Chapter 1Overview
Referral of the inquiry
1.1The Treasury Laws Amendment (Refining and Improving Our Tax System) Bill 2023 (the bill) was introduced in the House of Representatives and read a first time on 22 March 2023.
1.2On 30 March 2023, the Senate referred the provisions of the bill to the Senate Economics Legislation Committee (the committee) for inquiry and report by 28April 2023. On 6 April 2023, the committee presented a progress report which sought an extension of the reporting date to 12 May 2023.
Purpose of the bill
1.3The bill seeks to amend several acts to implement the measures in the bill’s five schedules:
Schedule 1—gives force to the Convention between Australia and Iceland for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance (the Convention);
Schedule 2—extends the income tax treatment that applies to the Future Fund Board to its 100 per cent subsidiaries incorporated in Australia;
Schedule 3—transfers the administration of three deductible gift recipient registers and the Overseas Aid Gift Deduction Scheme to the Commissioner of Taxation;
Schedule 4—establishes that an eligible business entity liable for excise duty for excisable goods, or customs duty for excise-equivalent goods (being fuel and alcohol), can align their excise returns and customs returns with their other indirect tax liabilities; and
Schedule 5—establishes that the repackaging of beer, which would otherwise be excise manufacture, is not taken to be the manufacture of beer if it meets certain requirements.
In introducing the bill, the Assistant Minister for Competition, Charities and Treasury, the Hon DrAndrew Leigh MP, explained that the measures in the bill ‘remove unnecessary administrative and compliance burdens associated with our tax system.’
Provisions of the bill
1.5This section provides an overview of the bill’s schedules. Submissions to the inquiry were limited to Schedules 3 and 5, and submitters’ views on those schedules are incorporated in this section.
Schedule 1—The Convention
1.6Schedule 1 amends the International Tax Agreements Act 1953 (Agreements Act) to give force of law to the Convention.
1.7The Convention was signed by Australia and Iceland on 12 October 2022 with the key objectives of alleviating double taxation that results from the interaction of the countries’ respective tax systems and to prevent tax avoidance. Australia is party to 45 other bilateral double taxation agreements.
1.8The Explanatory Memorandum notes that the key features of the Convention include:
reduced withholding tax rates to create a more favourable bilateral investment environment while making it cheaper for Australian business to access foreign capital and technology;
rules to reduce potential double taxation, which can deter investment; and
providing greater tax certainty to taxpayers in both jurisdictions.
1.9Under the Convention, Australia and Iceland agree to ‘restrict their respective taxing rights’ to alleviate the double taxation of certain income categories, including: business profits; dividends; interest; royalties and pensions. The Convention applies to all residents of Australia and/or Iceland. In circumstances where both countries ‘attempt to tax the same income’ the Convention makes provisions for the resolution of disputes.
1.10The Convention also includes treaty-related recommendations of the OECD/G20 Base Erosion and Profit Shifting Project to address international tax avoidance practices.
Schedule 2—Income tax exemption for certain subsidiaries of the FFB
1.11Schedule 2 amends the Income Tax Assessment Act 1997 (ITAA 1997) to extend the income tax treatment which applies to the Future Fund Board (FFB) to its 100 per cent subsidiaries incorporated in Australia. The amendments exempt the subsidiaries from income tax and include the subsidiaries as ‘entities eligible for a refund of a tax offset relating to a franked distribution.’
1.12Under the current law, 100 per cent subsidiaries of the FFB incorporated in Australia are liable to pay income tax which, ultimately, is refunded to the FFB on payment of franked distributions by the subsidiaries.A comparison of the key features of the current law and that of the proposed new law are outlined in the below table.
Table 1.1Schedule 2—Comparison of current law and the new law
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The FFB is exempt from income tax and is eligible for a refund of a tax offset relating to a franked distribution. This does not extend to its 100 per cent subsidiaries. | The FFB is exempt from income tax and is eligible for a refund of tax offset relating to a franked distribution. A 100 per cent subsidiary of the FFB incorporated in Australia is also exempt from income tax and eligible for a refund of a tax offset relating to a franked distribution provided it only undertakes investment activities that the FFB is able to undertake. |
Source: Explanatory Memorandum, p. 62.
1.13The Explanatory Memorandum notes that the new law would ‘minimise the unnecessary compliance and administrative burden’ of the current law and enable the FFB to maximise available funds for investment.
1.14The amendments ‘do not change’ the net income tax paid by the FFB and its 100 per cent subsidiaries. The income tax received by the Commonwealth also remains unchanged.
Schedule 3—Deductible gift recipient registers reform
1.15Schedule 3 amends the ITAA 1997 to transfer the administration of the deductible gift recipient (DGR) registers for Environmental Organisations (EOs), Harm Prevention Charities (HPCs) and Cultural Organisations, as well as the Overseas Aid Gift Deduction Scheme (OAGDS), to the Australian Taxation Office (ATO).
