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Tax and Superannuation Laws Amendment (2014 Measures No. 1) Bill 2014

Portfolio: Treasury
Introduced: House of Representatives, 26 February 2014

Summary of committee concerns

1.1        The committee seeks further information to determine whether the amendments proposed in Schedules 1 and 3 to the bill are compatible with human rights.

Overview

1.2         This bill proposes to amend various taxation and superannuation laws.

1.3        Schedule 1 to the bill will introduce penalties to deter and penalise persons who promote the illegal early release of superannuation benefits.

1.4        Schedule 2 to the bill will introduce administrative directions and penalties for contraventions relating to self-managed superannuation funds (SMSFs) including rectification directions; education directions; and administrative penalties.

1.5        Schedule 3 to the bill seeks to amend the Income Tax Assessment Act 1936 to phase-out the net medical expenses tax offset by the end of the 2018-19 income year. During the income years 2013‑14 to 2018-19 the tax offset will be subject to transitional arrangements.

1.6        Schedule 4 to the bill seeks to amend the Income Tax Assessment Act 1997 to update the list of specifically-listed deductible gift recipients.

Compatibility with human rights

Statement of compatibility

1.7        The bill is accompanied by a separate statement of compatibility for each schedule. The statements for Schedules 1 and 4 conclude that the relevant amendments do not raise any human rights issues. The statements for Schedules 2 and 3 conclude that the proposed amendments are compatible with human rights.

Committee view on compatibility

1.8        The committee considers that the amendments contained in Schedules 2 and 4 do not appear to give rise human rights concerns. The committee's comments on the amendments proposed in Schedules 1 and 3 of the bill are set out below.

Schedule 1 – Illegal early release schemes

1.9        The amendments in Schedule 1 will insert a new civil penalty provision, section 68B, into the Superannuation Industry (Supervision) Act 1993 (SIS Act) that prohibits a person from promoting a scheme that has resulted, or is likely to result, in the illegal early release of superannuation benefits.[1]

1.10      The consequences of contravening a civil penalty provision are provided for in Part 21 of the SIS Act under a provision of general application that applies to all civil penalty provisions in the Act. In proceedings commenced by the Regulator, a court may make a declaration that a person has committed a violation of a civil penalty provision (here the illegal early release of superannuation funds). The court may impose a pecuniary penalty of up to 2000 penalty units (or $340, 000) on the person. However, the court may not impose such a penalty ‘unless it is satisfied that the contravention is a serious one’.[2] In hearing a civil penalty application, the court is to apply the rules of evidence and procedure applied in civil proceedings.[3]

1.11      Part 21 of the SIS Act also provides for the institution of criminal proceedings against a person who contravenes a civil penalty provision ‘dishonestly, and intending to gain, whether directly or indirectly, an advantage for that, or any other person’ or ‘intending to deceive or defraud someone’. It is open to a court hearing criminal proceedings to make a declaration that a person has contravened a civil penalty provision, to make a civil penalty order imposing a financial penalty, and to order compensation be paid to a superannuation entity which has suffered loss, where the court does not proceed to a conviction.[4] Where a court in criminal proceedings convicts a person of an offence, the court may also order the payment of compensation to a superannuation entity which has suffered loss.[5]

1.12      If a person has been proceeded against for a civil penalty, a criminal prosecution may not be brought subsequently in relation to the same conduct.[6] If a person is prosecuted for an offence, the person may be proceeded against for a civil penalty order, where the person is not convicted in the criminal proceedings.[7]

Civil penalty provision as a ‘criminal charge’

1.13      The issue arises whether the civil penalty provision should be considered ‘criminal’ for the purposes of human rights law. The committee has noted on various occasions that where a penalty is described as 'civil' under national or domestic law, it may nonetheless be classified as ‘criminal’ for the purposes of Australia’s human rights obligations because of its purpose, character or severity. As a consequence, the specific criminal process guarantees set out in article 14 of the International Covenant on Civil and Political Rights (ICCPR) may apply to such penalties and proceedings to enforce them.

