Glossary

Purpose and history of the Bill

The purpose of the Treasury Laws Amendment (2022 Measures No. 4) Bill 2022 (the Bill) is to amend various taxation and superannuation laws across several Acts.

The Bill contains nine Schedules. However, the text of Schedule 7 has been replicated in the Treasury Laws Amendment (2022 Measures No. 5) Bill 2022 (No. 5 Bill), which is scheduled for debate in the Senate before this Bill. Accordingly, Schedule 7 is not covered in this Digest. Information on the amendments proposed in that Schedule is available in the Bills Digest for the No. 5 Bill.[1]

Structure of the Bill

The Bill comprises 9 Schedules:

• Schedule 1 amends the Income Tax Assessment Act 1997 (ITAA 1997)
• Schedule 2 amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations) and ITAA 1997
• Schedule 3 amends the Fringe Benefits Tax Assessment Act 1986 (FBTA Act)
• Schedules 4 and 5 amend the Income Tax (Transitional Provisions) Act 1997 (ITTP Act)
• Schedule 6 amends the Corporations Act 2001, the Australian Securities and Investments Commission Act 2001 (ASIC Act) and the Superannuation Industry (Supervision) Act 1993 (SIS Act)
• Schedule 7 has been replicated in Treasury Laws Amendment (2022 Measures No. 5) Bill 2022
• Schedule 8 amends the Clean Energy Finance Corporation Act 2012 (CEFC Act)
• Schedule 9 amends the ITAA 1997, the ITTP Act and the Income Tax Assessment (1997 Act) Regulations 2021 (ITA 1997 Regulations).

Structure of this Bills Digest

As many of the matters covered by each of the Schedules are independent of each other, the relevant background, stakeholder comments (where available) and analysis of the provisions are set out under each Schedule number. As set out above, Schedule 7 is not considered in this Digest.

Committee consideration

Senate Economics Legislation Committee

The Bill was referred to the Senate Economics Legislation Committee (the Economics Committee) for inquiry and report by 25 January 2023.[2] On 22 December 2022, the Economics Committee tabled a progress report seeking an extension of time to report to 3 March 2023.

At the time of writing this Digest, 29 submissions have been published online and summaries of some of the submissions are provided in relevant sections for the Schedules to this Bill in this Digest.

Senate Standing Committee for the Scrutiny of Bills

The Senate Standing Committee for the Scrutiny of Bills had not considered the Bill at the time of writing this Digest.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[3]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights had not considered the Bill at the time of writing this Digest.

About tax deductions and tax offsets

Schedules 1, 4 and 5 create new tax incentives to support Australia’s overall global digital competitiveness. Schedule 1 introduces a new refundable tax offset to strengthen the digital games industry. Schedules 4 and 5 introduce two temporary deductions to enhance small business digital capabilities. The discussion below sets out the basic difference between a tax offset and a tax deduction and therefore their different impacts to the targeted populations.

A tax offset is more valuable than a deduction

Income tax payable is calculated by multiplying a taxpayer’s taxable income by the applicable tax rate (as set out in the Income Tax Rates Act 1986 (Cth)) and then subtracting ‘tax offsets’.[4] The legislated income tax formula is as follows.

Income tax payable = (taxable income x rate) – tax offsets[5]

A taxpayer’s taxable income is calculated by subtracting ‘deductions’ from assessable income. If the deductions equal or exceed the assessable income, the taxpayer doesn’t have a taxable income.[6] The legislated formula for ‘taxable income’ is provided below.

Taxable income = assessable income – deductions[7]

As explained in the Australian Taxation Law (2021):

In most cases, tax offsets can only reduce a taxpayer’s tax liability to nil and excess tax offsets (ie the amount that exceeds the basic income tax liability) are lost. In some cases, excess offsets are refundable, eg the franking credit offset, or may be transferred to a spouse, eg the seniors and pensioners tax offset.

A tax offset must be distinguished from a ‘deduction’. While a deduction is subtracted from assessable income to calculate taxable income (s 4-15 ITAA97), a tax offset is subtracted from the tax payable on taxable income (s 4-10). This makes a tax offset more valuable than a deduction. It also makes a tax concession in the form of a rebate, credit or offset more equitable than if it is in the form of a deduction (p. 59).

The good tax criteria for the tax and transfer system

Issues can arise when a tax system has not met the ‘good tax criteria’. As tax systems evolve, most tax policy experts agree that Australia has developed a set of good tax criteria for evaluating the system. The generally accepted criteria for a good tax system are set out in Table 1 below.

Table 1: Good tax criteria for the tax and transfer system

Source: Australia’s Future Tax System Panel (Ken Henry, Chair), Australia’s Future Tax System Review, report to the Treasurer, (Canberra: Treasury, December 2009), 17, and Parliamentary Library analysis.

The criteria for a ‘good tax system’ are different to the question ‘what is a good tax?’. A single tax can be less efficient but still operate effectively and be compensated by other complementary taxes in the system (for example, fringe benefits tax (FBT) does not raise much revenue, but without it the amount of personal income tax raised would substantially decrease).

To achieve a tax system that meets all the criteria can be complex, and some goals compete against each other. For example, economic efficiency requires low marginal tax rates. However, vertical equity requires high average tax rates on high income individuals and entities. A good tax system can promote a preferred redistribution with a minimum loss of efficiency. Where the good tax criteria conflict, it has become a challenge for the Parliament to define and accept trade-offs.

In particular, this Bills Digest considers the amendments in Schedules 1, 4 and 5 in the context of the flexibility criterion. That is, whether the amendments will operate so as to be flexible enough to achieve the Government’s non-fiscal objectives, and also provide sufficient support to targeted groups of taxpayers for them to compete digitally on a global stage.

Schedule 1: Digital Games Tax Offset (DGTO)

Background

In his Second Reading Speech to the Bill (p. 3257), Assistant Treasurer Stephen Jones explained:

The DGTO is a 30 per cent refundable tax offset for eligible companies that develop eligible games and spend a minimum of $500,000 on qualifying Australian development expenditure from 1 July of this year. This new offset is estimated to increase payments by a total of $38.4 million over four years from financial year 2021–22.

All entertainment and educational games will be eligible for the DGTO, provided they can receive a classification from the Australian Classification Board and are broadly available to the general public. Importantly, gambling like activities are excluded from this measure.  

According to the Explanatory Memorandum (paragraph 1.4) to the Bill:

The digital games and interactive entertainment sector is the largest creative sector in the world and one of the fastest growing industries worldwide. The global digital games industry is worth approximately A$250 billion. In 2020–21, Australian game development studios generated A$226.5 million of income and employed 1,327 fulltime workers.

Digital Technology Taskforce

The Digital Technology Taskforce was established by the former Government in November 2019. The taskforce is hosted in the Department of the Prime Minister and Cabinet (PM&C) and is looking to ensure Australia is a leading digital economy by 2030. The Taskforce works with industry, including large and small businesses, the community and with relevant Australian Government agencies.

On 6 May 2021, the former Government released Australia’s Digital Economy Strategy: A leading digital economy and society by 2030 and made the first mention of the DGTO (p.73). The former Government then announced the DGTO measure[8] in the 2021–22 Budget (p.73) and expanded it in the 2021–22 Mid-Year Economic and Fiscal Outlook (MYEFO) (p.274). In October 2022, the Minister for Arts Tony Burke announced the current Government’s support for the measure.[9]

Consultation

The Treasury released a draft of the proposed legislation for public comment on 21 March 2022. The submissions to Treasury in relation to the draft legislation have not been published on the Treasury website.

Position of major interest groups

In its latest submission to the Senate Economics Legislation Committee, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) broadly supports the amendments in this schedule. However, it submits (p.1) that the minimum spending threshold should be reduced from $500,000 to $300,000 to ‘capture smaller developers.’

Key provisions

Item 1 of Schedule 1 to the Bill adds a new digital games tax offset to an existing list of refundable tax offsets under section 67-23 of ITAA 1997.

