Chapter 1Introduction
Referral of the inquiry
1.1The Treasury Laws Amendment (Delivering Better Financial Outcomes and Other Measures) Bill 2024 (the bill) was introduced in the House of Representatives and read for a first time on 27 March 2024.
1.2On 27 March 2024, the Senate referred the provisions of the bill to the Senate Economics Legislation Committee for inquiry and report by 20 June 2024.
1.3On 20 June 2024, the committee presented a progress report seeking an extension of time to report. This extension was to 21 June 2024.
Conduct of the inquiry
1.4The committee advertised the inquiry on its website and wrote to relevant stakeholders and interested parties to invite written submissions by 26April2024.
1.5The committee received and published 59 submissions, of which one was accepted as name withheld. The committee also received six confidentialsubmissions.
1.6The committee held one public hearing for the inquiry at Parliament House on 13 June 2024. The names of witnesses who appeared at the hearing can be found at Appendix 1. The committee also received additional information and answers to questions on notice, which are listed at Appendix 2.
Structure of report
1.7Chapter 1 of this report provides an overview of the bill and the conduct of the inquiry. Chapter 2 summarises the views of inquiry participants on the bill, and in turn provides the committee view and recommendation.
Purpose of the bill
1.8The bill contains six schedules, which would amend several Acts to achieve a range of outcomes, as outlined below.
Implementing the ‘Delivering Better Financial Outcomes’ package
1.9In response to several recommendations of the 2019 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, in March 2022 the then government initiated an independent review of the effectiveness of measures to improve the quality of financial advice. The resulting Quality of Advice Review (the Review), led by Ms Michelle Levy, considered ‘how the regulatory framework could better enable the provision of high quality, accessible and affordable financial advice for retail clients (consumers)’. The final report of the Review (December 2022) made 22 recommendations.
1.10Schedule 1 of the bill would implement 11 of those recommendations and deliver the first tranche of measures of the Government’s Delivering Better Financial Outcomes package.
1.11Summarising the Tranche 1 reforms, the Explanatory Memorandum states the amendments will provide legal certainty for the payment of financial adviser fees from a member’s superannuation fund account, remove red tape that makes financial advice more costly than it needs to be, and support increased access to affordable financial advice for millions of Australians.
Recommendations to be implemented from the Quality of Advice Review
1.12The bill implements measures responding to the following recommendations of the Review:
Recommendation 7, to provide more certainty to superannuation fund trustees about deduction of adviser fees from members’ superannuationaccounts;
Recommendation 8, to consolidate the administrative steps in obtaining clients’ consent to ongoing fee arrangements;
Recommendation 10, to allow advice providers the flexibility to either provide clients with Financial Services Guides or to make information publicly available on their website;
Recommendation 13.1, to clarify that clients may provide Australian Financial Services (AFS) licensees with monetary and non-monetary benefits, and that the prohibition on accepting conflicted remuneration applies where these benefits are given by product issuers, not clients;
Recommendation 13.2, to enable clients to authorise trustees to pay AFS licensees an advice fee directly from the client’s superannuation fund;
Recommendation 13.3, to remove ‘likely redundant’ exceptions to the prohibition on AFS licensees accepting certain benefits from clients, following Recommendation 13.1;
Recommendation 13.4, to remove an exception that allowed AFS licensees and representatives to accept monetary benefits for providing financial product advice, where they had not provided advice about that product or class of products for at least 12 months prior to the provision of the benefit;
Recommendation 13.5, to remove an exception that allowed employees of authorised deposit-taking institutions (ADIs) to receive benefits for recommending certain banking, insurance, or credit insurance products;
Recommendation 13.7, to maintain current commission arrangements for life risk insurance products, but requiring an adviser to obtain their retail client’s informed consent before accepting a commission;
Recommendation 13.8, to maintain current remuneration allowances for advisers of retail clients in relation to general insurance products, but requiring an adviser to obtain their retail client’s informed consent before accepting a commission;
Recommendation 13.9, to maintain current arrangements for consumer credit insurance advisers, who are currently able to obtain commissions for advising retail clients up to a cap of 20 per cent of the premium, but requiring an adviser to obtain their retail client’s informed consent before accepting a commission.
Petroleum resource rent tax changes
1.13Schedule 2 to the bill would update the petroleum resource rent tax (PRRT) anti-avoidance rules so they align with the more robust anti-avoidance rules contained in part IVA of the Income Tax Assessment Act 1936 (ITA Act 1936).
1.14Schedule 3 to the bill would amend the Petroleum Resource Rent Tax Assessment Act 1987 to clarify the meaning of the phrase ‘exploration for petroleum’. It would also clarify that mining, quarrying or prospecting rights cannot be depreciated for income tax purposes until those rights are used, as well as clarifying circumstances where issuing new rights over areas covered by existing rights leads to income tax adjustments.
