a person will be an ‘Australian resident’ (and hence able to access the tax-free threshold and relevant tax rates) if the definition in subsection 6(1) of the ITAA 1936 applies to them. [31]  That subsection defines a ‘resident’ of Australia by reference to four tests, the:

• resident according to ordinary concepts
• domicile and permanent abode
• 183 day test– unless the Commissioner is satisfied that the person’s usual place of abode is outside Australia and that the person does not intend to take up residence in Australia and
• Commonwealth superannuation fund test.[32]

Importantly, a person only needs to satisfy one of the above tests in order to be a resident, and hence be taxed as an Australian resident rather than as a non-resident.

A series of decisions by the Administrative Appeals Tribunal (AAT) in 2015 provided some clarification of when working holiday visa holders qualify as residents, confirming that when applying the ‘183 day’ test the entirety of that test, as provided in the legislation, must be considered. That is, being physically in Australia for 183 days in an income year was not sufficient for satisfying residence criteria, instead a full assessment of the facts and circumstances relevant to the requirements outlined in the provision must be undertaken to ascertain residency status.[33] In the relevant cases, the AAT concluded that as the working holiday visa holders had no plans to live in Australia, they would not be residents during their stay under the 183 days test as:

• they had a usual place of abode elsewhere and
• had no intention of taking up residence in Australia.

This meant that despite spending more than 183 days in Australia they were not residents for tax purposes.[34] In that regard, the cases did not represent a departure from previous legal precedents. However, partly as a result of the attention that the AAT cases drew to the residency of working holiday visa holders, it was noted by the ATO that:

compliance activity has identified that many [working holiday makers] WHMs are currently incorrectly assessing themselves as residents for tax purposes. In particular, many WHMs have been relying on their presence in Australia for six months as sufficient to be an Australian tax resident.[35]

This raised concerns that some working holiday visa holders were incorrectly receiving the benefit of the tax-free threshold and the Low Income Tax Offset, meaning that they were not paying any tax until their income exceeded $20,542 in 2016–17.[36]

Appropriate level of taxation for non-residents working in the agricultural industry

Staffing availability issues and the need to rely on foreign workers on short-term visas are long-standing challenges for Australia’s agricultural sector (particularly the horticultural sector).[37]

A range of different temporary visa types are currently used to fill seasonal labour shortages, including:

• the temporary skilled migration program
• the working holiday maker program and
• Australia’s Pacific mobility schemes (the existing Seasonal Worker Programme (SWP) and Pacific Labour Scheme (PLS)).[38]

In 2021, the Government announced it would merge the existing SWP and PLS into the new Pacific Australia Labour Mobility (PALM) scheme and, separately, create a new Australian Agriculture visa ‘to support the growth of Australia’s agricultural industries’.[39] Further information about the new PALM scheme and Agricultural visa has been published by the Parliamentary Library.[40]

Running parallel to proposals for specific short-term visas for agricultural workers has been debate about the appropriate level of taxation of non-residents who hold short-term visas and work in the agricultural sector. As such, the taxation of such workers is a long-standing issue of some controversy that the Government and others have previously examined.[41]

The key issue at the centre of the debate is whether it is more appropriate to tax foreign workers on short-term visas working in the agricultural sector:

• in the same manner as all other non-residents workers or
• on a concessional basis compared to all other non-residents workers.

On 12 May 2015 the then Treasurer stated:

anyone on a working holiday in Australia will have to pay tax from their first dollar earned, rather than enjoying a tax-free threshold of nearly $20,000. This will save the Budget $540 million.[42]

The then Treasurer Joe Hockey noted the proposed measure was one of several ways the government was promoting 'fairness and a level playing field'.[43] The 2015-16 Budget Papers confirmed that the new taxation rate from the first dollar earned would be 32.5 per cent.[44] This would have meant that many working holiday makers (WHMs) – who form a substantial part of the agricultural workforce (particularly in relation to horticulture) – would have been taxed at a rate of 32.5 per cent from the first dollar earned, as is ordinarily the case for non-residents. This was forecast to raise revenue of $540 million over the forward estimates.[45]

The Explanatory Memorandum to the Bills that sought to implement the budget measure reinforced that the objective was to ensure all short-term visa holders working in Australia, including WHMs working in agriculture, were taxed on the same basis as non-residents:

The [2015–16 Budget announcement] was designed to ensure greater compliance with the tax laws and align WHMs with other individuals treated as non-residents for tax purposes.[46] [emphasis added]

The then Agriculture Minister, Barnaby Joyce argued:

I think the vast majority come here because we still have a great wage rate. Australians… have to work the full year to get the tax-free threshold. It does seem a little bit incongruous that someone can work four months, five months, six months and get a tax-free threshold because that actually puts them at a strategic advantage on two levels to their other Australian workers.[47] [emphasis added]

The measure proposed in the 2015-16 Budget reflected the view that it is appropriate to tax foreign workers on short-term visas working in the agricultural sector in the same manner as all other non-resident workers in other sectors.

However, following a review process, the Government announced on 27 September 2016 an amended measure that would have seen tax paid for by WHMs earning below $37,000 at a rate of 19 per cent. Ordinary marginal tax rates would have applied after that.[48]

The package of legislation to implement this measure was introduced into Parliament on 12 October 2016.[49] However, on 28 November 2016, after further negotiations to secure passage through the Senate, the Treasurer announced that the rate of tax was to be further reduced from 19 per cent to 15 per cent.[50] The legislation to achieve this outcome received Royal Assent on 2 December 2016 and the scheme commenced on 1 January 2017.[51]

That is, the measure that was enacted (rather than what was proposed in the 2015-16 Budget) reflected the view that foreign workers on short-term visas working in the agricultural sector should be taxed on a concessional basis compared to other non-resident workers. The policy arguments for this position are explored later in this digest. For further background readers are referred to the Bills Digest for the package of 2016 Bills referred to above.[52]

In relation to the Bill, the Government argues that taxing foreign workers on the new short-term visas on the same basis as other non-residents may discourage participation in the programs ‘as workers under these programs would typically be lower income earners’.[53]

As such, the Bill would reduce the effective tax rate on certain income earned by foreign resident workers participating in the Australian Agriculture Worker Program or the Pacific Australia Labour Mobility scheme from 32.5 per cent to 15 per cent and providing tax treatment similar to that of WHMs noted above. The result would be that the Bill would further differentiate the tax treatment of non-residents with working holiday visas and those participating in the Australian Agriculture Worker Program or the Pacific Australia Labour Mobility scheme to non-residents working in other sectors or under other visas, and hence, as discussed below, may be viewed as breaching the tax design principle of horizontal equity.

Minor and technical amendments

The Bill contains a large number of minor and technical amendments, the operation of which is accurately described in the Explanatory Memorandum.

Committee consideration

The Bill has not been referred to any Parliamentary Committee for inquiry and report. The Senate Standing Committee for the Scrutiny of Bills had no comment on the Bill or the Labour Mobility Bill.[54]

Policy position of non-government parties/independents

The position of non-government parties and independents on the precise measures contained in the Bill could not be determined at the time of writing. However, the Opposition has previously:

• called for improvements in relation to protections from UCTs provided to small businesses[55] and
• opposed previous attempts to allow taxpayers to self-assess the depreciation of intangible assets. The Opposition previously opposed a similar measure in the Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill 2017, arguing at the time that ‘a sufficiently strong policy case’ had not been made for the proposal[56] and
• in relation to the taxation of non-residents working in the agricultural sector:
• supported legislation aimed at ensuring working holiday makers were taxed in the same way as other as non-residents and
• subsequently did not oppose legislation that sought to tax working holiday makers on a lower, concessional basis compared to other non-residents on other short-term visas whilst arguing for an ‘internationally competitive rate of 10.5 per cent’.[57]

Position of major interest groups

Where the position of major interest groups and stakeholders on precise measures contained in the Bill could be determined it is discussed in the Key Issues and Provisions sections of this Digest.