Item 2 in Schedule 1 amends the ITAA 1997 by inserting proposed Division 378—Digital games (tax offset for Australian expenditure on digital games) which provides for a new 30% refundable digital games tax offset.

How Schedule 1 works

Within new Division 378, proposed Subdivision 378-A provides that a company is entitled to receive the tax offset when the following conditions are met.

• A DGTO certificate has been issued by the Arts Minister to the company under proposed section 378-25. There are 3 possible certificates:
  • a completion certificate for a digital game completed in the income year under proposed subsection 378-25(1)
  • a porting certificate for a digital game issued under proposed subsection 378-25(3). Item 6 in Schedule 1 inserts the definition of ported in relation to a digital game into existing section 995-1. Porting occurs where a digital game has been completed and is first made available to the general public, or (in cases where the game is developed for another entity) when the game is provided to that entity in a state that is ready to be made available to the public on a new platform, as stated under proposed subsection 378-25(4)
  • an ongoing development certificate for activities undertaken to update, improve or maintain the game after it has been completed under proposed subsection 378-25(5).
• The company claims the offset in its income tax return for the income year (proposed paragraph 378-10(1)(b)). 
• If the company is required to lodge a notice with the Commissioner of Taxation – it has lodged the notice with the Commissioner (proposed subsection 378-15(3)).

The Bill sets out the following:

• Eligible claimants: Companies that are Australian tax residents or foreign tax residents with a permanent establishment in Australia: proposed paragraph 378-10(1)(c).
• Eligible games: A digital game that can receive a classification, if it is made available to the general public over the internet. The game does not include gambling or gambling like elements nor is used for advertising or for commercial purposes: proposed sections 378-20 and 378-25
• Qualifying expenditure: an item of expenditure will be qualifying Australian development expenditure if it is substantially attributable to the development of the game; and is incurred for, or is reasonably attributable to, goods and services provided or acquired in Australia: proposed subsections 378-40(1) and (2). By way of example this might include:
  • expenditure on research for the game: proposed paragraph 378-35(2)(b)
  • expenditure on prototyping for the game: proposed paragraph 378-35(2)(c)
  • expenditure on user testing, debugging, and collecting user data for the game: proposed paragraph 378-35(2)(e) and
  • expenditure on updating the game: proposed paragraph 378-35(2)(f).

Some exclusions apply, including but not limited to:

• expenditure on employees or contractors who were not Australian residents at the time the expenditure was incurred: proposed subparagraph 378-35(3)(b)(ii)
• expenditure incurred on activities that are incidental to, but not directly attributable to, the development of the game (e.g. expenditure on social media managers, forum administrators or moderators): proposed subparagraph 378-35(3)(b)(i)
• company overheads: proposed paragraph 378-35(3)(a)
• expenditure on travel, accommodation, catering, entertaining or hospitality expenditure for employees: proposed subparagraph 378-35(3)(a)(ii).

• Tax offset amount: The amount of the tax offset is 30% of a company’s total qualifying Australian development expenditure as determined by the Arts Minister. The offset is capped at $20 million per company (or group of companies who are consolidated or related) per year: proposed section 378-15. Reaching this cap requires approximately $66.7 million in eligible expenditure.[10]
• Administration: The company must apply for a certificate, stating the amount of expenditure on which the offset will be determined. The offset will be claimed in the usual income tax process: proposed Subdivision 378-C.

Financial Impact

The measure is estimated to increase payments by $34.9 million over the 4 years from 2021–22 as shown in the table below.

Table 2: Financial impact Schedule 1 in $m

Source: Explanatory Memorandum, 1.

Although the Explanatory Memorandum states that the Bill is estimated to increase payments by $34.9 million over the 4 years from 2021–22 (p.1), the figure is not consistent with the amount expressed by the Assistant Treasurer in his Second Reading Speech (p.3257)—being $38.4 million.

This inconsistency cannot be resolved in this Bills Digest except in so far as to note that the amount quoted by the Assistant Treasurer is equal to:

Schedule 2: Taxation treatment of digital currency

Background

The Assistant Treasurer explained in his Second Reading Speech (p.3237):

Schedule 2 of the bill amends the tax law to clarify that digital currencies (such as bitcoin) continue to be excluded from being treated as a foreign currency for Australian income tax purposes… the legislation will maintain the status quo. Clarification in the legislation is necessary following a decision by the El Salvadorian government to recognise bitcoin as unrestricted legal tender from 7 September 2021. We're advised by the Australian tax commissioner that this introduced uncertainty about the status of bitcoin and similar digital currencies for Australian income tax purposes. This bill addresses the uncertainty by making it quite clear that bitcoin is not currency, or will not be taxed as currency, under Australian law.

The Government issued a media release on ‘crypto not taxed as foreign currency’ on 22 June 2022. The measure was then announced in the October 2022–23 Budget (p.11).

Review by the Board of Taxation

On 8 December 2021, the former Government released its response to the Review of the Australian Payments System , the Senate Select Committee on Australia as a Technology and Financial Centre Final Report, and the Parliamentary Joint Committee Corporations and Financial Services Report on Mobile Payment and Digital Wallet Financial Services.

In its response, the former Government requested the Board of Taxation (p. 1) to report on an appropriate framework for the taxation of digital transactions and assets by the end of 2022.

On 21 March 2022, the former Government released the Terms of Reference for the Board’s review. In August 2022, the Board published a Consultation Guide which provides an overview of crypto assets and the current taxation treatment within Australia. The Board is yet to release its final report.

According to Wolters Kluwer:

Depending on its findings, the Board may decide to establish a set of tax principles, amend the current tax laws to comply with these principles, and/or establish a new taxing regime. Its aim is to provide a neutral outcome (ie it should not encourage or discourage substitution from crypto assets to other assets), as well as to support the ATO’s administration of the taxation of crypto assets and digital transactions. The closing date for comments is 30 September 2022, and the Board is required to report back by 31 December 2022.

The Board’s consultation is a much-anticipated event among tax professionals. It coincides with the government’s decision to commence consultation to improve Australia’s regulatory system for crypto assets generally. The consultation will aim to identify gaps in the existing regulatory framework, progress work on a licensing framework, review innovative organisational structures, look at custody obligations for third party custodians of crypto assets and provide additional consumer safeguards. As a priority, “token mapping” work commences in 2022 and a consultation paper on token mapping will soon be released.[11]

On 22 August 2022, the Government announced ‘Work Underway On Crypto Asset Reforms.’

A global tax transparency framework for crypto-assets

The Organisation for Economic Co-operation and Development (OECD) has released a new global tax transparency framework entitled the Crypto-Asset Reporting Framework (CARF) to provide for the reporting and exchange of information with respect to crypto-assets, as well as approved amendments to the Common Reporting Standard (CRS) for the automatic exchange of financial account information between countries. The new framework was developed with G20 countries and aims to increase transparency with respect to crypto-asset transactions and reduce the likelihood of the use of crypto-assets for tax evasion. Changes have also been made to ensure that indirect investments in Crypto-Assets through derivatives and investment vehicles are covered by the CRS.[12]

Importantly:

The CARF contains model rules that can be transposed into domestic legislation, and commentary to help administrations with implementation. The OECD will be taking forward work on the legal and operational instruments to facilitate the international exchange of information collected on that basis of the CARF and to ensure its effective and widespread implementation, including the timing for starting exchanges under the CARF.[13]

Current taxation treatment

The ATO issued a media release helping taxpayers to understand their crypto-assets tax obligations which states:

Generally, crypto is considered an asset for capital gains tax (CGT) purposes and you must report when there has been a disposal of a crypto asset, which is generally when you no longer own the asset including:

• trading, selling or gifting crypto
• exchanging one crypto asset for another crypto asset
• converting crypto to a fiat currency, for example to Australian dollars (AUD)
• using crypto to obtain goods or services.

When the disposal of a crypto asset occurs, investors may have a capital loss or a capital gain, which needs to be included in their tax returns. All records for crypto transactions need to be kept to work this out.