Improving legislative efficiency and remedying unintended consequences
1.15Schedule 4 would amend legislation governing Australia’s agreements with various Multilateral Development Banks (MDBs) and the International Monetary Fund (IMF). As a result of these amendments, and consistent with modern drafting practice, changes to Australia’s agreements with these MDBs and the IMF would be automatically incorporated into domestic legislation byreference.
1.16Schedule 5 would amend various laws falling within the Treasury portfolio, making minor changes to improve outcomes, address drafting defects and remedy unintended consequences.
Increasing screen industry tax incentives through the location offset rebate
1.17Schedule 6 would amend the Income Tax Assessment Act 1997 (ITA Act 1997) to increase the location offset and production offset tax rebates for qualifying Australian screen productions. It would also change the qualifying requirement for the location offset. According to the Explanatory Memorandum, these changes would incentivise international investment in the Australian screen industry and maximise the employment and training opportunities provided domestically.
Provisions of the bill
Schedule 1 – Financial outcomes amendments
1.18As noted above, the amendments in Schedule 1 respond to several recommendations made by the Quality of Advice Review.
1.19Schedule 1 would amend the Corporations Act 2001 (Corporations Act), the Superannuation Industry (Supervision) Act 1993 (SIS Act), and other Acts to implement these changes.
Requirements for paying advice fees from member’s interest in a fund
1.20Division 1 of Part 1 of Schedule 1 would repeal and replace section 99FA of the SIS Act to provide greater clarity about when and on what basis trustees can pay fees for advice from a member’s superannuation interest.
1.21Members of superannuation funds are able to obtain advice from financial advisers about their superannuation interests. This includes where an adviser provides advice to a member individually, with the trustee paying the fee for advice from the member’s superannuation fund.
1.22The stated intention of these changes to section 99FA is to provide clarity regarding the legal basis for charging these fees, and to provide superannuation fund trustees with certainty about paying advice fees from members’ superannuation accounts.
1.23The EM explains that the current section 99FA of the SIS Act was inserted by the Financial Sector Reform (Hayne Royal Commission Response No. 2) Act 2020 with the intention of preventing trustees from charging members for advice, except where the member had entered into an arrangement for the cost of advice, and the trustee held the member’s written, express consent to being charged for theadvice.
1.24The Quality of Advice Review found that section 99FA did not provide a clear legal basis for paying fees from a member’s superannuation funds and recommended that this section be replaced.
1.25The new subsection 99FA(1) would introduce a number of requirements that must be satisfied before a trustee or trustees pay the cost of advice from a member’s interest in a fund. This includes new consent requirements, which are outlined below.
1.26The new section 99FA would require that fees for financial product advice are paid only where that advice is wholly or partly about the member’s interest in the fund. This is intended to ensure that the advice that members receive relates specifically to the member’s interest.
1.27The changes would also introduce a requirement that the amount charged for providing advice about the member’s interest in the fund must not exceed the cost of providing that advice. While advice may deal with matters in addition to the member’s superannuation interest, this requirement is intended to ensure that the cost of providing advice about these additional matters is not charged against the member’s interest in the fund.
1.28The amendments relating to the payment of advice fees from superannuation would commence the day after the bill receives Royal Assent. However, the amendments would apply to costs that are charged on or after the start day, which would be six months after the commencement day of the amendments.
1.29In order to ensure minimal impact on one-off advice arrangements, there is a grace period for such arrangements, so that a written consent which meets the current section 99FA requirements would be taken to meet the new section 99FA requirements until either the arrangement is terminated or until the end of a period of 12 months beginning on the start day, whichever occurs sooner.
Client consent requirements for fees
1.30The bill would introduce new requirements for obtaining a client’s consent to enter, or renew, ongoing fee arrangements for advice. The bill would impose additional requirements for obtaining consent for the deductions of ongoing fees from accounts. It would also include powers for the Minister to prescribe a standardised consent form for ongoing fee arrangements.
1.31The new consent requirements would reflect and codify the requirements currently found in the ASIC Corporations (Consent to Deductions – Ongoing Fee Arrangements) Instrument 2021/124.
1.32The new written consent requirements replicate the current requirements in the SIS Act under paragraph 99FA(1)(b), with two changes. The language ‘passing the cost on’ is replaced with ‘charging the cost’, reflecting an intention to prohibit certain costs being charged against members interests in superannuation. The ‘written request’ is included as an alternative to ‘written consent’, more clearly covering situations where payment is made in response to a member’s request or consent.
1.33These new requirements are intended to achieve several outcomes, including to require more active consent from clients, to set out details of an arrangement in writing in advance, and to enable clients to make informed decisions.
1.34Where there are ongoing fee arrangements, the amendments would provide additional protection by requiring that the consent requirements of the Corporations Act that apply to ongoing fee arrangements, and related deduction arrangements, are met.
1.35Changes to service would require a variation of consent, or a new consent, but changes to the name or contact details of the fee recipients would not trigger the need to vary or obtain new consent. This is intended to balance the objective of ensuring clients provide informed consent to fee arrangements with the streamlining of the administration of ongoing fee arrangements.
