Chapter 2

Key issues

2.1 As noted in chapter 1, the bill contains a number of schedules that propose to amend various taxation laws to implement a range of discrete changes. This chapter examines the schedules to the bill on which the committee received evidence on, namely the:

monthly PAYG instalments for large entities (schedule 1);
tax loss incentive for designated infrastructure projects (schedule 2);
tax transparency measures for large corporations (schedule 5); and
removal of the CGT discount for foreign individuals (schedule 7).

Schedule 1: Monthly PAYG instalments

2.2 Schedule 1 proposes to amend Division 45 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to require certain large entities to pay PAYG instalments monthly.

2.3 Currently, most entities in the PAYG instalment system pay instalments on a quarterly basis (with some paying annually or biannually if certain criteria are met). However, many of these entities are required to pay GST on a monthly basis.

2.4 The government announced that it would seek to change the timing of PAYG instalments by large corporate entities in the 2012–13 Mid Year Economic and Fiscal Outlook (MYEFO). As the explanatory memorandum outlines, the amendments to the PAYG instalments are intended to:

... allow PAYG instalments to be more responsive to the economic conditions faced by businesses, and to better align PAYG instalment payments with the GST payments for most large companies.[1]

2.5 The explanatory memorandum notes that in response to concerns raised in subsequent consultations on the design of the measure the government announced in the 2013–14 Budget, it would extend the reforms to all large entities.[2] Accordingly, the bill proposes a number of thresholds that, if exceeded, would require an entity to make monthly PAYG instalments. The thresholds are, for most entities, the amount of its base assessment instalment income (BAII) that it has for a particular income year.[3]

2.6 The proposed thresholds and transitional arrangements are outlined below in Table 2.1.

Table 2.1: Thresholds for determining monthly PAYG instalment payers

Date	Type of entity	Entity required to pay PAYG instalments monthly if its threshold amount is equal to or greater than
1 January 2014	Corporate tax entities	$1 billion
1 January 2015	Corporate tax entities	$100 million
1 January 2016	Corporate tax entities	$20 million
1 January 2016	All other entities	$1 billion
1 January 2017	All other entities	$20 million

Source: Schedule 1, item 19, proposed section 45-138; schedule 1, items 45–47.

2.7 The increased frequency of instalments being remitted to the Australian Taxation Office (ATO) is expected to increase revenue by $10.15 billion over the forward estimates.[4]

2.8 The bill also includes a provision that would enable the Commissioner of Taxation to determine, by legislative instrument, additional methods for calculating the amount of a monthly instalment.[5] The Minister noted that this provision is intended to help further reduce any compliance costs.[6]

Stakeholder views on schedule 1

2.9 In its submission, the Australian Bankers' Association advised that it is not concerned about these measures.[7] However, the Institute of Chartered Accountants Australia (ICA) expressed its view that any added costs of compliance arising from these measures have not been adequately addressed. It also noted that it had made a number of suggestions to Treasury regarding how to amend the calculation of instalment income.[8]

Committee comment on schedule 1

2.10 The committee notes the comments made by the ICA regarding alternative ways to calculate instalment income. However, the bill does propose to enable the Commissioner of Taxation to develop, by legislative instrument, other additional methods by which a specified class of entities that are monthly payers may calculate their instalments. While the ICA considers that it is 'unfortunate' that follow up consultation will be required, and the committee acknowledges the ICA's concern on this point, there is a process in place for these issues to be carefully considered and addressed. The measures in the bill should not be delayed; in fact, the passage of the bill will also be likely to provide an impetus for these issues to be successfully resolved.

Schedule 2: Tax loss incentive for designated infrastructure projects

2.11 Schedule 2 proposes to amend the ITAA 1997 to provide a tax incentive for entities that carry on a nationally significant infrastructure project that has been designated by the Infrastructure Coordinator. The explanatory memorandum provides the following reasoning for providing a tax incentive for such projects:

Infrastructure projects often experience long lead times between incurring deductible expenditure in the construction phase and earning assessable income in the operational phase. Tax losses are therefore accumulated and carried forward to later income years awaiting the receipt of income.