If an investor holds onto a crypto asset for 12 months or more, they may be eligible for a 50% CGT discount.

A capital loss can only be made when an asset is disposed of and must be reported in the year they occur. Paper losses can’t be claimed when an asset decreases in value. Capital losses can’t be offset against other income like salary or wages but can be used to offset against capital gains from the current financial year or be carried forward to offset capital gains in future financial years.

Investors need to keep details for each crypto asset as they are separate CGT assets.

In addition, the ATO explains how it can track money trails back to taxpayers through data matching, which will help educate investors on the tax obligations. The ATO urges taxpayers not to engage in the ‘asset wash sales’, which are a form of tax avoidance.

Consultation

The Treasury released a draft of the proposed legislation for public comment on 6 September 2022. The submissions to Treasury in relation to the draft legislation are not available on the Treasury website.

Policy position of non-government parties/independents

Liberal Senator Andrew Bragg has recommended regulating cryptocurrency through a market licensing system as well as token mapping stating, ‘No choice is required. Both can be done.’

Key issues and provisions

The key issue for Schedule 2 is to maintain policy consistency (one of the criteria for a good tax system) in the taxation treatment of ‘digital currency’ such as bitcoin.

Item 1 of Schedule 2 repeals and replaces paragraph (d) of the definition of digital currency in the Dictionary in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure that the definition of digital currency does not include government-issued digital currency. Cryptocurrencies such as bitcoin remain treated as digital currency even if they have been adopted as legal tender by foreign jurisdictions.

Items 2 and 3 of Schedule 2 further amend the definition of digital currency and also the definition of money in the GST Act to ensure that if something is both money and digital currency, it is considered to be digital currency and not money. Importantly, if the amendments in Schedule 2 to the Bill are not legislated, bitcoin can be potentially treated as money or foreign currency (see the example of El Salvador) under the current definitions. If so, it will be inconsistent with Government tax policy as expressed in Taxation Determination TD 2014/25. The changes to the GST Act are to clarify that bitcoin remains a digital currency for GST purposes and are not intended to affect GST outcomes.[14] Items 4-11 in Schedule 2 to the Bill amend the GST Regulations to reflect the updated definitions in the GST Act.

Item 12 of Schedule 2 amends subsection 995-1(1) of the ITAA 1997 so that digital currency in the ITAA 1997 has the same meaning as in the GST Act. This operates so that even where a digital currency is adopted as a foreign country’s legal tender, it is still not a foreign currency for income tax purposes.

Importantly, the amendments in Schedule 2 maintain the current income taxation treatment of digital currencies, meaning that depending on the individual taxpayer’s circumstances, a bitcoin can be a ‘CGT asset’ (see TD 2014/26), a trading stock (see TD 2014/27), or may even attract FBT (see TD 2014/28) depending on the circumstances.

Item 13 of Schedule 2 repeals and replaces the definition of foreign currency in the ITAA 1997 to make it clear that non-government issued digital currency (such as bitcoin) is not a foreign currency—although a government-issued digital currency is. In addition, proposed paragraph (c) of the definition inserts a power to make regulations for the purposes of the definition. According to the Explanatory Memorandum, the regulation-making power, which is subject to appropriate Parliamentary scrutiny, allows ‘the Government flexibility to provide taxpayers and administrators with clarity and certainty on tax arrangements’ in a relatively new and evolving crypto ecosystem.[15]

Items 14 and 15 of Schedule 2 are application provisions. They operate so that the amendments to the GST Act, GST Regulations and ITAA 1997 apply in relation to supplies or payments made on or after 1 July 2021. The retrospective amendments cover any unintended income tax outcomes from 7 September 2021 when the El Salvador decree took effect or after. They ensure consistent tax outcomes for all taxpayers, including those with substituted accounting periods.[16]

Stakeholder comments

On 30 September 2022, Chartered Accountants Australia and New Zealand, CPA Australia, Institute of Public Accountants, Law Council of Australia and The Tax Institute (together, the ‘Joint Bodies’) published their submission to the Treasury in relation to the draft legislation.

The Joint Bodies made the following points in their submission:

• first, the Joint Bodies considered that at the outset the Government should make a clear policy statement outlining whether Australia supports the use and adoption of cryptocurrencies and other digital assets
• second, they expressed concern about the power to make regulations which might be used to provide further exclusions to the definitions of foreign currency and digital currency on the grounds that it may cause uncertainty for taxpayers. The Joint Bodies would prefer a principles- based, rather than prescriptive, definition in the primary legislation
• third, the definition of digital currency should be subject to regular Parliamentary review—possibly every 3 years—in order to ensure it remains appropriate and
• fourth, that the outcome of the Board of Taxation Review’ is as yet unknown and that being the case, the amendments are premature.

In a submission to the Economics Committee in response to its inquiry into the Bill, Dr Elizabeth Morton echoed the sentiment in the final bullet point above, suggesting that Schedule 2 be removed from the Bill until after the Board of Taxation’s report on the Review of the Tax Treatment of Digital Assets and Transactions in Australia is released publicly.

Financial impact

According to the Explanatory Memorandum to the Bill (p.2), this measure has nil financial impact. In addition, the amendments in the Schedule will have nil compliance cost impact.

Schedule 3: Reducing the compliance burden of record keeping for fringe benefits tax

Background

The ‘Fringe Benefits Tax – reducing the compliance burden of record keeping’ measure was announced in the 2020–21 Budget.

Key provisions

Item 1 in Schedule 3 to the Bill inserts proposed section 123AA into the Fringe Benefits Tax Assessment Act 1986 (FTBA Act). Proposed subsection 123AA(2) empowers the Commissioner to make a determination by legislative instrument specifying the following:

• one or more years of tax
• one or more classes of statutory evidentiary documents for a specified year of tax
• one or more classes of persons for a specified class of statutory evidentiary documents for a specified year of tax
• one or more kinds of alternative documents or records for a specified class of persons for a specified class of statutory evidentiary documents for a specified year of tax.

Where such a determination is in place, proposed subsection 123AA(1) allows ‘employers finalising their FBT returns…to rely on adequate alternative records holding all the prescribed information instead of seeking that information again by way of statutory evidentiary documents, such as prescribed employee declarations.’[17]

Stakeholder comments

The submission from the ASBFEO to the Economics Committee supports the amendments in Schedule 3, but submits (p.1) that more should be done to reduce regulatory burden of FBT on small businesses, such as ‘aligning FBT reporting with other tax reporting obligations’.

Financial impact

According to the Explanatory Memorandum to the Bill the ‘measure is estimated to result in a small but unquantifiable decrease in receipts of the forward estimates period' and an ‘ongoing compliance saving for employers’.[18]

Schedules 4 and 5: Skills and Training Boost and Technology Investment Boost

Background

As the Assistant Treasurer explains in his Second Reading Speech to the Bill:

Schedule 4 to the bill and schedule 5 to the bill are related. They introduce the Skills and Training Boost and the Technology and Investment Boost arrangements respectively.

The Skills and Training Boost will support small businesses to train and upskill employees.

Small businesses with annual turnover less than $50 million per annum will have access to a bonus of 20 per cent deduction for eligible expenditure on external training of employees. This measure is being legislated to build a better trained and more productive workforce, helping to address skills shortages. The Skills and Training Boost will be available to eligible businesses [until] 30 June 2024.

Schedule 5 to the bill introduces the Technology and Investment Boost, again directed at small business, to support eligible small businesses to improve their digital capacity, allowing them to enhance productivity and business growth. Small businesses will have access to a bonus of 20 per cent tax deduction for eligible expenditure of up to $100,000 per income year to support their digital operations. Unlike the previous measure, this will be available until 30 June 2023.

Digital Economy Strategy

In March 2022, the former Government released the Digital Economy Strategy 2022 Update, which outlines the progress made, including through new commitments in the March 2022–23 Budget (p.157), to achieve the 2030 vision.