Financial implications

According to the Explanatory Memorandum the measures would have the following financial impacts on the Commonwealth (all figures in $m):

Table 1:     Financial impact of measures contained in the Bill

Schedule	2021-22	2022-23	2023-24	2024-25	Total
Schedule 1	‘small but unquantifiable gain to the budget over the forward estimate period’[58]
Schedule 2	‘unquantifiable impact on receipts over the forward estimate period’[59]
Schedule 3	-	-	-20.0	-150.0	-170.0[60]
Schedule 4	Nil[61]
Schedule 5	‘no impact on receipts over the forward estimate period’[62]
Schedule 6	40.0	70.0	100.0	105.0	315.0[63]
Schedule 7	‘the financial impact is unquantifiable but expected to be small’[64]

Source: as per footnotes in table above.

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 Bills’ 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 Bills are compatible.[65]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights had no comment on the Bills. [66]

Key issues and provisions: assisting business to meet their tax record-keeping obligations

Schedule 1 will amend the TAA 1953 and other legislation to allow the Commissioner to direct an entity to complete an approved record-keeping course (a tax-records education direction) as an alternative to the existing civil penalties.

Current requirements to keep tax-related records

The scope of an entity’s record-keeping obligations depends on its nature, size, and the structure. In general, the tax law record-keeping provisions require entities carrying on a business or subject to indirect tax obligations to keep records:

• that record and explain transactions and other acts related to their tax affairs which enable their tax liability to be readily ascertained
• are in English (or are readily accessible and easily convertible into English) and
• for 5 years after they are prepared or obtained, or 5 years after the completion of the transaction or acts to which they relate to (whichever is later).[67]

Current penalties for failure to meet tax recording keep requirements

Generally, where an entity is required to keep or retain records under a taxation law and fails to do so in the manner required, they will be liable to an administrative penalty under section 288-25 in Schedule 1 of the TAA 1953.[68] However, section 298-20 in Schedule 1 of the TAA 1953 allows the Commissioner to cancel or refrain from imposing all or part of such an administrative penalty.

Black economy taskforce recommendations

As noted above, the Taskforce’s Final Report found that some businesses have genuine difficulty complying with their record-keeping obligations, resulting in omitted income being added to the black economy. The Report recommended:

• the requirements for tax-related record-keeping obligations should be clear and simple for entities carrying on businesses[69], and
• penalties for breaches of these rules should be designed so that the ATO has a range of administrative sanctions available at its discretion.[70]

In response to the Taskforce’s Report, the Government agreed that the requirements for tax record-keeping should be clear and simple, and that entities carrying on businesses should adhere to strong record-keeping practices.[71]

2018 Treasury consultation paper

The 2018 Treasury consultation paper Improving Black Economy Enforcement and Offences requested submissions in response to the question: ‘what non-financial penalties could be considered to enhance compliance with tax law?’.[72]

Whilst travel bans and bankruptcy-style lists were suggested in the consultation paper[73] there appears to have been no suggestion regarding tax-record education directions. Submissions to this consultation were not published and Treasury did not produce a publicly available report on the outcome of the consultation. Submissions that have been published on their own websites by submitters do not discuss education as an enforcement measure.

As such, prior to the measure Black Economy – assisting businesses to meet their reporting obligations being announced in the 2019-20 MYEFO[74] there appears to have been no formal recommendation, consultation or proposal to introduce a tax-records education regime in response to the Black Economy Taskforce’s Final Report recommendation. That aside, given that the TAA 1953 contains an existing education directions framework the measure can be seen as broadly consistent with the recommendation that the ATO has a range of administrative sanctions available at its discretion.[75]

Summary of proposed power to issue a tax-records education direction

The amendments in Schedule 1 will enable the Commissioner to issue a tax-records education direction requiring an entity to complete an approved record-keeping course.

The purpose of a tax-records education direction is to directly address the knowledge gaps and reduce cases of non-compliance with record keeping obligations by helping entities better understand their tax-related record-keeping obligations.[76] They will operate as an alternative to the administrative penalties that apply where an entity has failed to meet its record-keeping obligations under a taxation law.[77]

Existing education direction framework

The proposed tax-records education direction will be implemented by amending the existing education direction framework in Division 384 in Schedule 1 of the TAA 1953. That framework allows the Commissioner to give an education direction to an entity requiring a specified course of education to be undertaken where the Commissioner reasonably believes the entity has failed to comply with certain obligations arising under taxation laws. It also allows the Commissioner to approve courses of education.[78]

Under the existing TAA 1953 framework an education direction must be in writing and:

• specify the approved course that must be undertaken by:
• the taxpayer (if a sole trader or individual) or
• an individual who makes, or participates in making, decisions that affect the whole, or a substantial part, of the taxpayer’s business[79] and
• specify the period within which the entity must comply with the direction (which must be a period that is reasonable in the circumstances).[80]

The direction requires that the entity ensure that a specified approved course of education is undertaken by the appropriate person and provide the Commissioner with evidence that the relevant individual has completed the course.[81]

What is a tax-records education direction?

A tax-records education direction is a written direction from the Commissioner to:

• undertake an approved course of education specified by the Commissioner and
• provide the Commissioner with evidence of completion of the course.[82]

When can a tax-records education direction be issued?

The amendments in Schedule 1 will enable the Commissioner to issue a tax-records education direction requiring an entity to complete an approved record-keeping course where the Commissioner reasonably believes that:

• there has been a failure to comply with one or more specified record-keeping obligations under a taxation law where non-compliance gives rise to an administrative penalty under section 288-25 in Schedule 1 to the TAA 1953 and
• the entity is not disengaged or deliberately avoiding their record-keeping obligations.[83]

That is, it is intended that the Commissioner will issue a tax-records education direction to an entity where they reasonably believes that the entity has made a reasonable and genuine attempt to comply with (or believed they were complying with) their tax record-keeping obligations.[84]

The Commissioner will be able to issue a tax-records education direction to an entity three months after the day the Bill receives Royal Assent.[85] Importantly, the amendments will apply to failures to comply with record-keeping obligations under a taxation law that occur both before and after the Bill receives Royal Assent.[86] In that regard the Explanatory Memorandum states:

Providing the Commissioner of Taxation with the ability to issue a tax-records education direction in relation to breaches of record keeping obligations that occurred before the commencement of the Bill is appropriate and wholly beneficial to businesses. This is because the amendments will allow entities to choose to complete the approved record-keeping education course as an alternative to paying the financial administrative penalties if they wish.[87]

What does a tax-records education direction require a taxpayer to do?

A tax-records education direction requires the entity to:

• complete or arrange for the completion of the approved course of education before the end of the specified period set out in the written direction and
• provide the Commissioner with evidence of completion of the course.[88]

Under the existing education framework in the TAA 1953, the Commissioner of Taxation or other entity providing an approved course of education may charge fees for the course.[89] As such, a tax-records education direction also requires the entity pay any such course fees.

A tax-records education direction will operate as an alternative to the existing administrative penalty that applies where an entity has failed to meet its record-keeping obligations under a taxation law.[90]

What are the consequences for failing to comply with a tax-records education direction?

If an entity fails to comply with a tax-records education direction they will be liable to the original administrative penalty as set out in section 288-25 in Schedule 1 to the TAA 1953.[91] That is, there are no additional penalties applied if an entity does not comply with a tax-records education direction.

Views of stakeholders

At the time of writing the position of major interest groups and stakeholders regarding the measures proposed by Schedule 1 could not be determined.

Key issues and provisions: Intangible asset depreciation

Schedule 3 will amend the ITAA 1997 to allow taxpayers the choice to self-assess the effective life of certain intangible depreciating assets instead of using the statutory effective life to determine the decline in value of the asset.

National Innovation and Science Agenda – Intangible Asset Depreciation

On 7 December 2015, the Government announced a package of measures designed to incentivise and reward innovation as part of its National Innovation and Science Agenda. One of those measures will allow taxpayers the choice to either self‑assess the effective life of certain intangible depreciating assets or use the statutory effective life.[92]

Treasury subsequently released Exposure Draft legislation as part of a consultation process in April 2016. Five submissions were received, of which four were generally supportive of (whilst raising specific issues around the drafting of) the measure.[93] One submission was critical of the proposal to allow depreciation of non-innovative intangible assets, such as telecommunications site access rights, datacasting transmitter licences and spectrum licences.[94]

Previous reforms to depreciation of intangible assets

Other than minor reforms to the statutory effective life of in-house software[95] and mining, quarrying or prospecting information[96] the first attempt at substantial reform to how depreciation of intangible assets is calculated occurred in March 2017 when the Government introduced the Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill 2017 (the 2017 Bill).