1.16DGR status allows eligible entities to receive income tax deductable gifts and contributions from the public. There are currently 52 categories of DGR, all of which are endorsed and administered by the ATO, except for the administration of the legislation for the four DGR categories set out in Schedule3. Those DGR categories are currently administered as follows:
Environmental Organisations—by the Department of Climate Change, Energy, Environment and Water;
Harm Prevention Charities—by the Department of Social Services;
Cultural Organisations—by the Office for Arts in the Department of Infrastructure, Transport, Regional Development, Communications and the Arts; and
Overseas Aid Organisations—by the Department of Foreign Affairs and Trade.
1.17The Explanatory Memorandum states that in can take up to two years for organisations to be endorsed for DGR status in the abovementioned categories. The transfer of the administration of these registers to the ATO is expected to reduce the DGR approval time to around one month.
1.18Schedule 3 repeals the powers and requirements of the departments and ministers for the administration of the abovementioned DGR categories and transfers those powers to the ATO. The Explanatory Memorandum notes that, in general, the amendments in Schedule 3 ‘preserve the existing rules as they affect entities seeking endorsement as a DGR’.
Views on the schedule
1.19The committee received three submissions in relation to Schedule 3 from the Stronger Charities Alliance (SCA), the Law Council of Australia (LCA) and the Australian Council for International Development (ACFID).
Stronger Charities Alliance
1.20The SCA’s submission supported the provisions of Schedule 3 and stated the amendments would be ‘likely to reduce red tape and have a more consistent approach to DGR status for these categories.’ The SCA commented on the importance of DGR status for charity funding and the broader challenges charities can experience with the DGR system.
1.21The SCA recommended the prioritisation of ‘holistic DGR reform by simplifying and progressively extending it to all charities registered with the Australian Charities and Not-for-Profit Commission’.
Law Council of Australia
1.22The LCA’s submission expressed overall support for the ‘policy intention to simplify the administration of the DGR categories’. However, the LCA also expressed concerns with certain provisions of Schedule 3 as drafted.
1.23Regarding the proposed conduit policy for EOs and HPCs in Parts 1 and 2 of Schedule 3—which would require DGRs in those categories to ‘have a policy of not acting as a mere conduit for the donation of money or property to other organisations, bodies or persons’—the LCA expressed concern that the policy:
creates confusion across DGR categories as it is an existing provision of the ITAA 1997 that no DGR can act as a mere conduit;
may result in EOs and HPCs inadvertently breaching the conditions of the policy when amending their constitutions; and
is ‘not clear about why an EO or HPC should have a policy and how an EO of HRPC would meet the conduit policy special condition’.
1.24The LCA further considered that the proposed transitional provisions in Schedule 3 for EOs, HPCs and Cultural Organisations:
would cause some DGRs in these categories to lose their DGR status;
may require some DGRs to transfer money to another entity; and
would require some DGRs to urgently seek legal advice on how to comply with the transitional provisions.
1.25The LCA made several recommendations on how these potential issues could be addressed through amendments to proposed paragraph (1)(c), Subsection 2, and paragraphs 2(b) and (2)(c) of Schedule 3.
1.26The LCA raised a series of questions in relation to the operation of the proposed transitional provisions for organisations which operate overseas aid funds, as contained in Item 20 of Schedule 3. In doing so, the LCA considered that few DGRs which operate overseas aid funds would meet the transitional requirements of Schedule 3 as:
…they will not have articulated in their current constitution (or the rules of their overseas aid funds) the principal purpose as described in substitute item 9.1.1 proposed by Schedule 3—that is, delivering development or humanitarian assistance activities (or both) in a developing country and in partnerships with entities in the country, based on principles of cooperation, mutual respect and shared accountability.
Australian Council for International Development
1.27ACFID welcomed the Australian Government’s efforts to reform the DGR registers as a:
…critical first step to relieving the administrative burden faced by resource constrained Australian charities in accessing and maintaining the tax-deductible status that many rely on to attract much needed ongoing support from a generous Australian public.
1.28ACFID also welcomed changes made during the exposure draft consultation to expand Item 9.1.1 in Schedule 3 to include a public fund under the OAGDS. ACFID stated that the amendment:
…allows for the fact that there are many organisations, including up to 95 ACFID members, which have a wider purpose and remit to the Australian public than the OAGDS fund they operate. In the case of these organisations, development and humanitarian relief activities is the primary purpose of the fund but not the sole purpose of the charity.
1.29However, ACFID raised concerns that ‘any substantive benefits’ of the amendment for charities ‘will not be realised’ due to a lack of clarity in the transitional provisions for the OAGDS. ACFID submitted that the wording of paragraph 20(3)(d) ‘may narrow the eligibility’ of an organisation such that it can only operate a public fund under the OAGDS if the organisation itself meets the qualifying principle purpose criteria set out in Item 9.1.1. ACFID submitted that such potential eligibility issues should be resolved by amendments to clarify paragraph 20(3)(d) or Item 9.1.1 in Schedule 3.
Schedule 4—Aligning excise and customs reporting with other indirect taxes
1.30Schedule 4amends the Customs Act 1901 (Customs Act), Excise Act 1901 (Excise Act), Taxation Administration Act 1953 and ITAA 1997 to establish that an eligible business entity which is liable for excise duty for excisable goods, or customs duty for excise-equivalent goods (being fuel and alcohol), can align their excise returns and customs returns with their other indirect tax liabilities on a quarterly basis.