Both STB and TIB were announced by the former Government in the March 2022–23 Budget (pp.26–27). The current Government announced its intention to legislate the measures via a joint media release in August 2022.

Consultation

Treasury released drafts of the proposed legislation in relation to the Skills and Training Boost (STB) and the Technology Investment Boost (TIB) for public comment on 29 August 2022. Treasury has received and published submissions for:

• STB: 23 out of 24 submissions (with one submission remaining confidential)
• TIB: 18 out of 18 submissions.

Stakeholder comments

In their submissions to the Economics Committee, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO)(p.1), Australian Chamber of Commerce and Industry (ACCI) (p.1), MYOB (p.1) and National Tax & Accountants’ Association Ltd (NTAA) (p.1) broadly support the two schedules—but with some qualifications.

Extending the expenditure period

• ASBFEO submits (p.1) in relation to STB, that the expenditure period ending in 2022–23 should be extended to allow small businesses more time to invest in upskilling employees; and clarifications are required on eligibility for employees located outside Australia.
• MYOB submits (p.1 and 3) that the end dates for both STB and TIB deductions be extended to 30 June 2024 so the two inherently linked measures can better meet the needs of small businesses, be measured quantitatively, and minimise the risks to the ATO, accountants and bookkeepers due to the short implementation time-frame.

References to eligible training providers

• ACCI submits (pp.2–3) that in relation to STB, eligible training providers should also include bona fide registered associations which deliver training and continuous professional development to small business members; the STB be available for sole traders, and in turn, it will provide large dividends to productivity and the economy; the end dates for both the STB and TIB deductions be extended to 30 June 2025.

What amounts can be reimbursed

• NTAA submits that two issues arise from the Schedules. First, the STB ‘appears to conflict with the intention of the new legislation’ due to the words used in proposed section 328–450(1)(e) in item 1 of Schedule 4 to the Bill. NTAA submits that the STB does not appear to apply ‘where an employer reimburses an employee for expenditure incurred by the employee’ (pp.1–2). Second, the TIB is unclear on whether an employer who provides certain fringe benefits, such as reimbursing an employee for the purchase of a portable electronic device, can qualify. And if so, whether the ‘bonus 20% deduction could be passed on to an employee under an effective salary sacrifice agreement’ (p.2).

Key provisions

The provisions in Schedules 4 and 5 to the Bill amend the Income Tax (Transitional Provisions) Act 1997 (ITTP Act) and introduce to small businesses with aggregate annual turnover of less than $50 million two temporary bonus deductions equal to 20% of eligible expenditure incurred on:

• external training provided to their employees: item 1 in Schedule 4 to the Bill and
• expenses and depreciating assets for the purposes of their digital operations or digitising their operations (subject to a maximum bonus deduction of $20,000 per income year): item 1 of Schedule 5 to the Bill.

The amendments in Schedule 4 apply to eligible expenditure incurred from 7:30pm on 29 March 2022 until 30 June 2024 and to enrolments or arrangements for the provision of training made or entered into at or after 7:30pm, on 29 March 2022.

The amendments in Schedule 5 apply to eligible expenditure incurred from 7:30pm on 29 March 2022 until 30 June 2023.

How Schedule 4 works

Item 1 in Schedule 4 to the Bill inserts proposed sections 328-445 and 328-450 into the ITTP Act.

Proposed subsection 328-445(1) provides that a small business entity with a turnover of less than $50 million[19] can deduct 20% of particular expenditure for the 2022–23 income year if the following conditions are satisfied:

• the expenditure is incurred between 7.30pm on 29 March 2022 and the end of the 2022–23 income year and
• the small business entity can deduct 100% of the expenditure under another provision of a taxation law (whether or not in, or wholly in, the income year in which the expenditure is incurred) and the expenditure is of a type described in proposed section 328-450.

Proposed subsection 328-445(2) is set out in equivalent terms except that it provides for the deduction to be made in relation to expenditure incurred in the 2023–24 income year. Proposed subsection 328-445(3) allows the 20% deduction to be made in a later income year provided that the expenditure is incurred before 30 June 2024.

Nature of the expenditure

Proposed section 328-450 sets out the conditions for eligible expenditure which will attract the 20% deduction:

• the expenditure is for in-person training for one or more of the entity’s employees located in Australia or online training for employees
• the training is provided by a registered higher education provider (within the meaning of the Tertiary Education Quality and Standards Agency Act 2011); a NVR registered training organisation (within the meaning of the National Vocational Education and Training Regulator Act 2011); a registered education and training organisation (within the meaning of the Education and Training Reform Act 2006 (Vic.)) or a registered training provider (within the meaning of the Vocational Education and Training Act 1996 (WA))
• none of the providers of the training is an associate of the small business entity
• enrolment of participants or the arrangement for the provision of training is made on or after 7.30pm on 29 March 2022 and
• the expenditure is charged to the small business entity by the providers of the training, whether directly or indirectly.

How Schedule 5 works

Item 1 in Schedule 5 to the Bill inserts proposed sections 328-455 and 328-460 into the ITTP Act in similar terms to the amendments in Schedule 4—that is, it provides for small businesses with an aggregated turnover of less than $50 million with access to a bonus deduction of 20% of eligible expenditure on expenses and depreciating assets for the purposes of their digital operations or digitising their operations.

The bonus deduction applies to the total of eligible expenditure of up to $100,000 per income year or specified time period, up to a maximum bonus deduction of $20,000 per income year or specified time period.[20]

The Explanatory Memorandum to the Bill sets out examples of the types of spending that will attract the deduction. These include:

• digital enabling items – computer and telecommunications hardware and equipment, software, internet costs, systems and services that form and facilitate the use of computer networks
• digital media and marketing – audio and visual content that can be created, accessed, stored or viewed on digital devices, including web page design
• e-commerce – goods or services supporting digitally ordered or platform-enabled online transactions, portable payment devices, digital inventory management, subscriptions to cloud-based services, and advice on digital operations or digitising operations, such as advice about digital tools to support business continuity and growth and
• cyber security – cyber security systems, backup management and monitoring services.[21]

Financial impact

In relation to the measures in Schedule 4, the Explanatory Memorandum states that it is ‘estimated to decrease receipts by $550.0 million over the forward estimates’ as set out in the table below.

Table 3: Financial impact Schedule 4 in $m

Source: Explanatory Memorandum, 4.

In relation to the measures in Schedule 5, the Explanatory Memorandum states that it is ‘estimated to decrease receipts by $1.0 billion over the forward estimates’ as set out in the table below.

Table 4: Financial impact Schedule 5 in $m

Source: Explanatory Memorandum, 5.

Schedule 6: Financial reporting and auditing requirements for superannuation entities

Background

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry recommended that, with respect to superannuation, the roles of the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) should be adjusted, so that APRA retained responsibility for prudential regulation of the industry while ASIC took on the role of the ‘conduct and disclosure regulator …  [which] primarily concerns the relationship between RSE licensees and individual consumers’.[22]

Treasury opened a consultation on much of the content of Schedule 6 in August 2021. In a press release announcing this the then Minister for Superannuation, Financial Services and the Digital Economy, Senator Jane Hume, stated that the proposed reforms would, ‘increase the transparency of financial information and better enable regulators’ oversight of superannuation funds’.[23]

Speaking in respect of the Bill at its introduction, the Assistant Treasurer and Minister for Finance, Stephen Jones, stated that the Bill would:

…overhaul the transparency requirements for superannuation funds so that members can access clearer, more meaningful, and more consistent information about their fund … so that members have meaningful information to hold trustees to account and make accurate comparisons between funds on performance, fees and expenditure.[24]

Policy position of non-government parties/independents

The non-government parties and independents have not commented on Schedule 6.