1.36The Corporations Regulations would be able to prescribe additional information which must be disclosed to a person before obtaining consent. This is intended to ensure that the regulatory framework is kept up to date while providing commercial certainty, in the context of the diversity, complexity and evolving practices of the financial services industry.
1.37Part 2 of Division 2 to Schedule 1 would establish streamlined and consolidated consent processes for clients’ entry into ongoing fee arrangements. Currently, fee recipients are required to give clients fee disclosures annually, no later than 60 days after the anniversary of entry into the ongoing fee arrangement. These disclosures must include information services provided, fees paid, and information or estimates about the upcoming year.
1.38Given the proposed new consent requirements, the requirement to provide fee disclosure statements to clients has been removed to reduce the cost of advice for clients.
1.39An explanatory note underneath subsection 99FA(1) would clarify that trustees do not have to agree to members’ requests to charge costs, even when these requirements are satisfied. This would reflect specific language of the recommendation in the Quality of Advice Review and would ensure trustees are able to remain flexible to meet their other obligations under the SIS Act. The Explanatory Memorandum notes, for example, that a ‘trustee could decline the member’s request if in their view it does not relate to the member’s beneficial interest in the fund or if charging the cost would be inconsistent with the trustee’s other regulatory obligations’.
1.40The current section 962X would be retained, which establishes that it is a criminal offence for a fee recipient to fail to keep records to enable compliance in relation to the ongoing fee arrangement to be readily ascertained. Additional requirements would apply in given situations, depending on whether there are ongoing fee arrangements or one-off advice is provided. This is intended to enhance consistency with current law, to ensure good recordkeeping and to ensure that arrangements are compliant.
Consent and request forms for paying fees
1.41The bill would insert a new section 962Y, which would provide the Minister the power to approve one or more forms for giving consent to enter into or renew an ongoing fee arrangement. There would be no requirement for the Minister to approve a form, but if the Minister approves such a consent form, consent must be obtained in the approved form.
1.42The bill would also ensure that forms to obtain clients’ annual written consent to renew ongoing fee arrangements and to obtain authorisation to deduct fees from their financial products would be combined into a single form.
1.43Ongoing fee arrangements will terminate if a client has not given written consent that complies with the new consent requirements in section 962G. Section 962H also outlines circumstances under which consent would cease to have effect for ongoing fee arrangements.
1.44For one-off advice, the amendments would create minimum requirements for the form and content of the written request or written consent. These minimum requirements include the contact details and names of the member and financial advice provider, a description of the services the member is entitled to under the arrangement, and information prescribed in the SIS Regulations.
Flexibility for renewal of consent
1.45While consent is required to be obtained at least annually, Part 2 of the bill would make amendments to provide an extended window of time around that annual date. Clients and advisers would have the ability to agree an earlier renewal date at the time a consent is first signed or renewed.
1.46Schedule 1 would also introduce flexibility for renewal of consent. The bill would allow a consent to specify a reference day for determining when the renewal period will start, which must be specified in the consent documentation. The bill would allow new consents to be given up to 60 days before the reference day discussed above, allowing clients to provide consent earlier than the reference day. Additionally, a new compliant consent must be given on or before 150 days after the reference day.
1.47If consent is not renewed, the consent ceases to have effect 150 days after the renewal day, at which point the arrangement terminates.
Redress for deduction of fees without consent
1.48Currently, section 962R requires fee recipients not to deduct ongoing fees without consent, and section 962S requires fee recipients to neither arrange for nor accept the deduction of ongoing fees without consent. These sections would not be directly amended by the bill.
1.49If a client consents to the deduction of fees after an arrangement terminates due to the fee recipient not complying with sections 962R or 962S, the fee recipient will not be obliged to refund the amount deducted or received as a result of deductions made in accordance with the consent.
1.50Where a fee recipient has knowingly or recklessly continued to deduct ongoing fees from the account after the arrangement, the EM indicates that a person could apply to a court to obtain a refund of those fees.
Termination of arrangements and refunds of fees
1.51Termination of ongoing fee arrangements will occur automatically, at the time that the relevant circumstances for termination are met. For example, an arrangement that is entered into which does not meet the consent requirements automatically terminates on entry.
1.52If a client makes a payment of an ongoing fee after the arrangement terminates automatically, the fee recipient is not obligated to refund the payment. Clients are not taken to have waived their rights by continuing to pay an ongoing fee after an arrangement terminates. They would have the right to apply to the court for a refund where fee recipients knowingly or recklessly continued to charge a client what purports to be an ongoing fee under an arrangement. Courts will not make an order if it is not reasonable in the circumstances and cannot make an order in relation to fees paid more than six years before the proceedings for the order are commenced.
1.53If an ongoing fee arrangement terminates for any reason, the fee recipient must not continue to charge a fee that purports to be an ongoing fee under the arrangement to the client. Where a fee recipient does charge such a fee, the fee recipient is subject to a civil penalty provision.