1.14      The committee has set out in its Interim Practice Note 2 the expectation that statements of compatibility should provide an assessment as to whether civil penalty provisions in bills are likely to be ‘criminal’ for the purposes of article 14 of the ICCPR, and if so, whether sufficient provision has been made to guarantee their compliance with the relevant criminal process rights provided for under the ICCPR.

1.15      The statement of compatibility accompanying these amendments provides such an assessment. It argues that the civil penalty provision should not be considered ‘criminal’ because (i) there is a clear demarcation between what constitutes a civil and a criminal penalty under Part 21 of the SIS Act; (ii) no term of imprisonment is available as an alternative to the monetary penalty; and (iii) the courts can tailor the amount of the monetary penalty to the circumstances of the case.

1.16      The committee accepts that the prosecution of an offence where a person contravenes a civil penalty provision ‘dishonestly, and intending to gain, whether directly or indirectly, an advantage for that, or any other person’ or ‘intending to deceive or defraud someone’ is a separate criminal proceeding under the SIS Act. The committee agrees that this is not a relevant factor for assessing whether the civil penalty provision in question is ‘criminal’ for the purposes of human rights law.

1.17      The committee also accepts that there is no direct prospect of imprisonment for a contravention of the civil penalty provision. The committee notes the suggestion in the statement of compatibility that this position can be contrasted with certain cases that were considered by the European Court of Human Rights, where the fact that the imposition of monetary penalties could be commuted into a period of imprisonment for non-payment contributed to/influenced the characterisation of those penalties as ‘criminal’. The committee notes that imprisonment in those circumstances was not a direct consequence of the contravention, but rather a consequence which flowed from the non-payment of the monetary penalty. In the Australian context, it is possible that imprisonment could result in some cases where failure to pay is considered to be contempt of court. The committee notes that the European jurisprudence has found in other cases that coercive imprisonment for non-payment would not in and of itself transform a civil penalty into being ‘criminal’,[8] and would therefore caution against cherry-picking particular cases from comparative case law to support an argument. The committee notes that while imprisonment is a key indicator of criminality, it is not an exclusive factor for the purposes of determining whether a penalty is severe enough to be characterised as 'criminal'.

1.18      The committee notes the helpful discussion in the statement of compatibility on the case law to date with regard to civil penalty proceedings under the SIS Act, and accepts that the courts will and do take account of a range of factors when determining the amount of a civil penalty. The severity of a penalty, however, involves looking at the maximum penalty provided for by the relevant legislation. The legislation in this instance permits a maximum penalty of $340,000 to be imposed on an individual.

1.19      The committee considers that, even if the civil penalty provision were considered to be regulatory in nature (that is, it has a punitive/deterrent purpose but applies to a particular group of persons in a specific capacity), the committee remains concerned that the significant penalties involved – up to $340,000 for an individual – suggest that the civil penalty provision in question may be considered as ‘criminal’ for the purposes of human rights law. The committee considers that without adequate justification for setting the maximum penalty at this high level, appropriate procedural protections should be applied to the relevant enforcement proceedings.

1.20             The committee intends to write to the Treasurer to seek clarification as to why a maximum penalty of $340,000 for an individual is considered to be appropriate in these circumstances, and if not, whether sufficient provision has been made to guarantee compliance with the relevant criminal process rights provided for under the ICCPR, in particular the right to be presumed innocent, the right not to incriminate oneself and the prohibition against double jeopardy.

Schedule 3 – phase-out of the net medical expenses tax offset

1.21      The net medical expenses tax offset (NMETO) is a tax rebate to offset out-of-pocket medical expenses incurred above a certain threshold. Net medical expenses are out-of-pocket medical expenses incurred minus any refunds received from Medicare or a private health insurer. Medical expenses are broadly defined and include expenses related to an illness or operation which has been paid to a doctor, nurse, pharmacist or hospital; as well as the cost of the purchase and maintenance of medical aids and artificial limbs, artificial eyes and hearing aids.