Position of major interest groups

The Association of Superannuation Funds of Australia (ASFA) made a submission to the consultation on the exposure draft of the bill. In this submission ASFA states that the proposed legislation will ‘significantly, and unnecessarily, increase costs, with limited benefit to members’.[25]

ASFA quotes from the Australian Accounting Standards Board (AASB) Conceptual Framework and AASB 1056 to demonstrate that general purpose financial reporting (such as that undertaken by companies) and superannuation financial reporting serve different needs. ASFA also observes that superannuation funds are already required to provide financial data to APRA and cites a Memorandum of Understanding between ASIC and APRA that states: ‘The agencies agree to engage on industry data collection and seek to minimise duplication in statistical reporting by industry.’[26]

The Australian Institute of Superannuation Trustees (AIST) also made a submission to the Treasury consultation. AIST made many of the same points as were made by ASFA, noting in particular the added cost to members and the regulatory overlap between APRA and ASIC. [27]

The submissions by ASFA and AIST both express concern that compliance costs will be significant and criticise the lack of a Regulatory Impact Statement for this legislation. [28] In particular, AIST states that, ‘implementing the proposed package of measures could result in additional ongoing costs of $10–$15m to the superannuation industry, which will ultimately be borne by members’. [29]

Key issues and provisions

Schedule 6 amends the Corporations Act 2001, the Australian Securities and Investments Commission Act 2001 (ASIC Act) and the Superannuation Industry (Supervision) Act 1993 (SIS Act).

New financial reporting requirements

Item 17 in Part 1 of Schedule 6 to the Bill repeals and replaces the definition of registrable superannuation entity (RSE) in section 9 of the Corporations Act so that the term registrable superannuation entity:

(a) when used in a provision outside Chapter 2M of the Corporations Act (which deals with financial reports and audit) or an associated definition—has the same meaning as in the SIS Act and

(b) when used in Chapter 2M or an associated definition—means a registrable superannuation entity (within the meaning of the SIS Act) but does not include the following:

(i)  an exempt public sector superannuation scheme (within the meaning of the SIS Act)

(ii)  an excluded approved deposit fund (within the meaning of the SIS Act)

(iii) a small APRA fund (within the meaning of section 1017BB of the Corporations Act).

Part 1 in Schedule 6 to the Bill amends the financial reporting requirements for RSEs in Chapter 2M of the Corporations Act by requiring the RSE licensee to:

• prepare a financial report and a directors’ report each financial year, and lodge them with the Australian Securities and Investments Commission (ASIC): items 32 and 33; items 37–42
• make a copy of the financial report and the directors’ report for the financial year publicly available on the entity’s website: proposed section 314AA inserted by item 64
• provide a copy of the financial report and the directors’ report for a specified financial year to a member upon request: item 175.

The financial report must be prepared in accordance with the relevant accounting standards and must therefore include financial statements, notes to the financial statements and other information specified in the standards. The directors’ report must also be prepared in accordance with the relevant accounting standards as well as including information required under the Corporations Act: items 34 and 35.

Auditing requirements

Schedule 6 proposes two measures which will make the auditing requirements for RSEs different to those of companies or registered schemes.

RSEs are only permitted to have one auditor at a time, ensuring that a single individual (or lead auditor of a team of auditors) is responsible for the audit. This accords with the prudential standard.[30]

Unlike with companies or registered schemes, there are no restrictions on the maximum hours of non-audit services an audit firm may provide to an RSE and still retain its independence, provided that the additional services are required or permitted to be provided under the prudential standards for RSE licensees. This allows audit firms to provide comprehensive reviews of frameworks and even internal audit functions as well as ad hoc engagements on specific topics.[31]

Financial impact

The Explanatory Memorandum states that Schedule 6 has no financial impact.[32]

Schedule 8: Amendment of the Clean Energy Finance Corporations Act 2012

Additional Credits to the CEFC Special Account

At enactment, the CEFC Act provided for the crediting of $10 billion over 5 years between 2013‑2017 by a special appropriation. At the time, no ongoing funding from the Commonwealth was anticipated, with Minister Combet noting in his second reading speech to the Bill:

The corporation will receive $2 billion per year for five years from 2013–14 through the special appropriation in this bill. The corporation will also be provided three years of funding through the annual appropriation bills to assist with the establishment and operations of the corporation.

The corporation is intended to be self-sustaining once mature—that is, it will not require further assistance from the budget. Rather, the corporation’s profits and funds returned from its investments will be available for reinvestment.[33]

Schedule 8 to the Bill proposes to credit the CEFC Special Account with an additional $11.5 billion, to be credited as soon as practicable after the new paragraph commences: item 3 inserts proposed paragraph 46(ea). It also proposes to allow Parliament to credit additional money to the CEFC special account by ordinary appropriation: item 4 inserts proposed subsection 46(2). It is the first injection of additional Commonwealth funds into the CEFC Special Account since the CEFC Act was enacted in 2012.[34]

The funds to be credited to the CEFC Special Account come from two sources. The first $11 billion is funds to implement the Powering Australia – Rewiring the Nation (RTN) measure from the October 2022-23 Budget. The second is $500 million from the Powering Australia Technology Fund (PATF) previously announced as the Low Emissions Technology Commercialisation Fund (LETCF) measure from the 2021–22 MYFEO.[35]

How the CEFC operates

The CEFC is established, under the CEFC Act, as a corporate Commonwealth entity (which may sue and be sued) and is empowered to carry out a number of functions—including its investment function.[36] Its Board is required to decide the strategies and policies to be followed by the Corporation; ensure the proper, efficient and effective performance of the Corporation’s functions; and carry out any of other functions conferred upon it by the CEFC Act.[37]

The investment function of the Corporation is limited by the investment mandate. That is a direction, made by the responsible Ministers by way of legislative instrument.[38] The former Government made such a direction in May 2020. It is still in effect and states, amongst other things:

The Corporation must include in its investment activities a focus on technologies and financial products as part of the development of a market for firming intermittent sources of renewable energy generation, as well as supporting emerging and innovative clean energy technologies.

In supporting clean energy technologies, the Corporation is strongly encouraged to prioritise investments that support reliability and security of electricity supply. The Corporation will also take into consideration the potential effect on reliability and security of supply when evaluating renewable energy generation investment proposals, and if commercially feasible, consider investment in proposals that support reliability or security of supply.

This Bill credits the CEFC Special Account an additional $11.5 billion. It does not amend the CEFC Act or otherwise legislate to specify that how this money will be spent. The Department of Climate Change, Energy, the Environment and Water (DCCEEW) has foreshadowed that a new Investment Mandate would be issued to establish the governance arrangements of the $500 million PTAF and $11 billion RTN funds:

Specific directions relating to RTN and PATF investments will be set out in an updated Investment Mandate, to be issued by the responsible Ministers. As per Section 65 of the CEFC Act, an Investment Mandate direction must not have the purpose, or likely to have the effect, of directly or indirectly requiring the Board to, or not to, make a particular investment or be inconsistent with the CEFC Act and its object.[39]

While the Australian Energy Market Operator (AEMO) and the Rewiring the Nation Office (RTNO) within DCCEEW will offer technical advice to the CEFC Board on investment decisions, the Board is the final decision-maker.[40]

Stakeholder view

In its submission to the ongoing Senate Economics Committee inquiry into the Bill, the Smart Energy Council supported all the measures of Schedule 8, but called for amendments to the definition of energy efficiency technologies that the CEFC can invest in. This would make it more explicit that the CEFC can invest in flexible demand and storage technologies, including in battery electric vehicles.[45]

Policy position of non-government parties/independents

The Shadow Treasurer raised concerns over Schedule 8 of the Bill, claiming that the Bill created a $1 billion dollar ‘slush fund’ for DCCEEW outside the independent CEFC process described above:

On top of the billions in spending for transmission projects, within this bill is a hidden billion-dollar fund for the Department of Climate Change, Energy and Water to circumvent the independent CEFC process…

Worse than that is that buried deep in schedule 8 is a change to remove the safeguards around spending through the Clean Energy Finance Corporation. This means in practice that Minister Bowen, the Minister for Climate Change and Energy, will be able to sneak in changes without consulting the parliament. That's what he wants to be able to do. Hidden in the explanatory memorandum is the revelation that the minister and the department will have this billion-dollar fund to fund whatever they want without being accountable to this place.[46]

Opposition MP, Henry Pike stated that this is the ‘most contentious of all the schedules within this Bill’, arguing that infrastructure investment of this scale would increase inflation and construction costs.[47]

No other party or independent has commented on this schedule explicitly.