Schedule 2 of the 2017 Bill would have allowed taxpayers to choose to self-assess the effective life of certain intangible depreciating assets that they start to hold on or after 1 July 2016, rather than using the specified statutory effective life.[97]

This proposed change was not supported by the Opposition. At the time the Shadow Assistant Treasurer stated:

Schedule 2—which, as I have said, Labor will not be supporting—gives taxpayers the choice to self-assess the effective life of certain intangible depreciating assets rather than using the statutory effective life, in working out decline in value… The argument that has been made for this in submissions to the Re:think tax discussion paper is the way in which such intangible assets are depreciated in Britain and the United States. But Labor does not feel that a sufficiently strong policy case has been made for the measures in schedule 2. Were the government to split the bill, Labor would be pleased to support what is currently schedule 1, but we cannot support schedule 2.[98] [Emphasis added]

The above was consistent with the Opposition’s criticism of the proposed changes to the tax deduction and depreciation arrangements for intangible assets in late 2015:

Currently, these assets must be claimed as tax deductions according to a timetable set by the Australian Tax Office— meaning their value can only be claimed back over either 8 or 20 years. The Government now wants to let companies choose their own depreciation schedules instead. This means they may claim tax breaks over a much shorter period and dramatically boost their profits in the process … Any company doing business here which acquires intangible assets will be able to write them off this way—including the world’s biggest technology firms and other corporate behemoths.

As the Senate’s corporate tax inquiry has heard, shifting money around from one arm of a company to another under the guise of paying for intangible assets is already a standard trick in the tax avoidance toolkit. Adding another tax incentive into this mix will likely lead to even more money draining away offshore.[99]

The 2017 Bill was passed in an amended form as the Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Act 2019 without the proposed changes relating to depreciation of intangible assets.

Digital Economy Strategy

In the 2021-22 Budget, the Government announced the Digital Economy Strategy, setting out Government policies aimed at targeting investments that would ‘underpin improvements in jobs, productivity and make Australia’s economy more resilient’.[100] One proposed measure was to:

grow investment in digital technologies by allowing taxpayers to self-assess the effective life of certain intangible assets, which would better match the tax treatment of such assets with the period of time they provide economic benefits to the taxpayer.[101]

Schedule 3 to the Bill seeks to give effect to that proposal.[102] In December 2021 Treasury released Exposure Draft legislation for consultation. Submissions to that consultation are not publicly available on the Treasury website.[103]

Current requirements relating to depreciation of intangible assets

The cost of depreciating assets (including certain intangible assets) is generally of a capital nature and hence is not immediately deductable as an ordinary business expense. However, in some circumstances deductions are available for the decline of the value of depreciating assets (including certain intangible assets) to the extent that the asset is used for a taxable purpose.[104]

Division 40 of the ITAA 1997 creates a uniform capital allowance system that, amongst other things, deals with deductions for the decline in the value of depreciating assets. Currently the tax law recognises a number of different types of intellectual property and other intangible assets as depreciating assets and provides special rules for their effective life.[105]

Currently, the decline in value for intangible assets (and hence the amount of a deduction) is calculated by spreading the cost of the asset over its ‘effective life’, which in this case is the ‘statutory effective life’ set out in the table in subsection 40-95(7) of the ITAA 1997, and reproduced below.

Table 2: current statutory effective life of depreciating intangible assets

Type of intangible asset	Effective life
Standard patent	20 years
Innovation patent	8 years
Petty patent	6 years
Registered design	15 years
Copyright (other than film copyright)	The shorter of: (a) 25 years from acquisition of copyright; and (b) the period until the copyright ends
A licence (not relating to a copyright or in-house software)	The term of the licence
A licence relating to copyright (except copyright in a film)	The shorter of: (a) 25 years from when the taxpayer became licensee; and (b) the period until the licence ends
In-house software	5 years
Spectrum licence	The term of the licence
Telecommunications site access right	The term of the right

Source: ITAA 1997, subsection 40-95(7); CCH Australia, Australian master tax guide, Wolters Kluwer, Sydney, 2017, pp. 1075–1109, paras [¶17-005] and [¶17-370] in particular.

As noted in the Explanatory Memorandum, the law currently mandates the effective life to be used for certain intangible depreciating assets in calculating their decline in value (the ‘statutory effective life’, set out above in Table 2: current statutory effective life of depreciating intangible assets). The Government argues that the standardised deduction allowed for depreciation of such assets ‘may not necessarily reflect the period of time that the assets provide economic benefits to the taxpayer’.[106]

Factors to be considered when self-assessing the effective life of a depreciating asset

Section 40-105 of the ITAA 1997 provides that when a taxpayer elects to self-assess the effective life of a depreciating asset, they must work out the effective life in accordance with that section, which includes taking into account:

• how they expect to use the asset (whilst assuming that the asset will be maintained in reasonably good order and condition)
• the estimated period of time that the asset can be used by any entity to derive income at its start time (for a taxable purpose, for producing exempt income or non-assessable non-exempt income, or for the purpose of conducting research and development activities)
• the likelihood of the asset becoming obsolete and
• the estimated time when the asset will be sold for ‘no more than scrap value’ or abandoned.

As a result, usually a depreciating asset will start to decline in value from its ‘start time’ (generally when the taxpayer first uses the asset or has it installed and ready for use) until the end of its effective life.

Associate and same user rules

Section 40-95 of the ITAA 1997 contains the associate and same user rules. In short, these are rules for calculating the effective life of a depreciating asset where:

• it was acquired from an associate (for example, a related company) or
• where the holder of the asset changes but the asset continues to be used by the same former user (or an associate of the former user).

In simple terms, generally where a depreciating asset is acquired from an associate, the new holder is required to use the effective life determined by the former holder. This means the new holder of the asset does not have the choice to self-assess the effective life of the asset—they must use an effective life equal to the effective life of the former holder that is yet to elapse at the time the new holder starts to hold the depreciating asset.[107]

Recalculating the effective life of a depreciating asset

Section 40-110 of the ITAA 1997 contains rules for recalculating the effective life of a depreciating asset. In effect, it allows taxpayers to recalculate the effective life of a depreciating asset from a later income year if the effective life being used is no longer accurate because of changed circumstances relating to the nature of the use of the asset. Some examples include:

• the use of the asset turns out to be more or less rigorous than expected
• there is a downturn in demand for the goods or services the asset is used to produce that result in the asset being scrapped
• legislation prevents the asset’s continued use or
• changes in technology make the asset redundant.[108]

A taxpayer must recalculate the effective life of a depreciating asset where the cost of the asset increases by 10 per cent or more in a later income year (including if the asset was acquired from an associate and the cost increases by 10 per cent or more in a later income year).[109]

Importantly, currently subsection 40–110(5) of the ITAA 1997 provides that the recalculation provisions do not apply to intangible deprecating assets listed in the table in subsection 40–95(7) (which are subject to the statutory effective life).

Summary of proposed changes

The amendments will allow taxpayers to choose to self-assess the effective life of intangible depreciating assets that they start to hold on or after 1 July 2023 listed in the table in subsection 40–95(7) of the ITAA 1997, rather than using the specified statutory effective life.

Eligible intangible assets

Taxpayers will be able to self-assess the effective life of the following intangible depreciating assets currently included in the table to subsection 40–95(7) of the ITAA 1997:

• a standard or innovation patent
• a registered design
• a copyright (except in film) or a licence relating to a copyright (except in a film)
• a licence (except one relating to a copyright or in-house software)
• in-house software
• a spectrum or datacasting transmitter licence and
• a telecommunications site access right.[110]

Self-assessment of the effective life of intangible depreciating assets by taxpayers

The proposed amendment to subsection 40–95(7) and proposed paragraph 40–105(4)(a) of the ITAA 1997 (at items 8 and 12 of Schedule 3 to the Bill) have the effect of allowing taxpayers to self-assess the effective life of any intangible depreciating assets that the taxpayer starts to hold on or after 1 July 2023, or to use the specified statutory effective life in the table to subsection 40–95(7) of the ITAA 1997, other than in relation to petty patents (as item 9 will remove petty patents from the table of intangible depreciating assets currently included in the table to subsection 40–95(7) of the ITAA 1997).