1.54The bill repeals certain civil penalties that currently apply to noncompliance with notification obligations. Where a fee recipient receives a notice from an account holder varying or withdrawing their consent to deductions, and the fee recipient fails to give written confirmation that the notice was received or fails to give a copy of the notice to any third-party account provider, the fee recipient will no longer be subject to a civil penalty.
1.55A fee recipient who fails to give notice to any third-party account provider that consent for account deductions has ceased to have effect within 10business days of the cessation will no longer be subject to a civil penalty.
1.56However, the Explanatory Memorandum explains that, while the current civil penalty provisions are disproportionate to the consumer harm of noncompliance with notification obligations, fee recipients are still required to comply with these obligations. Other regulatory consequences continue to exist in relation to noncompliance, including banning, disqualification, or licence suspension powers by the Australian Securities and Investments Commission or Financial Services and Credit Panels.
1.57Clients retain the right to terminate an arrangement at any time by providing a notice to the fee recipient, in writing, that the client wishes to terminate the arrangement. The termination is effective on the day the notice is provided.
1.58Where the continued provision of a service is dependent on the continued payment of ongoing fees, the obligation to provide that service will terminate upon termination of an ongoing fee arrangement. This provides certainty to fee recipients that their obligation to provide continued advice services will, in most cases, cease after termination. A fee recipient will not be liable for client losses because of a failure to provide advice to a client after termination.
1.59Schedule 1 of the bill would also amend the Corporations Act to ensure that documents permitted to or required to be sent or signed in relation to ongoing fee arrangements can be sent or signed electronically.
1.60Schedule 1 would make consequential amendments to the Corporations Act, namely to ensure that fee recipients may continue to be liable for a civil penalty in several circumstances, such as charging a fee that purports to be an ongoing fee under an arrangement after the arrangement is terminated, or accepting payment of ongoing fees from an account without consent.
Tax deduction of superannuation fees
1.61Division 2 of Part 1 of Schedule 1 would amend the ITA Act 1997 to ensure that fees charged under section 99FA of the SIS Act would be tax deductible for the superannuation funds that incur costs and would not be treated as superannuation benefits of the member.
1.62These amendments would commence from the first day of the first quarter to occur after Royal Assent. They would apply to the 2019-20 income year and later income years, and deductions would be available for these income years.
1.63A number of criteria must be met for the fees to be deductible for the fund and are listed in the Explanatory Memorandum. While there is already a provision that provides for general deductions, these amendments are intended to provide more certainty for industry through providing a specific deduction.
1.64The Quality of Advice Review raised concerns that a fee paid for advice given to a member could be treated as a benefit paid to the member, and if a member has not satisfied a condition of release, that benefit could be taxable in the hands of the member. Therefore, an amendment to section 307-10 of the ITA Act 1997 would be made, in order to specify that such a payment would not be taxable in the hands of the member.
Flexibility for providing Financial Services Guide information
1.65Part 3 of Schedule 1 would implement recommendation 10 of the bill by amending the Corporations Act to allow providers of personal advice to make Financial Services Guide (FSG) information publicly available on their website (‘website disclosure information’), as an alternative to providing clients with an FSG.
1.66The Quality of Advice Review found that the provision of an FSG contributes to the time, cost and volume of documents required to be prepared by advisors without providing a significant benefit to clients. The FSG is not tailored to each client, and content does not change based on the advice. The Review concluded that what is important is not the provision of an FSG, but that the information is available and accessible when the advice is provided.
1.67Various sections of the Corporations Act require that AFS licensees comply with requirements relating to the provision of FSGs to clients, as well as outlining where an FSG is not required. Civil penalties and offences apply to failure to comply with FSG requirements.
1.68The bill would allow financial service providers the option of fulfilling FSG requirements by providing website disclosure information where certain requirements are met.
1.69Obligations relating to website disclosure information would be introduced by the bill. A person who fails to meet an obligation in the new Division 2A of Part 7.7 of the Corporations Act may incur a penalty. An authorised representative of an AFS licensee must have authorisation from the licensee to distribute or to alter website disclosure information, and the website disclosure information must be kept up to date and specify the day on which it was prepared or last updated.
1.70Disclosure obligations generally will be subject to the same sanctions for failing to comply with disclosure obligations irrespective of whether they provide an FSG or website disclosure information.
1.71A number of offences exist regarding the provision of defective FSGs. These will be extended to include circumstances in which defective website disclosure information is made available.
1.72Civil liability for any loss or damage suffered will generally fall on an AFS licensee, except in some circumstances where a person alters website disclosure information that results in the information being defective, or more defective, than it would otherwise have been without the authority of the AFS licensee, or where the AFS licensee took reasonable steps to ensure that the information would not be defective.
1.73The amendments made by Part 3 of Schedule 1 will commence the day after the Bill receives Royal Assent.
Conflicted remuneration
1.74Part 4 of Schedule 1 to the bill would implement Recommendations 13.1, 13.2, and 13.3 of the Quality of Advice Review, which relate to conflicted remuneration.