Responsible Minister Amendments

Schedule 8 also amends the provisions regarding the administration of the Act by Ministers. Currently the CEFC Act grants various powers and imposes functions, and responsibilities on:

• The Responsible Ministers: The CEFC Act specifies that the Minister for Finance and the Treasurer are the Responsible Ministers.[48] However, the Acts Interpretation Substituted Reference Order 2017 (the Substituted Reference Order) substitutes the reference to the Treasurer with ‘the Minister administering the CEFC Act’ – currently the Minister administering DCCEEW.[49]
• The Nominated Minister: The Responsible Ministers must, in writing, determine that one of them is the Nominated Minister for the purposes of the functions, powers and duties under the Act.[50] This determination is not a legislative instrument, and can only be varied but not revoked.[51]

Items 1, 6, and 7 in Schedule 8 to the Bill propose to make amendments to the Act so that the text of the CEFC Act reflects current administrative practice, without the Act needing to be read alongside the Acts Interpretation Substituted Reference Order 2017.

• Item 1 replaces the Treasurer with the Minister administering the Act, as is already provided for under the Substituted Reference Order.
• Item 6 repeals subsections 76(1) and (2), concerning how a Minister becomes the Nominated Minister. Instead of the Nominated Minister being determined by an instrument made by the Responsible Ministers, the proposed subsections provide that the Minister administering the Act is the nominated Minister, unless a determination is made that the Nominated Minister is the Finance Minister.
• Item 7 provides that a determination that the Nominated Minister is the Finance Minister is not a legislative instrument, as with determinations under the current provisions.

Importantly, as noted in the Explanatory Memorandum, ‘this amendment is administrative in nature only and makes it clearer in the CEFC Act who the responsible Ministers are’.[52] No substantive change is made to who the responsible ministers and nominated minister are, and the amendments do not expand or change the powers of the Ministers or Government in relation to the CEFC.

Financial impact

According to the Explanatory Memorandum to the Bill the credits to the CEFC Special Account will ‘not have an impact on the underlying cash balance.’[53]

Schedule 9: Taxation of military superannuation benefits

Background–taxation principles

Taxation of income generally

Under Australia’s tax laws and the common law, a characteristic of ‘income according to ordinary concepts’[54] is periodicity, recurrence, or regularity, even if the receipts are not directly attributable to employment or services rendered (which military invalidity payments arguably are).[55] Where payments, such as pension payments, have, are expected to, or will recur regularly (even if the amounts vary from time to time), then they would be income according to ordinary concepts.

Whilst certain lump sums can be income (for example, lump sum payments of wages paid in arrears), generally only lump sum payments which are unlikely to be repeated are not considered to be income according to ordinary concepts and therefore not taxed or taxed concessionally.[56]

Taxation of lump sums connected to loss of income, disability and invalidity

Where a lump sum payment is made in respect of personal injuries, disability or invalidity, in general if the payment reflects a loss of earning capacity, it will be tax-exempt but, if it is made for loss of earnings/income, it is taxed as income.[57]

Whilst there are differences between how workers compensation, total and permanent disability (TPD), social security, veteran payments related to disability or incapacity and invalidity payments made from superannuation funds are taxed, they still share a set of common characteristics:

• regular payments related to income or loss of income, or lump sums made in arrears or in lieu of such payments, are treated and taxed as income and
• genuine lump-sum payments not related to income (for example, payments for injury per se) are either not taxed, or are taxed on a more concessional basis than income.[58]

If ordinary income tax concepts are applied, a series of invalidity ‘pension’ payments from a superannuation fund, or a single payment made in arrears of such payments, should be treated as taxable income, not as a non-taxable lump sum.

Taxation of superannuation benefits: income streams vs lump sums

Importantly, superannuation tax laws modify the general rule explained above by taxing some lump sums at a lower concessional rate (or not at all) compared to the concessional tax rates applied to superannuation income streams. How a lump sum or income stream (that is, ‘pension’) paid from a superannuation benefit is taxed will turn on a range of factors, including:

• the age of the person receiving the benefit
• whether the benefit is being paid as a lump sum or an income stream and
• whether the benefit is a disability benefit.[59]

Each superannuation benefit has a tax-free component and a taxable component.[60] As its name suggests, the tax-free component of a superannuation benefit is not taxed. A disability superannuation benefit is a payment for loss of future income, rather than being a compensation payment primarily for the injury or disability itself. Importantly, a disability superannuation benefit can be paid as a lump sum or via regular payments (most commonly as an invalidity pension).[61] Critically, the tax-free component of a member's superannuation interest includes any superannuation lump sum which is also a disability superannuation benefit.[62]

This creates a financial incentive to have such payments – even if they are paid regularly or in arrears of regular payments – classified as lump sums, rather than income streams. This is because by being classified as such, the payment becomes tax-free, whereas if a disability superannuation benefit is not classified as a superannuation lump sum:

• it will not form part of the tax-free component and
• as it may then be included as part of the taxable component (which includes the element untaxed in the fund), it will therefore be taxed (although often at a concessional rate and/or with a tax offset).

When is a superannuation benefit a superannuation lump sum?

The meaning of a superannuation lump sum is defined negatively in the tax law as ‘a superannuation benefit that is not a superannuation income stream benefit’.[63] In turn, a superannuation income stream benefit is defined as a payment from a superannuation interest that supports a superannuation income stream as defined in regulations. Critically, the definition of a ‘superannuation income stream’ in the Income Tax Assessment (1997 Act) Regulations 2021 (ITAR Regulations) captures all income stream payments from superannuation vehicles that are made in line with the payment standards applying at the relevant time as set out in the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations).[64] Those standards are complex and technical, but include, among other things, a requirement that:

• the payments are paid at least annually throughout the life of the primary beneficiary and
• the payments increase with CPI.[65]

This means that despite the long-standing general tax principles discussed above, regular, periodic disability payments made from a superannuation benefit (or lump sums paid in arrears for such payments) that do not comply with the relevant payment standards in the SIS Regulations are taxed as lump sums, despite being regular, periodic payments for loss of income.

The effect of this is that the portion of the tax-free component increases if it includes certain invalidity payments or a disability superannuation benefit if it is classified by the relevant laws as a lump sum, even if it is not a lump sum under ordinary tax principles (for example, an invalidity pension that does not increase with CPI). This results in a greater proportion of the payments being tax-free, reducing the taxpayer’s assessable income and therefore potentially resulting in the taxpayer becoming eligible for the Family Tax Benefit, childcare rebate, and for the low‑income health care card.

As such, how a superannuation benefit – and in particular a disability superannuation benefit – is classified as lump sum or income stream under the relevant tax and superannuation laws is critical and is what the Douglas decision dealt with.

The Douglas decision

Decision of the Full Court of the Federal Court

The Douglas case before the Full Court of the Federal Court (Full Federal Court) dealt with three appeals of Administrative Appeal Tribunal (AAT) decisions concerning the taxation of invalidity benefits paid to former Australian Defence Force (ADF) members under the Defence Force Retirement and Death Benefits Act 1973 (DFRDB Act) and the Military Superannuation and Benefits Act 1991 (MSB Act). In summary the Full Federal Court held that:

• in one case, arrears of invalidity pay paid in a lump sum (which normally would have been paid in a series of periodic payments) and
• in another case, a series of invalidity pension payments that varied due to changes in disability classification

were entitled to concessional tax treatment as a superannuation lump sum, despite the payments either being arrears for periodic payments or being paid in periodic payments. Invalidity pension payments in the third case remained classified as a superannuation income stream.