Intangible depreciating assets held by the taxpayer before 1 July 2023 will still be subject to the specified statutory effective life. The effective life is then used in calculating the decline in value of the intangible depreciating asset under section 40–105 of the ITAA 1997 (discussed above).

Restrictions on timing of self-assessment

Proposed subsection 40–95(7A) of the ITAA 1997 (at item 10 of Schedule 3 to the Bill) provides that where a taxpayer chooses to self-assess the effective life of an intangible depreciating asset, the choice must be made for the income year in which the asset’s ‘start time’ occurs (generally when the taxpayer first uses the asset or has it installed and ready for use).

The choice must be made by the day the taxpayer lodges their income tax return for the income year, unless a later time is allowed by the Commissioner.[111]

Application of associate and same user rules

Proposed subsection 40–95(7B) of the ITAA 1997 (at item 10 of Schedule 3 to the Bill) provides that the existing associate and same user rules (discussed above) will apply to the intangible depreciating assets listed in the table in subsection 40–95(7). This means that the new holder of an intangible depreciating asset acquired from an associate, or that continues to be used by the former user must use the effective life determined by the former holder and will not have the choice to self-assess the effective life of the asset or use the statutory effective life in the table in subsection 40–95(7) of the ITAA 1997.

However, subsection 40–95(6) as amended by item 6 and proposed subsection 40–95(6A), at item 7, provide that where the holder of the asset changes but the asset continues to be used by the same former user (or an associate of the former user) and:

• the new holder does not know and cannot readily find out which effective life the former holder was using or
• the former holder did not use an effective life, then

the new holder of the intangible depreciating asset must use the statutory effective life in the table in subsection 40–95(7) of the ITAA 1997.

Application of recalculation rules

Proposed subsection 40-110(5), at item 15, repeals and replaces current subsection 40-110(5) of the ITAA 1997 (which provides that the recalculation provisions do not apply to intangible deprecating assets listed in the table in subsection 40–95(7)). As a result of the amendment, the effective life of an intangible depreciating asset can be recalculated by the taxpayer where there are changes, in a later income year, to the circumstances relating to the use of an intangible depreciating asset that the taxpayer started to hold on or after 1 July 2023 provided those changes make the previously calculated effective life inaccurate.

The effect of paragraph 40–110(2)(a)(iii) as amended by item 13, proposed paragraph 40–110(2)(a)(iv) at item 14 and subsection 40–110(5) is that a taxpayer must recalculate the effective life of an intangible depreciating asset where it increases by at least 10 per cent in a later income year or where the taxpayer starts to hold an intangible depreciating asset and:

• the taxpayer is using an effective life because of the associate or same user rule in subsections 40–95(4) or (5) and
• the intangible depreciating asset’s cost increases after the taxpayer starts to hold it in that income year by at least 10 per cent.

Any such recalculations must be done under section 40–105 of the ITAA 1997, using self-assessment.[112]

View of stakeholders

Whilst submissions to the 2021 Treasury Exposure Draft consultation are not publicly available on the Treasury website, the Institute of Public Accountants submission on its own website indicates support for the measure.[113] No other stakeholder views on the measure could be identified. However, given the overall similarities between the Bill and the 2017 Bill, it may be that the measures will attract similar positions.

Key issues and provisions: reforms to unfair contract term protections

Schedule 4 will amend the UCT regime in the CCA, ACL and ASIC Act with the aim of reducing the prevalence of unfair contract terms in consumer and small business standard form contracts.

Background to origin of current unfair contract term protections

Standard form contracts

Standard form contracts are commonly used by businesses as they save time and are cost-effective. However, consumers and small businesses often lack the resources and bargaining power to effectively negotiate terms in standard form contracts.

This is where the UTC regimes step in.[114] The current UCT regime applies to unfair terms in a standard form consumer or small business contracts, as discussed below.

Productivity Commission Review

In 2008, the Productivity Commission undertook a review of Australia’s Consumer Policy Framework which included amongst other things, the use of unfair contract terms (UCTs) and their effect on consumers.[115] According to the Productivity Commission:

Unfair contract terms are those that disadvantage one party but that are not reasonably necessary to protect the legitimate interests of the other. Examples of such ‘unfair’ terms include reserving the right to vary the contract at any time for any reason, or removing liability for interruptions in supply, which may have the effect of inefficiently shifting risk from suppliers to consumers …

The biggest concerns arise for standard-form contracts—typically used in the supply of a broad range of services including air travel, telecommunications, energy, consumer credit, car hire, holiday packages, home improvements and software sales. Such non-negotiated contracts have advantages for consumers—in particular, in competitive markets, lower business costs will be passed on to consumers as lower prices. But, by their nature, these contract terms are offered on a ‘take-it-or-leave-it’ basis, are often complex and apparently mostly not read. The concern is that businesses sometimes use unfair terms against consumers and the public interest generally.[116]

Subsequently, the Government enacted the Australian Consumer Law (which is located in Schedule 2 to the Competition and Consumer Act 2010 (CCA)) to establish the UCT regime.[117] The ASIC Act contains UCT provisions which are in broadly equivalent terms except that they apply to financial products or to a contract for the supply, or possible supply, of services that are financial services.[118] Initially the UCT regime applied only to business-to-consumer contracts. Later amendments extended the UCT regime to certain small business contracts.[119]

The UCT regime was further extended by the Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Act 2020, Schedule 1 to which commenced on 5 April 2021.[120] This extended the unfair contract terms protections under the ASIC Act to insurance contracts and in doing so, addressed Recommendation 4.7 – application of unfair contract terms provisions to insurance contracts– of the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. [121]

How the unfair contract terms regime operates

A term of a consumer or small business contract[122] is void if the term is unfair[123] and the contract is a standard form contract.[124]

What is an unfair contract term?

The existing UCT protections operate only if the contract is unfair. Currently a contract term is unfair where:

• it would cause a significant imbalance in the parties’ rights and obligations arising under the contract
• is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term and
• would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.[125]

In deciding whether a contract is unfair a court must take into account the transparency of the term—that is, whether it is expressed in reasonably plain language, is legible, is presented clearly and is readily available to any party affected by the term.[126] The ASIC Act UCT regime was recently considered by the Federal Court in Australian Securities and Investments Commission v Bank of Queensland Limited [2021] FCA 957. The case provides useful guidance on the types of contract terms that are likely to be considered ‘unfair’ under both the ASIC Act and ACL UCT regimes. Examples include:

• unilateral variation terms
• automatic renewal terms
• unreasonable termination and payment terms
• excessive exit fees; and
• unilateral price increases.

These types of provisions are commonly used in commercial contracts.[127]

The exceptions to the unfair contract term provisions are excluded terms, that is, terms that:

• define the main subject matter of the contract
• set the upfront price payable under the contract or
• are required, or expressly permitted, by a law of the Commonwealth, a state or a territory.[128]

The upfront price payable is the amount that is provided for the supply or sale under the contract. It is disclosed at, or before, the contract is entered into. It does not include any other consideration that is contingent on the occurrence or non-occurrence of a particular event.[129]

What is a standard form contract?

The existing UCT protections operate only if the contract is both unfair and the contract is a standard form contract.

If a party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless another party to the proceeding proves otherwise.[130]

The common understanding of a standard form contract is a ‘contract that is not individually negotiated by the parties but contains the same terms for all transactions of that type’.[131] Whilst the relevant Acts do not define what a standard form contract is, they provide a number of matters which a court may take into account in determining whether a contract is a standard form contract.[132] Those include:

• whether one of the parties has all or most of the bargaining power relating to the transaction
• whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties
• whether another party was, in effect, required either to accept or reject the terms of the contract (other than the excluded terms) in the form in which they were presented (on a ‘take it or leave it’ basis)
• whether another party was given an effective opportunity to negotiate the terms of the contract (other than the excluded terms)
• whether the terms of the contract (other than the excluded terms) take into account the specific characteristics of another party or the particular transaction (as opposed to a ‘one size fits all’ approach) and
• any other matter prescribed by the regulations (none are currently prescribed).[133]

These factors share a common theme: one party imposes the terms of the contract on the other party, with no genuine negotiation taking place.