As such, the present value of losses may be eroded over time, disadvantaging infrastructure investment compared to other types of investment.

Furthermore, infrastructure projects may move through a number of phases as they move from the construction phase to the operational phase, and the entity may have different owners as it moves through its different phases.

These changes could result in the entity no longer being able to use its tax losses to offset against future income, eroding the value of the losses altogether. Broadly, existing integrity rules in the income tax laws only allow the use of past tax losses where an entity maintains the same majority ownership (the continuity of ownership test) or is carrying on the same business (the same business test).[9]

2.12 For an entity carrying on a designated nationally significant infrastructure project, the proposed tax incentive contained in the bill would:

uplift the unutilised amounts of tax losses by the long-term bond rate; and
exempt the entity:
- if it is a company, from the continuity of ownership and same business tests; or
- if it is a trust, from the trust loss and bad debt deduction tests.

Stakeholder views on schedule 2

2.13 In their submissions, Infrastructure Partnerships Australia and the Australian Institute of Superannuation Trustees (AIST) expressed their support for the proposed measures. Infrastructure Partnerships Australia considers that the measures will:

... preserve the economic value of early-stage tax losses throughout an infrastructure project, and will provide much needed certainty to investors with respect to the recoupment of such losses.[10]

2.14 In addition, Infrastructure Partnerships Australia welcomed improvements that were made to the exposure draft of the bill that was released by Treasury for consultation. However, it noted a number of areas where, in its view, further changes could be considered. One area was the treatment of consolidated groups.[11] According to the explanatory memorandum:

The head company of a consolidated group may be a DIP [designated infrastructure project] entity only if none of the members of the consolidated group carries on, or has ever carried on, activities that do not relate to the same DIP.[12]

2.15 However, Infrastructure Partnerships Australia noted that:

In practice, there could be circumstances where a member of a consolidated group suffers losses at a time when there is no income derived elsewhere in the consolidated group, against which to offset those losses. For example, an infrastructure fund that holds multiple infrastructure projects, all in the construction phase, could experience losses across all projects for several years before projects commence operations and generate revenue.[13]

2.16 Infrastructure Partnerships Australia suggested that certain entities, such as superannuation funds or infrastructure-focused managed funds that invest in a number of DIPs could be ineligible as a result of the drafting of the bill.[14] Infrastructure Partnerships Australia also suggested that the circumstances that are outlined in certain examples in the explanatory memorandum be more clearly expressed in the bill to give greater certainty and to ensure that certain entities are not excluded from the eligibility criteria. The following extract from its submission regarding special purpose finance vehicles is one example:

Example 2.11 in the Explanatory Memorandum ... provides for the inclusion of special purpose finance entities that are "set up to manage finance for the project" as eligible DIP entities, specifically referring to "a special purpose vehicle established to source project finance for the group and to manage ongoing finance obligations." This is a welcome amendment to the Exposure Draft Legislation.

It would be preferable, however, if the reference to "special purpose finance vehicles" was included in footnotes in the legislation, rather than in the Explanatory Memorandum. There have been instances in the past when the Australian Tax Office (ATO) has not considered the Explanatory Memorandum in its rulings, and if this were the case with respect to the incentive, special purpose finance entities could still be excluded.[15]

2.17 A similar example relating to allowable ancillary activities was also given by Infrastructure Partnerships Australia.[16]

2.18 The AIST did not raise concerns about the eligibility criteria. However, it did recommend a further increase in the proposed uplift of tax losses that have been carried forward. The AIST argued that the long-term government bond rate (LTBR):

... does not reflect the true cost of capital of investors in infrastructure projects and does not fully compensate for the erosion of the real value of early stage tax losses of an infrastructure project.[17]

2.19 It recommended that a rate of LTBR plus six per cent would 'better reflect private investors' true cost of capital' because:

The equity market risk premium for operating assets is typically 6% above the long-term government bond rate, excluding any additional risk premium associated with greenfield projects.[18]

Committee comment on schedule 2

2.20 The new tax incentive will help remove impediments to private sector investment in certain infrastructure projects that have been designated to be of national significance.