1.22      In the 2013-14 Budget, the government announced that it would phase out the NMETO, with transitional arrangements for those currently claiming the offset. The amendments in Schedule 3 to this bill will give effect to that undertaking.

1.23      Under this measure the NMETO will be phased out between the 2013-14 and 2018-19 income years and ultimately be repealed on 1 July 2019. During that period there will be two sets of transitional arrangements in place:

• The NMETO will continue to be available for out-of-pocket medical expenses until the scheme is repealed on 1 July 2019 only for those medical expenses relating to disability aids, attendant care or aged care.
• The NMETO will continue to be available for out-of-pocket medical expenses unrelated to disability aids, attendant care or aged care until 30 June 2015 for taxpayers who receive an amount of the NMETO for the 2012‑13 and 2013-14 income years.

1.24      The explanatory memorandum says that the NMETO is being phased out because of the following shortcomings:

First, as it can only be claimed at the end of the financial year, it does not provide financial assistance when the medical expense is incurred. Secondly, only taxpayers who have a tax liability receive a benefit from the offset. Individuals with high out-of-pocket medical expenses and little or no tax liability gain no benefit from this offset as it is not refundable.[9]

Right to health

1.25      The committee notes that the phasing-out and eventual repeal of the NMETO may be viewed as either retrogressive or a limitation on the right to health.[10]  It is therefore necessary for the government to demonstrate that the measure pursues a legitimate objective and has a reasonable relationship of proportionality between the means employed and the objective sought to be realised.

1.26      The statement of compatibility argues that the phase out of the NMETO is consistent with the right to health for the following reasons:

• ‘[I]t merely removes an ineffective offset that is only really available to particular claimants for particular medical expenses’.[11]
• ‘[I]t will allow for further funding of other Government priorities, including health care’.[12]
• Individuals will continue to have access to a range of other subsidies for medical expenses, via the ‘Medicare Safety Net, which is supplemented by Medicare, the National Disability Insurance Scheme and the Pharmaceutical Benefits Scheme’.[13]

1.27      The committee recognises that the need for the government to manage and prioritise its fiscal needs is a legitimate objective. The committee also notes the value of including a phasing out period so that individuals will not be prejudiced by having their reasonable expectations frustrated. The statement of compatibility, however, does not articulate how the measure is rationally and proportionately connected to the stated objective of funding of other government priorities, including health care. 

1.28      The committee notes that the NMETO applies to medical expenses which are incurred after available reimbursements are taken into account, such as those through the Medicare Benefits Schedule, the Pharmaceutical Benefits Scheme, government aged care subsidies and private health insurance refunds. The claim in the statement of compatibility that individuals will still have access to the core government health schemes and systems, therefore, does not address the question of whether removing the tax offset could result in any disadvantage by entrenching high out-of-pocket medical expenses.

1.29      To assess whether this change is compatible with human rights the committee requires further information about the financial and other factors that the government has taken into account in phasing out the NMETO, including whether it will have a particular impact on vulnerable groups and individuals on low incomes. The committee notes its expectation that statements of compatibility provide more than assertions when justifying limitations on human rights.

1.30             The committee intends to write to the Treasurer to seek an explanation as to whether any limitations on the right to health that may result from the phasing out of the NMETO are reasonable and proportionate to the achievement of the government’s fiscal priorities.

Rights of persons with disabilities

1.31      The statement of compatibility states that the amendments are consistent with the rights of persons with disabilities because ‘the transitional arrangements allow for taxpayers to claim medical expenses under the NMETO where they relate to disability aids and attendant care’.[14]

1.32      The committee accepts that the transitional arrangements are likely to be consistent with the rights of persons with disabilities. However, issues in relation to the rights of persons with disabilities arise not only in the context of the transitional arrangements, but also when the NMETO is ultimately abolished. The statement of compatibility does not address this latter aspect of the amendments.

1.33             The committee intends to write to the Treasurer to seek clarification as to whether the repeal of the NMETO is consistent with the rights of persons with disabilities, including whether the National Disability Insurance Scheme and other relevant supports will adequately compensate for any gap left by its abolition.

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