Recent and consultations and reviews regarding of the UCT regime

A number of recent reviews and consultations have focused on the operation of the UCT regimes including the:

• 2018 Review of Unfair Contract Term Protections for Small Business: Discussion Paper (2018 review) and
• 2019 Consultation Regulation Impact Statement and consultation process.

In November 2020, at the meeting of the Legislative and Governance Forum on Consumer Affairs, ministers considered a Decision Regulation Impact Statement and agreed that reforms were necessary to better protect consumers and small businesses from unfair contract terms. This was followed by a 2021 Exposure Draft Treasury consultation process.[134]

Summary of proposed changes

The Bill will:

• expand the coverage of small businesses by the UCT regimes by increasing the small business definition thresholds and removing contract value threshold for contracts under the ACL and raising the value threshold for contracts regulated by the ASIC Act
• clarify and strengthen the UCT provisions generally by:
• ensuring that repeat usage of a contract must be taken into account by a court when determining whether a contract is a standard form contract
• clarifying that a contract may still be a standard form contract despite there being an opportunity for a party to negotiate changes that are minor or insubstantial in effect or select a term from a range of options determined by another party
• ensuring remedies for non-party consumers are also applicable to non-party small businesses and
• exempting certain categories of contracts from the UCT regime including certain life insurance contracts and operating rules of licensed clearing and settlement facilities
• strengthen the remedies and enforcement of the regime by:
• prohibiting the proposal of, use of, application of, or reliance on, UCTs in a standard form consumer or small business contract
• creating new civil penalty provisions for breaches of the prohibitions
• clarifying the powers of a court to make orders to void, vary or refuse to enforce part or all of a contract (or collateral arrangement)
• making clear a court’s power to make orders that apply to any existing consumer or small business standard form contract (whether or not that contract is put before the court) that contains an UCT that is the same or substantially similar to a term the court has declared to be an UCT and
• making clear a court’s power to issue injunctions against a respondent with respect to existing or future consumer or small business standard form contracts entered into by a respondent, containing a term that is the same or is substantially the same as a term the court has declared to be an UCT.

Expanding types of small businesses protected by the UCT regimes

Currently the UCT protections in the ACL and ASIC Act apply where one party to a contract is a business that:

• employs fewer than 20 persons and
• the upfront price payable under the contract does not:
• exceed $300,000 or
• where the contract has a duration of more than 12 month, does not exceed $1 million.[135]

The Bill would amend the ACL and ASIC Act in different ways, resulting in new and different thresholds under each law.

Changes to small business coverage under the Australian Consumer Law UCT regime

The Bill would amend the ACL by removing the upfront contract value threshold and replacing it with two new thresholds. This means that the UCT protections in the ACL would apply where one party to a contact is a business that:

• employs fewer than 100 persons or
• had a turnover for the last income year of less than $10 million.[136]

Changes to small business coverage under the ASIC Act UCT regime

In contrast to the changes to the ACL coverage of small businesses, the UCT protections in relation to small businesses and financial contracts under the ASIC Act would apply where the upfront price payable under the contract does not exceed $5,000,000 and one party to the contract is a business that:

• employs fewer than 100 persons and/or
• has a turnover for the last income year of less than $10 million.[137]

The effect of these changes will be to expand the number of small businesses captured by the ACL and ASIC Act UCT regimes.

Changes to how employees are counted under both UCT regimes

The Bill clarifies how the number of employees is to be counted under both the ACL and ASIC Act by providing that:

• part time employees are counted as an appropriate fraction of a full-time equivalent employee (rather than the current ‘head count only’ approach) and
• casual employees are not to be counted unless they are employed by the business on a regular and systematic basis.[138]

Changes to UCT provisions

The Bill makes a number of changes to the UCT provisions in the ACL and ASIC Act with the aim of clarifying and strengthening the UCT regimes generally.

Changes to determining if a contract is a standard form contract

Currently, when determining whether a contract is a standard form contract, a court must take into account the various matters noted earlier in the digest.

The Bill provides that when determining if a contract is a standard form contract a court must take into account whether one of the parties has used the same or a similar contract before.[139]

As noted above, currently when determining if a contract is a standard form contract a court must consider whether one party was required to reject or accept the terms of a contract in the form in which they were presented and whether another party was given an effective opportunity to negotiate the terms of the contract.

The Bill specifically provides that a contract can be determined to be a standard form contract despite there being an opportunity for a party:

• to negotiate changes that are minor or insubstantial in effect
• to select a term from a range of options determined by another party
• to another contract or proposed contract to negotiate terms of the other contract or proposed contract.[140]

The Explanatory Memorandum notes that the last dot point:

… clarifies that even if a subset of consumers or small businesses are able to negotiate the terms of a contract that is issued to a broader group of consumers or small businesses, the contract may still be a standard form contract.[141]

Expanding remedies for non-parties to a contract

Currently the UCT regimes allow a court to make orders that would redress, in whole or in part, loss or damage to non-party consumers arising out of a term in a contract which has been declared to be an unfair term or a prohibited term.[142] A non-party consumer is currently defined as a person who is not, or has not been, a party to an enforcement proceeding in relation to the conduct.[143]

As the definition includes the term ‘consumer’, currently it appears arguable that the definition only applies to consumers, not to businesses, despite the UCT regimes being applicable to both.[144]

The Bill replaces the definition of non-party consumer with the concept of ‘non-party’.[145] The effect of this change is to put beyond doubt that the remedies for a breach of the UCT provisions are available to all non-parties, regardless of whether they are consumers or small businesses.

Exempting certain categories of contracts from the UCT regime

Currently both UCT regimes exclude:

• contract terms that are required or expressly permitted by a law of the Commonwealth, a state or territory[146]
• constitutions of companies, managed investment schemes or similar bodies[147] and
• small business contracts to which a prescribed law of the Commonwealth, a state or a territory applies.[148]

In addition to the above, the ACL UCT regime excludes other forms of contracts such as marine salvage contracts and certain sea carriage contracts[149] and the ASIC Act UCT regime excludes other forms of contracts such:

• medical indemnity insurance contracts[150] and
• certain terms of insurance contracts.[151]

The Bill expands the types of contacts excluded by the UCT regimes.

Contracts with mandated minimum standards

As noted above, currently the UCT regimes exempt a term of a standard form consumer or small business contract if it is a term required, or expressly permitted, by a law of the Commonwealth, a state or a territory insofar that the term is required, or expressly permitted, by such a law.

The Explanatory Memorandum notes that the existing UCT regimes do not clearly exempt terms that are read into a contract by the operation of a law of the Commonwealth, a state or a territory, and notes:

In some cases, a law only requires or reads terms into a contract on a contingent basis; that is, it only requires certain contract terms be included in a contract if other types of terms have already been included in that contract.[152]

The Bill provides that all such terms are exempt of the UCT regimes.[153] The Explanatory Memorandum provides the following example to illustrate the operation of the proposed changes:

Ajay’s Phone Company (Ajay Co.) is seeking to rent a retail property from Sharon’s Building Management Co (Sharon Co.) located inside building A. As part of the lease agreement, Sharon Co. has included a term allowing them to terminate the lease if they want to demolish or renovate the building the relevant retail property is located in.

Under the relevant State law, where a term is included in a contract for a termination of a retail lease on the grounds of the proposed demolition or renovation of the building in which the retail property is located, the lease is taken to include other terms setting out how a person must notify or compensate a tenant as a result of the termination.