2.21 The committee supports the current form of the proposed amendments, and believes the proposed uplift rate is consistent with achieving the policy objective. Of course, changes to the uplift rate could be considered in the future if it is thought necessary. With regard to the examples contained in the explanatory memorandum relating to special purpose vehicles and allowable ancillary activities, given that the explanatory memorandum can be used to assist in ascertaining the meaning of provisions in legislation, and that the examples given do not appear inconsistent with the bill, the committee does not consider that amendments to the bill are necessary to provide added certainty regarding the use of special purpose vehicles and allowable ancillary activities.

Schedule 5: The publication of limited tax information regarding large corporations and information sharing arrangements

2.22 The TAA makes it an offence for a taxation officer to disclose tax information that identifies an entity, or is reasonably capable of being used to identify an entity, except in certain specified circumstances. Schedule 5 proposes to amend the TAA to allow the publication of particular information about the tax affairs of large corporations and to enable greater information sharing between the ATO and Treasury for the purposes of decision making under the Foreign Acquisitions and Takeovers Act 1975 (FATA) or Australia's Foreign Investment Policy.

Background

2.23 In his second reading speech on the bill, the Minister provided the following reasoning for the transparency measures:

There is growing concern—in Australia and globally—that many of the key rules of international taxation may not have kept pace with the evolution of the global economy.

The apparent ease with which some large corporate entities can shift taxable profits and erode a country's tax base is a shared concern for this government, the G20 and most OECD countries.

Policymakers and the Australian public should have more transparency around the levels of tax being paid by large and multinational businesses in Australia to allow for an informed debate about the efficiency and equity of our tax system.

This is particularly the case when there are increasing demands for the government to provide evidence about the challenges that base erosion and profit shifting present to the sustainability of our corporate tax system.[19]

2.24 The bill also deals specifically with amounts payable under the MRRT and PRRT. Earlier this year, after only combined figures for MRRT and PRRT revenue were published in the government's monthly financial statements, the Senate passed a motion noting that 'it is in the public interest to release the total amount of revenue raised from the Minerals Resource Rent Tax in order to provide confidence as to how the tax is playing out and the precise ways the revenue is collected'. The Senate ordered that the Commissioner of Taxation provide the Senate Economics References Committee with details about the revenue collected since the MRRT's commencement.[20] The Commissioner provided the information to the Senate committee and the Deputy Prime Minister and Treasurer on 8 February 2013. In a briefing paper addressed to the Deputy Prime Minister and Treasurer, the Commissioner expressed the following view on the operation of the secrecy provisions of the TAA:

Following the receipt of MRRT instalments for the second quarter of its operation, I have considered very carefully whether disclosing the total receipts would disclose an individual entity's affairs contrary to the provisions in Division 355 of the Taxation Administration Act 1953, as was the view formed after the first quarter's instalments.

I have, on balance, formed the view that disclosure of the total of the two quarters' instalments would not breach that provision. In doing so I took into account a range of factors including:

the total amount of the instalments, particularly the fact that the second instalment was substantially larger than the first;

the total number of payers;

the degree of uncertainty associated with deducing information about a particular payer; and

advice from the Australian Government Solicitor.[21]

Information about the tax paid by large corporations

2.25 The bill would require the Commissioner of Taxation to publish limited information about the tax affairs of corporations with:

a reported total income of $100 million or more; or
a liability to pay an amount of MRRT or PRRT in a future MRRT year or year of tax.

2.26 Specifically, the Commissioner will be required to publish the name and ABN of the entity, its total income, taxable income and the amount of tax payable.[22] The Commissioner must publish the information 'as soon as practicable' after the end of the year that applies to the particular tax.[23] The explanatory memorandum notes that a period is not prescribed to allow 'a flexible approach that accommodates organisational capabilities and priorities', although it adds that 'it is envisaged' that one annual report would be published that compiles the income tax, MRRT and PRRT information.[24]