1.75The changes would mean that monetary benefits and non-monetary benefits given by a retail client to an AFS licensee or representative of the licensee, as well as fees for personal advice relating to a member’s interest in a fund, are not conflicted remuneration.
1.76The Corporations Act establishes a prohibition for certain entities on giving or accepting conflicted remuneration. The issuer or seller of a financial product is currently prohibited from giving conflicted remuneration to an AFS licensee or an authorised representative of the licensee. This prohibition will be maintained by the bill.
1.77A new definition of conflicted remuneration will be introduced to ensure that benefits given by retail clients are not conflicted remuneration. The new definition will also clarify that giving a benefit includes causing a benefit to be given.
1.78As these amendments are intended to prohibit benefits given by product issuers or sellers rather than by retail clients, the unnecessary exceptions to the conflicted remuneration provisions will be removed. New exceptions will be introduced to ensure that the provision of benefits by clients to AFS licensees or authorised representatives will not be conflicted remuneration.
1.79An exception to the prohibition on conflicted remuneration currently exists that allows an AFS licensee or authorised representative to receive a benefit for the issue or sale of a financial product to a retail client where the licensee or representative has not provided financial product advice about the product to the client in the 12 months before the benefit is given. This exception would be removed.
1.80Another exception to the prohibition on conflicted remuneration exists which allows an Australian Authorised Deposit-taking Institute (ADI) to provide conflicted remuneration to a licensee or authorised representatives for recommending banking products, general insurance products, or consumer credit insurance. This bill would remove this exception on the basis that employees of ADIs should not be treated differently to employees of other financial institutions.
1.81The changes made by Part 4 of Schedule 1 will commence immediately after the commencement of the Part 3 amendments, which will commence the day after the bill receives Royal Assent. All amendments made by Part 4, except for the repeal of the conflicted remuneration exception relating to Australian ADIs, apply to benefits given on or after commencement.
1.82For removal of the remunerated conflict exception relating to Australian ADIs, the bill does not intend to extinguish existing benefits, rights or entitlements, and there would be a six-month transitional period allowing ADIs to adjust remuneration structured before the commencement of the repeal of the remunerated conflict exception relating to Australian ADIs.
Client consent for advice providers to receive insurance commissions
1.83Currently, exceptions exist to the prohibition on conflicted remuneration where an AFS licensee or an authorised representative is given a monetary benefit for certain insurance products. This means that providers of financial product advice to retail clients regarding those insurance products can receive commissions from product issuers.
1.84The Quality of Advice Review recommended that the current commission arrangements for life risk, consumer credit, and general insurance products should be maintained. The Review observed, however, that the prospect of receiving a commission creates a conflict for the provider. The bill seeks to address this conflict by requiring advice providers to obtain informed consent of retail clients before accepting commissions. This requirement will help clients understand how providers’ personal interests might influence the advice they are receiving on these insurance products.
1.85Certain information must be disclosed to the client before the client can provide informed consent. This includes, depending on the insurance product, the rate of monetary benefit as a percentage of the policy cost.
1.86The AFS licensee or authorised representative must ensure that they have a written record of the client’s consent. They must also provide a copy of the consent to the client as soon as reasonably practicable after obtaining the consent.
1.87To reduce administrative burden on licensees and clients, consent requirements are taken to be met regarding the renewal of general insurance products and in the event of transfer of business where certain conditions are met. A client’s original consent would cover renewal of the general insurance product where the provider has explained to the client before the original consent was given that the provider would be paid a commission on each occasion that the insurance is renewed. New consent would be required without such an explanation or if the rate of the commission increases above what was originally disclosed.
1.88A client’s original consent will continue in effect where a licensee sells or transfers their financial product advice business dealing with the client’s insurance. This is intended to ensure continued coverage of a client’s insurance in the event of corporate restructuring, and sales and transfers of business.
1.89Consents may be varied, such as where a client consents to variation to the name of insurer, rates and frequency of benefits or the nature or services provided to the client in relation to the product.
1.90The Corporations Act currently prohibits issuers and sellers of financial products from giving conflicted remuneration to AFS licensees and authorised representatives of AFS licensees. The bill would ensure that sellers and issuers of financial products are not held to have contravened the prohibition where the AFS licensee or its authorised representative has failed to obtain the client’s consent under the new consent provisions introduced by the bill. As the Explanatory Memorandum explains, this ensures that the obligation to seek the consent of the client only applies to the AFS licensee or authorised representative, and that the issuer or seller is not liable for ensuring or checking that this consent has been received.
1.91The amendments made by Part 5 of Schedule 1 will apply to benefits given in connection with the issue or sale of insurance products on or after the end of the period of 12 months beginning on the day the bill receives Royal Assent.
1.92The amendments will not apply to benefits in connection with products issued or sold in the period of 12 months beginning on the day the bill receives Royal Assent. This is intended to reduce the risk that a client could be left uninsured if the provider was required to wait for consent from a client prior to renewal.
Commencement, application and transition for existing fee arrangements
1.93The application and transitional arrangements would commence the day after the bill receives Royal Assent.