The term allowing Sharon Co. to terminate the lease agreement is exempt from the unfair contract terms protections because it results in one or more other terms being included in the contract by operation of a law of a State. The terms about notice and compensation are exempt from the unfair contract terms provisions as they have been included in the contract, or are taken to be so included, because of a law of a State.[154]

The Explanatory Memorandum notes that the effect of the amendments will be that the UCT regimes do not cover terms that other laws require parties to include in their contracts while still ensuring appropriate protections for consumers and small businesses from unfair contract terms. It will also enable state and territory governments to ensure that they are able to implement legislation that reflects the specific requirements of their jurisdiction.[155]

New specific categories of contract excluded from the UCT regimes

The Bill will exclude from the UCT regimes:

• the operating rules (including listing rules) of licensed financial markets and clearing and settlement facilities, such as ASX Limited[156]
• contracts that consist of, or relate to compliance with, listing rules of the licensed financial market between the operator of the licensed financial market and listed entities, responsible entities for registered schemes and operators of foreign passports funds[157]
• contracts made under or in accordance with the operating rules, and extends to written procedures that are incorporated into or made or approved in accordance with, the operating rules[158] and
• contracts that establish, contain, or incorporate rules governing the operation of a payment or settlement system approved under the Payment Systems and Netting Act 1998, as well as contracts made in the course of, or for the purposes of, operating such a system.[159]

The Explanatory Memorandum notes that operating rules are contracts that govern the core operational functioning of licensed markets and clearing and settlement facilities as well as the admission standards for listed securities, with such rules being integral to the operation of Australia’s financial markets by, for example, providing for the finality and irrevocability of transactions.[160] As such the:

Application of the unfair contract terms provisions to these contracts could potentially interfere with, or create uncertainty around, particular terms of operating rules that are necessary to the maintenance of market stability and integrity.[161]

The Explanatory Memorandum notes that the payment or settlement systems currently approved under the Payment Systems and Netting Act 1998 are the Reserve Bank Information and Transfer System, the Austraclear System and the Clearing House Electronic Sub-register System, all of which are critical to facilitating the orderly settlement of payment obligations in Australia and operate on a largely contractual basis.[162] As such, the Explanatory Memorandum notes that the application of the unfair contract terms provisions to these arrangements could potentially interfere with, or otherwise create uncertainty around, certain terms such as those which provide for the finality and irrevocability of the settlement of transactions.[163]

Exclusion of certain life insurance contracts

Currently the ASIC Act UCT regime does not apply to a transparent term  of an Insurance Contracts Act insurance contract (that is, one that is expressed in reasonably plain language, is legible, is presented clearly and is readily available to any party affected by the term[164]) that:

• is disclosed at or before the time the contract is entered into and
• sets an amount of excess or deductible under the contract.[165]

The Bill aims to exclude from the UCT regime certain life insurance contracts generally and guaranteed renewable life insurance contracts specifically. Guaranteed renewable life insurance contracts are contracts whereby the insurer agrees to continue to provide cover on the terms of the original contact so long as the policy holder continues to pay premiums.

The Explanatory Memorandum notes many of these contracts are ‘legacy contracts’: contracts that have lasted in excess of ten or twenty years and have the same terms as when they were originally entered into.[166]

The Explanatory Memorandum notes that since 5 April 2021 (when the UCT protections were extended to insurance contracts in response to the Hayne Royal Commission) it has been:

unclear as to whether the existing unfair contract terms provisions have applied in relation to certain long-standing life insurance contracts. Guaranteed renewable life insurance contracts were not intended to be covered by the unfair contract terms provisions and the insurance industry has proceeded on this presumption, however this has not been clarified under the existing law.[167]

The potential for the unfair contract terms provisions to apply to these guaranteed renewable life insurance contracts creates uncertainty in the life insurance industry for both consumers and business. This may result in contracts being voided as a result of terms entered into many years before and that may have been fair at the time the contract was signed.[168] (emphasis added)

The Government argues that this may result in worse outcomes for the consumer:

a consumer who has been paying life insurance premiums for decades may not be insurable on the same terms, or at all, if their health and/or occupational circumstances have deteriorated since they first took out the cover. Therefore, these contracts have been excluded from this Schedule to remove this potential negative impact on consumers.[169]

Types of life insurance policies excluded from the UCT regime

The Bill deals with life insurance contracts generally, as well as specifically and separately dealing with guaranteed renewable life insurance contracts.

In relation to life insurance contacts in general, the Bill provides that the UCT provisions as amended by the Bill do not apply, and are taken never to have applied, to certain life policies within the meaning of the Life Insurance Act 1995 which have been replaced, linked or unlinked.[170] In this context, linking and unlinking existing policies covers situations in which a policy holder changes the structure of their policy by connecting it with or separating it from another policy.[171]

This means that a life insurance contract is excluded from the UCT regime where it was entered into before 5 April 2021 and subsequent to 5 April 2021, is replaced for the following reasons:

• the replacement policy reinstates the previous policy and is issued at the request of the owner of the previous policy after the previous policy lapses[172]
• the replacement policy is a reissue of the previous policy to correct an administrative error in the previous policy (for example, where a person’s name is misspelled)[173]
• the replacement policy is issued, at the request of the owner of the previous policy for one or more of the following reasons:
• to change the ownership of the policy
• to extend or vary the cover provided under the policy in accordance with a term of the previous policy
• to change the terms relating to premiums paid under the policy or
• to link or unlink certain existing policies.[174]

The Bill also separately, specifically and retrospectively excludes guaranteed renewable life insurance contracts from the UCT regime where the contract was:

• made before 5 April 2021 and
• is renewed, or was renewed, on or after 5 April 2021.[175]

Commencement

The amendments to the UCT regimes (other than those related to life insurance contracts) will apply to new standard form contracts made at or after the commencement of Schedule 4 to the Bill: the day after the end of the period of 12 months beginning on the day the Bill receives Royal Assent.[176]

If an existing contract is renewed or varied at or after the commencement of Schedule 4 to the Bill, the Schedule applies to the contract as renewed or varied on and from the day on which the renewal or variation takes effect.[177]

The Explanatory Memorandum notes that the 12-month delay between Royal Assent and commencement is designed to give businesses time to review and adjust their contracts and practices if required to prepare for the new UCT provisions.[178]

The amendments in relation to life insurance contracts generally and guaranteed renewable life insurance contracts apply in the manner described above despite section 325 as inserted by Schedule 1 to the Financial Sector Reform (Hayne Royal Commission Response—Protecting Consumers (2019 Measures)) Act 2020 (which set out the application of the amendments providing that the UCT regime covered insurance contracts).[179] However, those amendments do not apply to the extent that their operation would result in an acquisition of property (within the meaning of paragraph 51(xxxi) of the Constitution) from a person otherwise than on just terms.[180]

Changes to enforcement and penalties for breaches of the UCT regimes

Currently under the ACL and ASIC Act UCT regimes where a person proposes, applies, relies or purports to apply or rely on an UCT, various court orders and remedies can be made, but no pecuniary penalties apply for such conduct per se.[181]

Under the Bill, both UCT regimes will be amended to specifically prohibit:

• the inclusion or reliance on an UCT in a standard form contract[182]
• applying or relying on (or purporting to apply or rely on) an UCT in a standard form contract[183] and
• proposing an UCT in a standard form contract which they have entered into.[184]

Where one of the above prohibitions is breached, the Bill provides that that a court can order various pecuniary penalties, which vary between the ACL and ASIC Act UCT regimes as set out below.