Whilst the reasons for the decisions are not explored in detail in this Digest, it is important to note the following. First, as observed by the AAT at first instance, the ‘correctness of the proposition that invalidity pay is income under ordinary concepts’ is ‘not controversial’ and the DFRDB Act does not operate so that each invalidity pension payment would be considered ‘an instalment of a capital sum’.[66] This meant that ‘it is certainly at least arguable not only that periodic payments of invalidity pay are income under ordinary concepts but also that a lump sum payment of arrears of the same has that same character’.[67]

Second, the AAT further observed that:  

Intuitively, a lump sum and an “income stream” are different concepts…. intuitively, a lump sum is a discrete payment whereas an “income stream” is a series of payments of an income character. Thus, uninformed by a statutory definition, it seems odd to regard periodic, invalidity pension instalments as a “lump sum” of any sort. That, however, is before one is required to venture into the interplay between the provision by Parliament, via the MSB Act, of various entitlements for particular members of the ADF who suffer injury or disease in the course of military service… and income tax law.[68]

Third, the Douglas decision turned on the interpretation of the legislation and regulations, which operated in a manner that resulted in regular payments and lump sums paid in arrears of such payments, contrary to the general tax principles and original policy intent discussed above, being classified as superannuation lump sums. The Full Federal Court stated that, in relation to the relevant parts of the SIS Regulations, they were ‘not well drafted’[69] as further noted:

… there are difficulties in applying SIS Regulations reg 1.06, which was drafted to cover “the ordinary indicia of a conventional pension or superannuation entitlement”, to the provisions of a unique statutory scheme. That observation should be endorsed. It is tolerably clear that the statutory scheme of which the MSB Rules form a part was designed with a view to it providing invalidity benefits in the form of income stream benefits… Assuming the legislature intended and intends the “invalidity pension” under the MSB Rules to constitute “superannuation income stream benefits”, which appears likely, it would not be difficult for the SIS Act or SIS Regulations to exempt them from the minimum standards or otherwise address the MSB Scheme separately.[70] [emphasis added]

Finally, the decision in Douglas largely turned on the finding that invalidity pay (whether paid in arrears or regularly) was not a superannuation income stream as defined in the ITAR Regulations for various reasons, the most relevant of which included that the provisions of the DFRDB Act and MASB Act did not meet the required payment standards in the SIS Regulations as:

• they did not ‘ensure’ that ‘the pension is paid at least annually throughout the life of the primary beneficiary’ (as required by subsection 1.06(2) of the SIS Regulations) and
• the invalidity pension could be cancelled under the MSB Act Rules and therefore the MSB Act Rules did not ‘ensure’ that ‘the pension is paid at least annually throughout the life of the primary beneficiary’ (as required by reg 1.06(2) of the SIS Regulations).

The outcome

As a result, the invalidity pay was subject to the concessional tax treatment as a superannuation lump sum under section 307–145 of the Income Tax Assessment Act 1997 (ITAA 1997). Importantly, had there been a requirement to make periodic payments under the relevant provisions of the DFRDB Act or MSB Act, it appears it would have resulted in the payment being classified as an income stream, not a lump sum.

In essence, all three cases determined in the Douglas decision were decided on highly technical grounds relating to when the entitlement to the payments arose but, more importantly, whether the payments met the relevant ‘standards’ in force and therefore would be classified as a superannuation income stream or not. When they did not, then despite being paid periodically or in arrears of periodic payments, they were considered and taxed as ‘lump sums’ in a clear breach of the long-standing principles discussed earlier. The Explanatory Memorandum notes:

It was the [original] policy intent… that defined benefit pensions would be treated as superannuation income streams. The Douglas decision identified a discrepancy in the statutory definition of a superannuation income stream that meant, contrary to the [original] policy intent, these types of pensions do not meet the definition of a superannuation income stream. As a result, payments from these pensions defaulted to being taxed as superannuation lump sums.[71] (emphasis added)

Key issues and provisions

Before 1 July 2007, defined benefit pensions of the type considered in the Douglas decision were taxed as ‘superannuation pensions’ under the Income Tax Assessment Act 1936 (ITAA 1936). The Simplified Superannuation reforms moved the taxation of benefits paid on or after 1 July 2007 to the ITAA 1997 and inserted the definition of ‘superannuation income streams’ – the intended equivalent terminology for ‘superannuation pensions’. It was the policy intent that defined benefit pensions would be treated as superannuation income streams.[72]

The Douglas decision arose due to a discrepancy in the statutory definition of a superannuation income stream that meant, contrary to the policy intent, certain income streams that commenced on or after 20 September 2007 do not meet the definition of a superannuation income stream as, for example, they do not meet the requirements of subregulation 1.06(1) of the SIS Regulations in that they can be cancelled, suspended, or reduced to nil in certain circumstances and therefore do not meet the relevant payment standards. As a result, payments from these pensions are taxed as superannuation lump sums, which is the default position, contrary to general tax principles discussed earlier and the policy intent.

What the Bill does

The Bill seeks to respond the Douglas decision by amending various taxation laws to amend the definition of a superannuation income stream to:

• confirm the beneficial tax treatment of invalidity pensions, spouse and child pensions payable on the death of a member receiving an invalidity pension paid under the DFRDB Act or MSB Act schemes and certain defined benefit pensions in accordance with the Douglas decision
• confirm the original policy intent that defined benefit pensions are superannuation income streams and taxed as such in relation to all other defined benefits pensions that commenced on or after 20 September 2007 and
• introduce a non-refundable tax offset to ensure recipients of invalidity benefits paid in accordance with the MSB Act and DFRDBS Act who may be negatively impacted by the Douglas decision do not pay additional income tax or Medicare levy.[73]

Amending definition of a superannuation income stream

Currently section 307–65 of the ITAA 1997 provides that a superannuation lump sum is a superannuation benefit that is not a superannuation income stream benefit. Section 307–70 then defines a superannuation income stream as having the meaning given by ITAR 2021 and provides that a superannuation income stream benefit is a superannuation benefit specified in the regulations paid from a superannuation income stream.

In turn, Subdivision 307–B of the ITAR 2021 defines a superannuation income stream as, among other things, income streams that are annuities or pensions paid in accordance with the SIS Regulations (and hence meeting the relevant payment standards) or other annuities or pensions covered by the SIS Act that commenced before 20 September 2007.

The effect of this is that currently a superannuation benefit that is not paid from a superannuation income stream (for example, because the SIS Regulation payment standards were not met) cannot be a superannuation income stream benefit and therefore the payments are a superannuation lump sum, even if paid periodically or in arrears of periodic payments.

The Bill, rather than amending the ITAA 1997, amends the definition of a superannuation income stream in the ITAR Regulations applicable to defined benefits pensions that commenced on or after 20 September 2007 to exclude:

• invalidity pensions and spouse and child pensions payable on the death of a member receiving an invalidity pension paid under the DFRDB Act or MSB Act schemes and
• non-military superannuation schemes that have defined benefits paid on the permanent incapacity of their members that do not meet the current payment standards in the SIS Regulations.[74]

As superannuation benefits that are not superannuation income streams, even if paid regularly, default to being superannuation lump sums, the effect of this is that all other defined benefit pensions similar to those paid under the DFRDB Act or MSB Act schemes that meet the relevant payment standards in the SIS Regulations will remain superannuation income streams.