1.94The amendments made by Part 2 of Schedule 1 do not apply until the ‘start day’, which is defined as six months after the commencement of Part 2. Some amendments will apply immediately, but others apply in different ways to new and existing ongoing fee arrangements.
1.95For ongoing fee arrangements entered into after the start day, the amendments apply to that arrangement without modification.
1.96Where ongoing fee arrangements are entered into and remain in force immediately before the start day, the arrangements apply in a modified way that preserves the operation of these arrangements until new renewals would otherwise need to be put in place, at which point consents consistent with these amendments can be implemented.
1.97For existing ongoing fee arrangements, after the start day, the first anniversary of the day which the arrangement was entered into is the ‘transition day’. The new obligations will apply in respect of existing ongoing fee arrangements starting from the transition day.
1.98For existing ongoing fee arrangements in force immediately before the start date, a consent that complies with the new requirements must be put in place with a modified renewal period. The modified renewal period must start on either the start day, or 60 days before the arrangement’s transition day, whichever is later. If this is not done, the arrangement will terminate at the end of the renewal period, 150 days after the transition day. This is to ensure that existing ongoing fee arrangements have the benefit of the amendments that increase flexibility in renewing consent after the start day.
1.99The repeal of subsection 962FA, which currently provides that an ongoing fee arrangement will cease upon non-compliance with certain terms, and amendments made to the consent required for deduction of ongoing fees from accounts, will not apply until 150 days from the transition day. This is to ensure that deductions which are consistent with a consent under current law but not the new law do not terminate until the end of the 150 day renewal period following the transition day for that fee arrangement.
1.100As introduced by the bill, sections 962Y and 962YA relate to forms for consent, and will only apply to ongoing fee arrangements to the extent that an ongoing fee arrangement requires a consent in accordance with the law as amended by the bill. For example, if, before the start day, the Minister were to approve a form to be used in giving any consent, this would only be mandatory for new ongoing fee arrangements and for the first consent for an existing ongoing fee arrangement that was put in place under new arrangements.
Schedule 2 – Petroleum resource rent tax anti-avoidance rules
1.101Schedule 2 would amend the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTA Act) in order to prevent entities from using contrived and artificial arrangements to avoid paying PRRT. These amendments would seek to make the anti-avoidance measures under the PRRTA Act consistent with the general anti-avoidance rules (GAAR) in the ITA Act 1936.
Previous changes to the general anti-avoidance rules
1.102Part IVA of the ITA Act 1936 deals with schemes to reduce income tax. In some circumstances, outlined in section 177F of the ITA Act 1936, the Commissioner of Taxation may cancel a tax benefit obtained by a taxpayer where the tax benefit was obtained in connection with a scheme to which Part IVA applies.
1.103In order to determine whether a person obtained a tax benefit from a scheme, and whether the sole or dominant purpose of participating in the scheme was to obtain the tax benefit, it is necessary to compare the scheme and an ‘alternative postulate’, that is, considering the alternative scenario in which the scheme was not implemented.
1.104The GAAR were updated in 2013 to address weaknesses revealed due to a number of unfavourable court cases. Taxpayers had successfully argued that they did not obtain a tax benefit because, if the alleged tax avoidance scheme had not been entered into, then the taxpayer would not have entered into an arrangement where they would have paid tax. They successfully argued that, in the absence of the arrangement, they instead would have either entered into another arrangement that avoided tax, or otherwise would have avoided or deferred the commercial arrangements and thereby avoided tax.
1.105The ITA Act 1936 was amended by the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013 to ensure several effects to address what were exposed as ‘deficiencies’ in the relevant sections of the ITA Act 1936. These effects were outlined in the Explanatory Memorandum for the 2013 Act.[111]
Proposed changes to the petroleum rent resource tax anti-avoidance rules
1.106In determining whether the PRRT anti-avoidance provision applies to an arrangement, it must be determined whether a person or people who participated in the arrangement did so for the sole or dominant purpose of enabling the taxpayer to obtain a tax benefit.
1.107The relevant purpose must be established objectively based on the analysis of various matters. These include how the arrangement was implemented, the form and substance of the arrangement, what the arrangement actually achieved as a matter of substance or reality, and any changes in financial position of the taxpayer or any person who has a connection with the taxpayer as a result of the arrangement.
1.108The new amendments would clarify the steps in the test for whether an arrangement enables a taxpayer to obtain a tax benefit. Section 52 of the PRRTA Act currently provides criteria for identifying relevant arrangements to obtain tax benefits. This section would be replaced by proposed sections 51A and 52.
1.109Proposed subsections 51A(2) and 51A(3) would make clearer the required steps in the process of deciding whether a tax effect would have, or might reasonably be expected to have, occurred if the arrangement had not been entered into or carried out.
1.110The amendments would provide clarity that there are two separate, alternative bases for determining whether an arrangement resulted in a tax effect. One basis is consideration of all the circumstances and events that actually occurred except for the arrangement; the other is consideration of a reasonable alternative postulate about what would have been expected to have happened in the absence of the arrangement.