Penalties under the Australian Consumer Law

Under the ACL UCT regime the maximum penalty that can be issued for breaches of the proposed prohibitions can be found in existing section 224 of the ACL. For an individual the maximum penalty would be $500,000.[185] For a body corporate, the maximum penalty will be the greater of:

• $10 million
• if the court can determine the value of the benefit that the body corporate, and any body corporate related to the body corporate, have obtained directly or indirectly and that is reasonably attributable to the act or omission, 3 times the value of that benefit or
• if the court cannot determine the value of that benefit—10% of the annual turnover of the body corporate during the 12‑month period ending at the end of the month in which the act or omission occurred or started to occur.[186]

Importantly, the Bill provides that each individual unfair term contained in a contract proposed by the person is considered a separate contravention.[187] This means a person can be found to have multiple contraventions in a single contract. The Explanatory Memorandum notes that while this could result in a high theoretical maximum penalty:

a court will apply existing principles regarding the assessment of the pecuniary penalty to be imposed, to ensure that the total quantum of penalties is appropriate. Accordingly, these provisions are consistent with the Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers.[188]

Penalties under the ASIC Act

Under the ASIC Act UCT regime the maximum penalty that can be issued for breaches of the proposed prohibitions can be found in existing section 12GBCA of the ASIC Act. For an individual the maximum penalty is the greater of:

• 5,000 penalty units[189] or
• if the court can determine the amount of the benefit derived and detriment avoided because of the contravention, that amount multiplied by three.[190]

For a body corporate, the maximum penalty will be the greatest of:

• 50,000 penalty units[191]
• the amount of the benefit derived and detriment avoided because of the contravention multiplied by 3 or
• 10% of the annual turnover of the body corporate for the 12 month period ending at the end of the month in which the body corporate contravened, or began to contravene, the civil penalty provision, or if that amount is greater than an amount equal to 2,500,000 penalty units, 2,500,000 penalty units.[192]

Importantly, the Bill provides that each individual unfair term contained in a contract proposed by the person is considered a separate contravention.[193] This means a person can be found to have multiple contraventions in a single contract as discussed above in relation to the ACL penalty provisions.

Issue: size of potential financial penalties

The potential civil penalties for breaching the UCT regimes are large. In that regard, the Explanatory Memorandum notes that ‘larger penalties are more appropriate for bigger companies, as they provide an adequate deterrent to breaches of the unfair contract terms provisions’.[194] In addition, when determining an appropriate penalty both the ACL and ASIC Act require a court to consider factors such as:

• the nature and extent of the contravention
• any loss or damage suffered because of the contravention
• the circumstances in which the contravention took place and
• whether the person had previously been found to have engaged in similar conduct.[195]

The Explanatory Memorandum notes that as a result:

a relevant consideration in setting a civil penalty amount is the maximum penalty that should apply in the most egregious instances of non-compliance with the new unfair contract terms provisions. The maximum civil penalty amounts that can be imposed under these new provisions are intentionally significant and are in line with the penalties for other breaches of the ACL and ASIC Act.[196]

Changes to remedies for breaches of the UCT regimes

Currently under both UCT regimes, where the court determines a term in a standard form contract to be unfair, the term is automatically void.[197] In addition, provided a person has suffered, or is likely to suffer, loss or damage because of the conduct of another person, a court can make orders:

• in relation to the whole or any part of a contract or collateral arrangement made between a respondent and another person, including that the contract or arrangement is void, varied, or is not able to be enforced in relation to:
• a person who is a party to a proceeding before a court
• a person on whose behalf the regulator has brought a matter before a court or
• in relation to non-party persons.[198]

The Bill will expand the above by ensuring that an unfair contract term in a standard form contract remains automatically void but also allowing a court to make orders to void, vary or refuse to enforce the contract, if it is appropriate to:

• prevent loss or damage that is likely to be caused or
• remedy loss or damage that has occurred.[199]

That is, a court will no longer be restricted to redressing actual loss or damage when making an order.

The Bill will also enable a court to make orders, on the application of the regulator:

• preventing a term that is the same or substantially similar in effect to a term that has been declared as unfair, from being included in any future standard form small business or consumer contracts[200] and
• to prevent or reduce loss or damage which is likely to be caused to any person by a term that is the same or substantially the same in effect to a term that has been declared unfair.[201]

Statutory review of changes

Item 80 of Schedule 4 requires the Minister to cause a review to be undertaken of the operation of the new UCT provisions introduced by the Bill during the two years post-commencement.

The statutory review must be completed and a report on the review provided to the Minister within six months after the end of the period to which it relates, with a final report required to be tabled in Parliament within 15 days of the relevant Minister receiving a copy.

The Explanatory Memorandum notes that the statutory review:

will allow the Government to carefully examine the effectiveness of the reforms and any potential changes that should be considered.[202]

Views of stakeholders

Self-Employed Australia, an industry body representing independent contractors, welcomed the proposed reforms to the UCT regimes, stating:

The implications of this are massive. Businesses that want to screw over consumers and/or small businesses with unfair contracts will be forced to dump those contracts. (Think phone, internet, car and other equipment leasing, land sales and on and on.) This is a huge economic reform that will make for a fairer and stronger Australian economy. More people will be able to do business and buy things with real protections against unfair contracts.[203]

However, Self-Employed Australia also noted ‘one major concern’:

Australian governments, state and federal, routinely break the unfair contract laws. They reckon they are exempt. And most often they are. We need all Australian governments to amend laws to hold government agencies accountable to the same contract laws they expect of the rest of the community.[204]

The National Farmers’ Federation also welcomed the Bill.[205]

In relation to the application or exclusion of life insurance from the UCT regimes however, in its 2018 submission to the Hayne Royal Commission the Consumer Law Action Centre argued that any reforms to the application of the UCT regime to life insurance policies should include:

Transitional arrangements… to ensure that certain types of insurance contracts, such as guaranteed renewable life insurance policies, are not effectively carved out of the [UCT] regime.[206]

This may suggest some concern regarding carving out guaranteed renewable life insurance contracts from the UCT regime.

Key issues and provisions: tax treatment for non-residents with agricultural visas

As noted above under the heading ‘Proposed tax offset for certain foreign workers’ staffing availability and reliance on foreign workers on short-term visas are long-standing challenges for Australia’s agricultural sector (particularly the horticultural sector) and the role that specialised visas and tax rates could or should play to address those issues has attracted consideration and debate over many years.

Schedule 6 of the Bill and the Labour Mobility Bill amend the ITAA 1997, Income Tax Assessment Act 1936 (ITAA 1936) and other tax laws:

• to reduce the effective tax rate on certain income earned by foreign resident workers under the Australian Agriculture Worker Program or the Pacific Australia Labour Mobility
• by providing a tax offset designed to ensure a 15% tax rate effectively applies to their first $45,000 of program income after deductions.

Pacific Australia Labour Mobility scheme and Australian Agriculture visa program

As noted earlier in this digest, foreign resident workers have been a significant source of labour for several sectors in the economy, most notably the agricultural and, in particular, the horticultural sector.

The Seasonal Labour Mobility Program (otherwise known as the Seasonal Worker Programme (SWP)) and Pacific Labour Scheme (PLS) were designed to help to meet these workforce shortages.[207] In 2021, the Government made a series of announcements regarding visa programs to fill labour shortages in the agricultural sector. These included:

• merging the SWP and PLS into the new Pacific Australia Labour Mobility (PALM) scheme and
• creating a new (separate) Australian Agriculture visa program.[208]

Currently, SWP workers may be granted a visa for up to 3 years but may not spend more than 9 out of every 12 months in Australia. PLS workers may be granted a visa for between 1 and 3 years. Current SWP and PLS visa settings provide no pathway to a permanent visa, and visa holders cannot bring family members with them. The merged PALM scheme will broadly retain these streams and settings while extending the 3 year maximum time span to 4 years. The PALM scheme is set to commence on 4 April 2022 and will be administered by the Department of Foreign Affairs and Trade.[209]

The Australian Agriculture visa program differs from the PALM scheme in a number of ways. First, when announced the Government indicated that the Australian Agriculture visa program would have similar settings to the SWP noted above, but:

• with an exemption for UK working holiday makers from having to undertake a period of specified agricultural work to qualify for a second-year or third year visa and
• would be aimed at South-East Asian countries.

However, further announcements have flagged a commitment to ‘creating options for permanent residence pathways’ for Australian Agriculture visa program participants.[210]

Current taxation arrangements for non-residents workers

Under Australia’s tax laws, only tax residents can access the tax-free threshold.[211] This means that generally, foreign residents are subject to the non-resident tax rates. For the 2021-22, 2022-23 and 2023-24 income years, a tax rate of 32.5 per cent applies from the first dollar of income earned up to $120,000.[212] From the 2024-25 income year onwards, a tax rate of 30 per cent applies from the first dollar of income earned up to $200,000.[213]

Two of the most relevant existing exceptions to the non-availability of the tax-free threshold for non-tax residents are in relation to:

• certain WHM visa holders[214] and
• individuals in the SWP.[215]

In summary, a ‘base’ tax rate of 15 per cent applies to those workers, which is substantially lower than the lowest marginal tax rate of 32.5 per cent that applies to other non-resident workers but:

• higher than the tax-free threshold (zero per cent) which applies to the first $18,200 earned by tax residents and
• lower than the 19 per cent for each dollar over $18,200 and 32.5 per cent for each dollar over $45,000 up to $120,000, earned by tax residents.