This ensures that moving forwards, the taxation of regular systematic payments linked to invalidity or disability from some, but not all, superannuation funds (or lump sum payments in arrears of such payments) conforms with the original (and long-standing) policy intent to treat such pensions as superannuation income streams, as well as the general tax principles discussed earlier.[75]

New non-refundable tax offset

Whilst the effect of Douglas was positive for most taxpayers, the Government has noted that there is potential for veterans to be adversely affected by the decision.[76] In his Second Reading Speech, the Minister for Veterans' Affairs and Minister for Defence Personnel noted:

While, in the most part, this decision has had a positive impact on payments for veterans, there are some who have been left worse off… The Douglas decision, as currently enshrined in law, has potentially adverse income tax outcomes for some veterans receiving an invalidity pension and invalidity pay. As a result of the decision, the superannuation income stream withholding schedules no longer applied to affected veterans. I wish to emphasise that, while the Douglas decision provided a positive tax outcome for many affected veterans, it created adverse income taxation impacts for some veterans on a permanent basis. For others, even though they may not be worse off on an annual basis, they may find that they have more tax withheld on a fortnightly basis from their pension… To counter the resulting adverse impacts of this change in the tax treatment of their superannuation benefit as a result of the Douglas decision, this schedule to the bill creates a non-refundable tax offset to ensure that these veterans will not pay any more income tax or Medicare levy on their superannuation lump sums than they would pay if these benefits were still treated in the previous way before the Douglas decision was handed down. We have consulted affected veterans as well as other key stakeholders and government departments in pulling this legislation together.

To counter such situations, the Bill creates a new non-refundable tax offset (the veterans’ superannuation (invalidity pension) tax offset) to individuals who receive:

• invalidity pay within the meaning of the DFRDB Act or an invalidity pension within the meaning of the MSB Act or
• a pension mentioned in a paragraph in subsection 307-70.02(1A) of the ITAR 2021 (various invalidity, death, child and spouse pensions paid under the DFRDB Act and MSB Act schemes).[77]

The effect of the offset is that veterans who would have had a higher tax liability because of the Douglas decision will pay no more income tax or Medicare levy on their superannuation lump sums than they would pay if those benefits were treated as a superannuation income stream. The offset applies retrospectively to income years starting on or after 1 July 2007, to prevent adverse income tax outcomes arising from the Douglas decision. The Commissioner retains the ability to amend income tax assessments to give effect to the offset.[78]

The Explanatory Memorandum sets out how the tax offset is calculated at pages 166 to 167. The Explanatory Memorandum provides an example of how the new tax offset will operate to reduce the types of negative tax outcomes noted in the Minister’s second reading speech above:

A veteran receives a modest invalidity pay from the DFRDBS that commenced on or after 20 September 2007 but does not meet the definition of disability superannuation benefit in subsection 995-1(1) of the ITAA 1997. The veteran is aged over 60 and as such was previously eligible for a 10% tax offset under section 301-100 of the ITAA 1997, on the untaxed element of the taxable component of the benefit because it was considered superannuation income stream and the individual had not exceeded their defined benefit income cap. However, because of the Douglas decision the invalidity benefit payments are now considered to be superannuation lump sums for income tax purposes. As such, the veteran is no longer eligible for the 10% tax offset under section 301-100 of the ITAA 1997 which is applicable to superannuation income streams.

However, in the individual circumstances of this veteran, the veteran would now receive a tax offset under section 301–95 of the ITAA 1997 when the payments of their invalidity pension are taxed as superannuation lump sums. If this tax offset is less than the tax offset the veteran would have received under section 301–100 of the ITAA 1997, (when the payments of the invalidity pay were taxed as superannuation income stream benefits), the veteran may pay more income tax following the Douglas decision and their income tax position may be worse off as a result.

As a result, the veteran is eligible for a non-refundable tax offset and this ensures that the veteran is in exactly the same income tax position as they would have been if the Douglas decision had not been handed down.[79] (emphasis added)

Horizontal equity

One of the good tax criteria is horizontal equity: the idea that people in the same circumstances should be treated in the same way.[80] One effect of the Douglas decision is that two taxpayers who both receive a regular, periodic superannuation benefit arising from invalidity caused by their military service can be taxed differently, as the need for the proposed veterans’ superannuation (invalidity pension) tax offset discussed above demonstrates. In this instance, a potential effect of the Bill is that two taxpayers receiving the same type of superannuation benefit on a regular basis (for example, invalidity pension payments) can be taxed differently, thus breaching the horizontal equity principle in tax design. For example:

• one taxpayer receives regular periodic payments for loss of income due to disability (or payments in arrears of such payments) that, due to the Douglas decision and amendments in Schedule 9, are classified as superannuation lump sums, which are either not taxed, or taxed on a highly concessional basis and
• another taxpayer also receives regular periodic payments for loss of income due to disability that, despite the amendments made by the Bill, remain classified as income streams, and therefore are taxed on a less concessional basis.

In contrast, had the general tax principle that periodic payments are generally income, or the original policy intent been applied, then no such differences in taxation between taxpayers would arise. This is because where two taxpayer both receive periodic superannuation benefit payments for loss of income due to disability or invalidity (or a lump sum payment in arrears of such payments) then, regardless of whether the payments comply with the relevant payment standards under the SIS Regulations or not, both would be taxed on the same concessional basis, namely based on the periodic payments being superannuation income streams, not lump sums.

By entrenching a definition of a superannuation income stream in the ITAR Regulations that allows periodic payments to be classified as superannuation lump sums, the Bill not only diverges from the long-standing policy intention and general tax principles noted earlier, but also may potentially facilitate a continuing breach of the horizontal equity tax design principle.

The Defence Force Welfare Association (DFWA) highlighted this issue, arguing that the Exposure Draft of the Bill (which does not materially differ from the Bill):

… embeds different tax treatment regimes for veterans depending on when they started receiving payments and the scheme. Veterans with the same date of enlistment, same employment and pay, same length of service and with the same disability, and receiving the same Invalidity Benefit payment under the same superannuation scheme, can be taxed differently. Veterans whose Invalidity Benefits payments commenced on or after 20 September 2007 receive more favourable taxation treatment than those whose payments started prior to that date.[81] [emphasis added]

Whilst the DFWA focused on different tax outcomes for veterans based on when relevant payments commenced, the Bill may operate so that workers other than veterans receiving similar payments from a superannuation benefit linked to a similar invalidity or disability may have those payments taxed differently to veterans.

Policy position of non-government parties/independents

At the time of writing, the position of the Opposition in relation to the measures in Schedule 9 could not be determined. However, when in Government, the Opposition had previously proposed amendments that appear to have been intended to:

• overturn the Douglas decision in respect of invalidity pensions paid under certain (military) superannuation schemes by ensuring such periodic payments would be classified as income streams, not lump sums but
• effectively preserve the beneficial tax treatment provided by the Douglas decision to existing taxpayers captured by the Douglas decision, by providing a non-refundable tax-offset.

At the time of writing the policy position of other non-government parties and independents on the measures in Schedule 9 could not be determined.

Position of major interest groups

At the time of writing, the position of major interest groups in relation to the measures in Schedule 9 could not be determined. However, in relation to the Exposure Draft of Schedule 9 to the Bill, whilst CPA Australia and Chartered Accountants Australia and New Zealand (CA ANZ) supported the Bill, they noted:

• ‘there still appears to be an opportunity to arbitrage between tax treatment for benefits paid as lump sums compared to income streams’
• the Bill is ‘a missed opportunity to review the policy reasoning behind the taxation of payments from superannuation schemes’ and
• ‘the superannuation benefit payment provisions… do not align well and are in need of a significantly detailed review to remove these inconsistencies. The Douglas case came about because of these inconsistencies. Whilst the proposed non-refundable tax offset solves the problems identified in the Douglas decision, we believe it would be better to remove all inconsistencies at their source rather than use a “band-aid” solution’.[82]

The DFWA indicated it supported the Bill to the extent it ‘provides relief to those veterans who have been negatively impacted by the decision in Douglas’ but noted:

we absolutely oppose any action that removes any tax or other benefits flowing from the decision in Douglas. DFWA is also of the view that the benefits of the Douglas decision—particularly the tax modification for disability superannuation benefits—should be extended to those DFRDB Invalidity Pay and MSBS Invalidity Pension recipients, whose benefits commenced prior to 20 September 2007. The same beneficial tax treatment should also be extended to contemporary veterans receiving Invalidity Benefits under ADF Cover.[83]

Financial impact

According to the Explanatory Memorandum, the measures proposed by Schedule 9 will decrease taxation receipts to the Commonwealth by $60 million from 2022–23 to 2025–26, and will have minimal compliance costs.[84]