1.111Determining a postulate that is a reasonable alternative to the arrangement, in that it could reasonably take the place of the arrangement, will require considering what other courses of action were reasonably open to the participants in the arrangement, and will necessarily require speculation about the state of affairs that would have existed if the arrangement had not been entered into or carried out.
1.112Under the new amendments, taxpayers will have obtained a tax benefit in connection with an arrangement if it is demonstrated that, after applying the provisions in the PRRTA Act to the facts once the arrangement is either assumed away or reconstructed, the effect secured in connection with the arrangement is greater than without the arrangement.
1.113Schedule 2 will commence the day after the bill receives Royal Assent and would apply to any arrangements that were entered into on or after 1 July 2023, in order to minimise the potential for taxpayers to obtain what may be artificial and contrived tax benefits.
Schedule 3 – Capital allowances for mining, quarrying or prospecting rights, and clarifying the meaning of exploration for petroleum
1.114Schedule 3 to the bill would amend the PRRTA Act to clarify the meaning of ‘exploration for petroleum’. It would also amend the ITA Act 1997 to clarify the circumstances in which the use or grant issuance of mining, quarrying, or prospecting rights (MQPRs) may lead to tax adjustments.
1.115These amendments are made in response to a decision of the Full Federal Court, which related to, among other things, whether the taxpayer was entitled to a deduction under subsection 40-80(1) of the ITA Act 1997. The case broadly related to the issue of depreciation of MQPRs held by Shell, when Shell had first used these MPQRs, and whether they had been used for exploration.
1.116The amendments would clarify the meaning of the phrase ‘exploration for petroleum’ in light of the decision of the Full Federal Court indicating potential ambiguity with the term. The amendments would clarify that the phrase is limited to ‘discovery and identification of the existence, extent and nature of the petroleum resource’, and does not extend to ‘activities and feasibility studies directed at evaluating whether the resource is commercially recoverable.’
1.117The amendments would clarify that ‘first use’ of MPQRs occurs where an activity authorised by the right is undertaken, rather than when the MQPR begins to be held without commencing activities authorised by the right.
1.118The amendments also ensure that income tax balancing adjustments do not occur in relation to MQPRs where the MQPR is replaced by one or more MQPRs and those new MPQRs relate to part of the areas that the replaced MQPR related to.
Commencement, application and transitional provisions
1.119The amendments made by Schedule 3 would commence on the first day of the first quarter to occur after the day the bill received Royal Assent.
1.120The amendments relating to section 37 of the PRRTA Act, which deals with exploration expenditure, apply to all expenditure incurred from 21August2013. These amendments would not make a person criminally liable for acts or omissions before the day on which the amendments commence, if the person would not have been liable had the amendments had not been enacted. This is intended to avoid any retrospective criminal liability.
1.121The amendments dealing with capital allowance provisions apply in respect of MQPRs that entities started to hold after the date of announcement on 9May2023.
Schedule 4 – Multilateral development banks
1.122Schedule 4 to the bill would make amendments to several acts to streamline the process by which amendments that are made to relevant international agreements are incorporated into domestic legislation. The amendments incorporate the agreements into legislation by reference, and this will ensure any future amendments to the agreements are automatically incorporated.
1.123The acts to be amended would be the following Acts:
the Asian Development Bank Act 1966;
the European Bank for Reconstruction and Development Act 1990; and,
the International Monetary Agreements Act 1947.
1.124The amendments would mean that the Acts would automatically incorporate amendments to the following agreements:
the Asian Development Bank Agreement;
the European Bank for Reconstruction and Development Agreement;
the International Bank for Reconstruction and Development Agreement; and
the International Monetary Fund Agreement.
1.125The Explanatory Memorandum states that as international agreements are ordinarily available on the internet, there is no need for legislation to contain the full text of the international agreements. The requirement to pass legislation to update the text of amended agreements can be administratively burdensome, and some amendments will enter into force for Australia at international law regardless of whether there is domestic legislation implementing these amendments.
1.126The Explanatory Memorandum also states that parliamentary oversight will be retained, as amendments to these agreements will constitute a treaty action and therefore be subject to Australia’s treaty-making procedures, such as consideration by the Joint Standing Committee on Treaties and approval by relevant ministers.
1.127Several consequential amendments would also be made to these Acts. These amendments include the removal of references to redundant or repealed legislation, as well as correcting minor typographical errors.
1.128Schedule 4 would commence the day after the bill received Royal Assent.
Schedule 5 – Miscellaneous and technical amendments
1.129Schedule 5 makes a number of miscellaneous and technical amendments to Treasury portfolio legislation. The miscellaneous and technical amendments are intended to maintain and improve the quality of Treasury legislation by repealing redundant and inoperative provisions, enhancing administrative efficiency and reducing unnecessary red tape, enhancing readability, and making other technical changes.