Taxation of working holiday makers

As noted earlier in this digest, a substantial proportion of WHMs work in the agricultural sector, in horticulture in particular.[216] As a result of reforms in late 2016 a special rate of income tax applies to income earned by some WHMs (also known as the ‘backpacker tax’).[217] The rate applies regardless of the status of the individual as either a resident of Australia for income tax purposes or a non-resident.[218]

The ‘backpacker tax’ applies to most WHMs, other than those who are nationals of the United Kingdom, Chile, Finland, Japan, Norway, Turkey, Germany (from 1 July 2017) and Israel (from 1 July 2020).[219] This is because of the operation of the non-discrimination article in the Double Tax Agreements between Australia and those countries as established by the High Court.[220]

As a result, a 15% income tax rate applies to most WHM taxable income on amounts up to $45,000, with ordinary income tax rates applying after that. The special rate is only available where the employer has registered with the ATO to be able to apply reduced rates of PAYG withholding on payments.[221]

Taxation of workers in the Seasonal Worker Programme

In addition to the concessional tax treatment provided to WHMs noted above, foreign residents working in the agricultural sector for an approved employer are effectively taxed a flat rate of 15 per cent on any income paid to them under the Seasonal Labour Mobility programme.[222]

Normal tax rates apply to any other income earned from other sources (for example, employment with a non-approved employer under the program).

What the Bill does

The effect of the Bill is that foreign resident workers participating in the Australian Agriculture Worker Program will be:

• effectively taxed at 15 per cent on the first $45,000 of program income and
• taxed at normal non-resident tax rates on any income above $45,000 or earned outside the Australian Agriculture Worker Program.[223]

For these purposes program income is defined as the salary, wages, commission, bonuses or allowances paid to the individual as an employee of an Approved Employer under the Australian Agriculture Worker Program derived by the worker when they held a Temporary Work (International Relations) Visa (subclass 403).[224]

The effect of the Bill is that foreign resident workers in the PALM scheme will be:

• effectively taxed a 15 per cent on income paid to them under the PALM and
• any other income earned from other sources (for example, employment with a non-approved employer) is taxed at the normal non-resident rates.[225]

For these purposes only salary, wages, commission, bonuses or allowances paid to the individual by an Approved Employer under the PALM when they held a relevant visa will attract the concessional tax rate.[226]

Ability to apply concessional tax rates to future new labour mobility programs

Item 40 of Schedule 6 allows regulations to extend the concessional tax treatment under either program to be extend to foreign resident by prescribing visa names for that purpose.[227]

The Explanatory Memorandum argues:

This will increase flexibility to update the tax law in response to future changes, such as changes to program names or the creation of new programs for foreign residents for which this tax treatment is appropriate. It will also allow flexibility to update the tax law in response to changes to visa names by regulations. This will provide the Government with the necessary flexibility to make timely changes to tax arrangements to support the success of Australia’s existing and future labour mobility programs. The regulations would be subject to disallowance and therefore will be subject to appropriate parliamentary scrutiny.[228]

Key issue: is the measure necessary?

As noted above, foreign resident workers have been a significant source of labour for several sectors in the economy, most notably the agricultural and, in particular, the horticultural sector. Further, the countries participating in the SWP and PLS generally have lower incomes than Australia. As such, traditionally the wages offered in Australia appear to have operated as major attractor for workers engaged in those programs, but less so in relation to WHMs (as in general they come from countries with higher incomes than those participating in the SWP and PLS).

Despite the higher wages on offer to workers engaged in the SWP or PLS programs or comparable wages on offer to WHMs, the prevalence of underpayment or non-payment of wages and other unlawful employment arrangements in the agricultural sector may operate to undermine the attractiveness of Australia’s wage rates.[229] For example, in relation to WHMs the Joint Standing Committee on Migration noted:

• six per cent of all formal disputes raised with the Fair Work Ombudsman during the year 2019-20 involved allegations in relation to WHMs, with agriculture being one of the top five industries for disputes involving WHMs
• in 2018 FWO investigated 638 harvest trail businesses and found that 70 per cent of the employers who employed temporary workers – most of them WHMs – had breached Australia’s workplace laws
• exploitation damages the reputation of the WHM program ‘with some rural towns being given nicknames such as ‘Horror Hill’ or ‘Helltown’ amongst WHMs’, and such reports may affect the decision of WHMs to choose Australia over time.[230]

In relation to the SWP, whilst similar concerns about exploitation exist,[231] SWP participants reported very high levels of satisfaction with their experience in Australia, with 91 per cent saying they would recommend it to others in their village.[232] It has been noted that:

evidence suggested that (notwithstanding reductions to gross pay for living expenses, taxes and other costs), the money workers [in the SWP] were earning in Australia was substantially more than they could expect to earn from employment in their home countries.[233]

As such, relatively high wages (especially in relation to individuals participating in the SWP and PLS) would appear to be a major attractor. Despite this, it has been argued that taxing foreign non-residents working in the agricultural sector would reduce the attractiveness of working in Australia, especially in relation to WHMs.[234] However, in 2016 the Joint Standing Committee on Migration concluded that:

there does not appear to be enough supporting evidence to recommend… reducing the current income tax rate for seasonal workers.[235]

The Explanatory Memorandum argues that taxing foreign non-residents working in the agricultural sector at the same rate as other non-residents ‘may discourage’ participation in the Australian Agriculture Worker Program and PALM as ‘workers under these programs would typically be lower income earners’ and the concessional tax rates would ‘increase Australia’s attractiveness as a destination of choice for foreign resident workers’ in that sector.[236]

An important principle of taxation design is horizontal equity: the notion that taxpayers in the same position should pay the same amount of tax, or, put another way, ‘horizontal equity demands equal treatment for people in similar circumstances’.[237] The South Australian Department of Treasury and Finance noted that:

Horizontal equity refers to the equal treatment of ‘equals’. It can apply to natural and non-natural persons. The principle can also be expressed the other way around – as the avoidance of arbitrarily different treatment of persons considered ‘equals’. That is, differential treatment of individuals and firms needs to be justified by different circumstances which are compelling on public policy grounds.[238] (emphasis added)

The 'same economic position' is often defined by reference to criteria such as individual income, family circumstances (such as the number of dependants) or ties to a specific geographic area.[239] In this case, the measure appears to breach the horizontal equity principle as it may result in non-residents potentially being treated (taxed) differently based on the visa they hold and in which sector they work.

However, it is not immediately clear whether reduced tax rates would be a more effective measure to increase the attractiveness of working in the Australian agricultural sector than alternatives such as greater enforcement of existing workplace laws to ensure greater compliance with relevant wages and other conditions, or raising wages payable for such work.

As such, it could be argued that the available evidence does not establish ‘compelling public policy grounds’ to justify the differential tax treatment proposed by the Bill.

Views of stakeholders

At the time of writing the position of major stakeholders and interest groups on the proposed measures could not be determined. However, given the historical interest in and advocacy for both agriculture-specific work visas and concessional tax treatment for foreign workers on such visas, it would appear likely that the agricultural sector broadly (and the horticultural sector specifically) may support the measure.

Concluding comments

The Bill contains a broad mix of measures. Some, such as allowing taxpayers to self-assess intangible asset depreciation and taxing foreign workers in the agricultural sector on a concessional basis compared to other non-tax residents, are measures that may be regarded as either lacking a strong evidentiary basis supporting the proposed reforms, or having a contested evidentiary basis in relation to the need for, or effectiveness of, such measures. As such, they may attract a degree of controversy.

Other measures, such as the proposed UCT reforms and tax-record education directions, would appear to be more widely supported and less controversial.