This Bills Digest replaces a preliminary Digest dated 5 December 2022.
Key points
- Digital games tax offset (Schedule 1) introduces a refundable tax offset for eligible expenditure incurred in the development of digital games.
- Taxation of digital currencies (Schedule 2) clarifies that digital currencies (such as bitcoin) continue to be excluded from the income tax treatment of foreign currency, meaning that the current treatment remains unchanged and that cryptocurrencies may not be regarded as foreign currencies.
- Reducing the compliance burden of record keeping for fringe benefits tax (FBT) (Schedule 3): the Commissioner of Taxation is empowered to allow employers finalising FBT returns to rely on adequate alternative records holding prescribed information, instead of seeking the information again by way of statutory evidentiary documents, such as prescribed employee declarations.
- Skills and training boost (Schedule 4) intends to provide small businesses (with aggregated annual turnover of less than $50 million) with access to a temporary 20% tax bonus deduction for eligible expenditure incurred on external training delivered to employees by registered providers.
- Technology investment boost (Schedule 5) intends to provide small businesses with a temporary 20% tax bonus deduction for eligible expenditure incurred on business expenses and depreciating assets that support digital operation.
- Financial reporting and auditing requirements for superannuation entities (Schedule 6) continues the process of making superannuation fund reporting more accessible to consumers, aligning superannuation funds’ accounting and reporting obligations with those of public companies.
- Amendment of the Clean Energy Finance Corporation Act 2012 (Schedule 8) intends to provide for additional funding as announced in the October 2022–23 Budget to implement the Rewiring the Nation election commitment.
- Response to the Douglas decision (Schedule 9) amends various taxation laws to confirm the tax treatment of certain superannuation benefits paid to veterans from the Defence Force Retirement and Death Benefits and Military Superannuation Benefits schemes following the Full Federal Court decision in Commissioner of Taxation v Douglas.
Introductory Info
Date introduced: 23 November 2022
House: House of Representatives
Portfolio: Treasury
Commencement: Schedules 1–5 commence on the first 1 January, 1 April, 1 July or 1 October after Royal Assent. Schedule 6 commences on 1 July 2023.
Schedules 8 and 9 commence the day after Royal Assent.
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:
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:
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
| 2021–22 |
2022–23 |
2023–24 |
2024–25 |
| - |
- |
-10.6 |
-24.3 |
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:
|
The amount stated in the 2021–22
Budget (p.73)
|
18.8 million
|
|
The amount stated as an expansion of the measure in the 2021–22
MYEFO (p. 274)
|
19.6 million
|
|
Total
|
38.4 million
|
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:
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
| 2021–22 |
2022–23 |
2023–24 |
2024–25 |
2025–26 |
| - |
- |
-150.0 |
-250.0 |
-150.0 |
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
| 2021–22 |
2022–23 |
2023–24 |
2024–25 |
2025–26 |
| - |
- |
-500.0 |
-350.0 |
-150.0 |
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]