1.130Division 1 of Part 1 of Schedule 5 would amend the Corporations Act 2001 to make typographical amendments.
1.131The amendments made by Division 2 of Part 1 of Schedule 5 include the implementation of recommendations regarding the safe harbour provisions for company directors to pursue restructures or other measures to deliver better outcomes for the company in the face of potential insolvency.
1.132Subsequent to the effects of the Treasury Laws Amendment (2023 Law Improvement Package No. 1) Act 2023, Division 3 of Part 1 of Schedule 5 would be amended to renumber references so that they refer to the correct and updated paragraphs.
1.133Division 4 of Part 1 of Schedule 5 would renumber section 1684 of the Corporations Act 2001 as introduced by the Treasury Laws Amendment (2022 Measures No. 4) Act 2023 to section 1685, on the basis thatthe Corporations Act 2001 already contained a different section 1684.
1.134Division 5 of Part 1 of Schedule 5 would ensure that members of regulated superannuation funds are able to retain insurance coverage following successor fund transfers.
1.135Division 6 of Part 1 of Schedule 5 would move certain requirements regarding the obligations of actuaries and auditors to report to the regulator. These would be moved from the Superannuation Industry (Supervision) Regulations 1994 to the Superannuation Industry (Supervision) Act1993. This is stated to provide certainty to readers of the legislation that the obligations are legally valid.
1.136The amendments made by Division 6 would also make changes to clarify that a person must consider matters prescribed by the regulations for the purpose of forming an opinion about whether the financial position of an entity may be about to become unsatisfactory, but that this does not limit the matters that they may consider.
1.137Division 7 of Part 1 of Schedule 5 clarifies reporting obligations for superannuation entities regarding what information these entities are required to give and to whom the information is required to be given. It separates the obligation to provide information upon establishment of an entity, and the obligation to comply with a request for certain information by the regulator or an authorised person.
1.138Where a trustee is required to provide information under subsection 254(1) of the SIS Act, the trustee is required to provide information in the approved form, or if there is no such form, the information as prescribed by the regulations must be given. The Explanatory Memorandum explains that the regulation making power would reduce the complexity of the Act, would be appropriate and necessary, and would be subject to parliamentary scrutiny and sunsetting.
1.139Existing offences and penalties would continue to apply. The strict liability that applies to such offences is stated by the Explanatory Memorandum as appropriate and as meeting all conditions listed in the Attorney-General’s Department’s Guide to Framing Commonwealth Offences.
1.140Part 2 of Schedule 5 would clarify the operation of the indirect value shifting rules so that non-assessable non-exempt income is also covered by subsection727–250(2) of the Income Tax Assessment Act 1997, which deals with distributions by entities to members or beneficiaries. It would also update guidance to the most recent version of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations which was adopted by the OECD’s Committee of Fiscal Affairs and published on 20 January 2022.
1.141Parts 2 and 3 of Schedule 5 would also make typographical changes and to remove redundant references, and would make consequential amendments to the SIS Act following reforms made by the Treasury Laws Amendment (2022 Measures No. 4) Act 2023 and the Treasury Laws Amendment (Financial Reporting and Auditing of Registrable Superannuation Entities) Regulations 2023.
Schedule 6 – Location offset and producer offset for films
1.142Schedule 6 to the bill would amend the ITA Act 1997 to make changes to the location tax offset for Australian film productions.
1.143The location tax offset is a refundable tax offset calculated by reference to qualifying Australian production expenditure incurred in making films. Film production companies may be entitled to this offset if they meet certain eligibility conditions. The conditions include that the production is of a certain format and genre, meeting the minimum total qualifying production expenditure threshold, and that the company carried out or made the arrangements for all the activities in Australia which were necessary for the making of the film.
1.144The amendments made by Schedule 6 modify existing conditions and introduce new eligibility conditions to be satisfied in order to qualify for the offset, including the use of Australian providers of post, digital and visual effects, and minimum training requirements.
1.145Schedule 6 would increase the location tax offset rate from 16.5 per cent of a company’s total qualifying Australian production expenditure on a film to 30per cent.
1.146The minimum qualifying Australian production expenditure is currently $15million, which would be increased by the amendments to $20million. Television series must meet an additional expenditure threshold that is specific to television series.
1.147The producer tax offset is a refundable tax offset calculated by reference to qualifying Australian production expenditure incurred in making a film. The amendments introduce an alternative means by which film production companies can access the producer tax offset, if it produces drama series that satisfy the new per-season qualifying Australian production expenditure threshold. A new category for eligibility for the producer tax offset was introduced because some long-form Australian drama series have high budgets per season but do not meet the existing per-hour expenditure threshold.
Legislative scrutiny
1.148In Scrutiny Digest 6 of 2024, the Senate Standing Committee on the Scrutiny of Bills made no comment in relation to the bill.
1.149At the time of writing, there has been no further legislative scrutiny of the bill.
Acknowledgements
1.150The committee thanks all individuals and organisations who assisted with the inquiry, especially those who made written submissions and participated in the public hearing.