Aggregate tax information

2.27 The bill would allow for the publication of aggregate tax information for each Commonwealth tax even if the publication may, when used in conjunction with publicly available information, be reasonably capable of being attributed to a particular taxpayer (other than a natural person). The explanatory memorandum notes that these amendments are intended to 'ensure that the Commonwealth can publish aggregate tax collection information for the purposes of fulfilling its financial reporting obligations'.[25]

Information sharing among government agencies

2.28 The bill would amend the information sharing arrangements between the ATO and Treasury. Currently, the sharing of confidential taxpayer information for the purposes of briefing the Treasurer about decisions that they may make under FATA is permitted. In addition to this, the bill proposes that taxation officers will be able to disclose confidential taxpayer information for the purpose of:

briefing an authorised Treasury officer in relation to a decision that may be made under the FATA; and
briefing the Treasurer or an authorised Treasury officer in relation to a decision that may be made under Australia's Foreign Investment Policy.

Stakeholder views on schedule 5

2.29 The key arguments made for and against the policy underpinning the proposed measures were well articulated in the submissions received from the Tax Institute and the ICA. The Tax Institute, which broadly supports the policy objective of the proposed measures, argued that:

Greater transparency as to the tax affairs of certain taxpayers may assist in informing a community debate on the appropriateness of our current tax policy settings.[26]

2.30 However, the ICA, which advised the committee that it opposes this measure, considered that:

... there is a clear risk that publication of this raw data will lead to a misunderstanding by the general public who might jump to incorrect conclusions. This in turn may lead to unfair outcomes such as reputational damage and consumer backlash.[27]

2.31 In its submission, the Tax Institute also discussed the reputational risk that the proposed amendments may create for some taxpayers. It anticipates that taxpayers may make public additional information about their tax affairs to give context to the information published by the Commissioner of Taxation, particularly where companies have complied with the tax law but 'have tax disclosures that fall outside expected norms'.[28] Rather than dismissing the proposed measures on this basis, however, the Tax Institute suggested that amendments to the reporting requirements contained in the Corporations Act 2001 be considered instead. It argued that the Corporations Act reporting regime has:

... historically and in the present day fulfilled a valuable function of keeping relevant stakeholders informed as to the present and planned activities of the relevant company or economic group.

The disclosure of additional information in this manner will allow tax information to be considered in context, allow greater transparency in relation to the economic substance of the transaction and could require additional disclosures deemed necessary via the notes to the financial statements.[29]

2.32 The Tax Institute also questioned the proposed threshold that would determine whether the measures would apply to a particular entity. As currently drafted, the measures would apply to corporate tax entities that have a reported total income of $100 million or more (or a liability to pay an amount of MRRT or PRRT in the future). The Tax Institute suggested that a threshold of total income of $250 million or greater should instead be used, noting that, internally, the ATO itself generally classifies large businesses as having an annual turnover of more than $250 million.[30] It argued that this higher threshold would:

... exempt as many small to medium sized closely held companies as reasonably possible. In this regard, the need to protect the actual and in principle privacy of individual taxpayers needs to be carefully balanced with the objectives of the tax transparency initiative.[31]

2.33 The Tax Institute cited data indicating that there are approximately 1400 businesses with turnover between $100 million and $250 million, over half of which are controlled by individuals.[32]

Committee comment on schedule 5

2.34 The amount of tax paid by large corporate entities and the strategies employed, particularly by multinationals, to minimise their tax liability while still complying with relevant tax laws has been the subject of recent interest in many developed countries, including Australia. Improving, in a limited and appropriate way, the transparency of the amount of tax paid by large entities will, over time, help inform an understanding of how Australia's comprehensive, but complex, tax system is performing, and how large businesses contribute to the provision of public services.

2.35 The committee considers that the measure should be implemented through amendments to the TAA, as proposed by the bill, rather than by amendments to the reporting obligations in the Corporations Act as has been proposed during this inquiry. While some companies may choose to provide further information to contextualise the tax they have paid, either in their financial statements or by other means, this is a decision for each corporate entity. The approach that companies consider desirable may differ according to their circumstances, and some companies may not see the need to provide further context about the limited information that will be published about their tax affairs. Amending the TAA will accordingly minimise any compliance burden associated with the measures as no additional reporting obligation will be imposed.

2.36 However, although the exact form of the reports that will be published will be left to the Commissioner of Taxation, the committee does consider that the published figures should be accompanied by an overview of Australia's business tax system and other information that will provide some general context about the published material.

Schedule 7: Removing the CGT discount for foreign individuals

2.37 Schedule 7 proposes to amend the ITAA 1997 to remove the CGT discount on discount capital gains accrued after 8 May 2012[33] for foreign resident and temporary resident individuals. The explanatory memorandum provides the following background information and overview of the proposed measure:

Currently, discount capital gains that are made by individuals may be reduced by a discount percentage before being included in assessable income. A CGT discount of 50 per cent is available to individuals regardless of tax residency status.

Generally, foreign and temporary resident individuals are only subject to CGT on taxable Australian property, which includes residential and commercial real estate and mining assets.

These assets are immobile and produce location specific returns. A reduction in the effective tax rate (by way of the CGT discount) is not necessary to attract foreign investment in these assets. Removing the CGT discount for foreign and temporary residents increases the return to Australia from gains made through foreign investment in Australian land.[34]

Stakeholder views on this schedule

2.38 The ICA questioned the analysis provided in the explanatory memorandum regarding the effect of a CGT discount on assets that are immobile and that produce location specific returns. It pointed to the 'availability of other non-Australian investment options for international investors', and noted:

Indeed, the very rationale for the introduction of the CGT discount was to "make the rate of capital gains tax in Australia for individuals competitive to those in other countries, particularly the United States." That will no longer be the case.[35]

2.39 The Tax Justice Network Australia (TJN-Aus) supports the proposed amendments. In its submission, it questioned the rationale for foreign residents receiving CGT concessions. On the foreign investment issue, it stated that it is 'unaware of any assessment that has sought to quantify if this concession has attracted any additional foreign investment and what the benefit of this investment has been'.[36]

2.40 The Tax Institute raised a practical concern with the proposed amendments, as currently drafted. It suggested that the application date be deferred from 8 May 2012 to 1 July 2012. Such a deferral would:

... cater for non-residents and trustees who will have already lodged 2012 income tax returns including gains calculated based on the current rules prior to the details of the rules being released. A start date of 1 July 2012 will save these taxpayers from having to amend previously lodged returns incorporating gains made to 30 June 2012 and will ensure all gains made from 1 July 2012 will be properly accounted for under these new rules.[37]

Committee comment on schedule 7

2.41 The committee has considered the evidence given by the Tax Institute relating to the application date.

2.42 The committee notes that the proposed measures were announced on 8 May 2012 as part of the previous Budget, and that they are currently intended to apply to part of the 2011–12 tax year (and onwards). The committee further notes that the measures announced in May 2012 related to the removal of the CGT discount for non‑residents; the intended removal of the discount for temporary residents was not announced.[38] However, an exposure draft of the bill was released for consultation in March 2013.

2.43 The committee appreciates the difficulties that the passage of time may cause for affected taxpayers and those that advise them. Nevertheless, the measures were announced prior to the introduction of this bill and taxpayers and their advisers could reasonably expect it to be enacted. The ATO also has a policy in place for dealing with retrospective law changes.[39] Changing the commencement date also has the potential to impact taxpayers that have arranged their affairs in anticipation of the law change, who will then need to amend their returns as a result of the law having changed in a way that was not anticipated.

Committee view

2.44 This omnibus bill contains a number of important measures relating to Australia's taxation law. The proposed amendments to the PAYG instalment system, which will require large entities to make their instalments on a monthly basis rather than quarterly, is a sensible change. Under these new arrangements, PAYG instalments will more closely reflect fluctuations in those entities' incomes. It is important to note that no entity will pay more tax as a result of this change; only the frequency of remittances to the ATO will be increased. The tax transparency measures contained in schedule 5 are also supported by the committee as they will help ensure public confidence in the integrity of Australia's corporate tax system and will deter aggressive tax minimisation and tax avoidance.

Recommendation 1

2.45 The committee recommends that the Senate pass the bill.

Senator Mark Bishop
Chair

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