1.31A comparison of the key features the current law and that of the new law, as proposed by Schedule 4 , are outlined in the below table.
Table 1.2Schedule 4—Comparison of current law and the new law
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An eligible business entity, as defined in the Excise Act and Customs Act, can apply to the Collector for a 7-day or monthly permission to deliver goods for home consumption without entry. | An eligible business entity, as defined in the Excise Act and Customs Act, will be able to apply to the Collector for a 7-day, monthly or quarterly permission to deliver goods for home consumption without entry. |
Source: Explanatory Memorandum, pp. 76–77.
1.32The Explanatory Memorandum notes that the current reporting frequency requirements for excise returns diverts resources away from a business’s core functions and creates ‘significant stress’ for their employees.
1.33Schedule 4 will, in effect, alleviate this administrative burden by allowing ‘small businesses with an aggregated turnover of less than $50 million to apply to deliver goods for home consumption without entry in respect of a quarter and reduce their excise and customs reporting frequency to a quarterly period if permission is granted.’
Schedule 5—Small-scale repackaging of beer
1.34Schedule 5 amends the Excise Act so the repackaging of beer, which would otherwise be considered excise manufacture under section 77FC of the ExciseAct, is not taken to be the manufacture of beer if it meets certain requirements.
1.35The amendments proposed in Schedule 5 affect beer that is repackaged into non-pressurised containers of no more than 2 litres (commonly known as ‘growlers’). The repackaging must occur immediately prior to the retail sale of the repackaged beer. Only the first 10 000 litres of beer repackaged at particular premise in a financial year is taken not to be the manufacture of beer.
1.36The Explanatory Memorandum notes that, under the current law, ‘[m]anufacturer licence holders carry significant obligations that are more appropriate to entities repackaging beer on a commercial basis.’ Schedule 5 would, in effect, remove the excise licensing obligations on businesses such as bars, pubs and retail liquor stores.
Views on the schedule
1.37Retail Drinks Australia’s (RDA) submission to the inquiry expressed support for Schedule 5. RDA considered that the ‘new rules will help retail liquor stores, often small independent and family-owned businesses’ and provided examples of the types of stores that would benefit from Schedule 5’s changes.
Commencement
1.38The bill’s schedules are due to come into effect as noted below.
Table 1.3Commencement details
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1 | The day after the bill receives Royal Assent |
2 | The first 1 January, 1 April, 1 July or 1 October after the bill receives Royal Assent |
3 | The first 1 January, 1 April, 1 July or 1 October to occur at the end of a period of six months after the bill receives Royal Assent |
4 | 1 July 2023 |
5 | 1 July 2023 and applies to beer packaged after that date |
Source: Treasury Laws Amendment (Refining and Improving Our Tax System) Bill 2023, p. 2 and Explanatory Memorandum, pp. 1–5.
1.39In relation to the commencement of Schedule 1, the Explanatory Memorandum notes that the Convention must first enter into force before it takes effect. This requires Australia and Iceland to exchange instruments of ratification, following completion of the countries’ respective domestic implementation processes.
Financial impact
1.40The Explanatory Memorandumestimates the bill’s schedules will have financial impacts as noted below.
Table 1.4Financial impact of measures by schedule
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1 | Negligible cost to receipts over the four years to 2025–26 |
2 | Nil |
3 | Nil revenue impact over the forward estimates |
4 | A negative impact on receipts as follows: nil in 2022–23; -$92million in 2023–24; - $4 million in 2024–25 and -$2million in 2025–26 |
5 | Negligible |
Source: Explanatory Memorandum, pp. 1–5.
Consultation and relevant inquiries
1.41This section summarises the consultation efforts and relevant inquiries related to the bill’s measures.
Treasury consultation
1.42The Department of the Treasury conducted consultation processes on exposure draft legislation for the measures contained within the bill, as follows:
tax treaty between Australia and Iceland—from 9 December 2022 to 23December 2023;
income tax exemption for wholly-owned Australian subsidiaries of the Future Fund—from 14 December 2022 to 22 December 2022;
deductable gift recipient registers reform—from 19 January 2023 to 19February 2023; and
streamlining excise administration: aligning reporting for smaller business and allowing small-scale takeaway beer sales—from 2 February 2023 to 16February 2023.
Joint Standing Committee on Treaties
1.43The Treaties Committee inquired into the Convention and tabled its report on 20March2023. The Treaties Committee’s report supported the Convention and recommended that binding treaty action be taken.
1.44The Treaties Committee noted, in particular, that:
provisions of the Convention exempt Australian superannuation funds from the application of withholding taxes on investments those funds make in Iceland; and
evidence received by the Treaties Committee queried the ‘constitutionality of the legislation that would provide for the obligation to assist Iceland in the collection of taxes.’ The Treaties Committee noted the ‘Treasury’s contending views on the matter of constitutionality and observes it is an issue that, were it to be pursued, could only ultimately be resolved by the High Court’.
1.45In summary, the Treaties Committee was of the view that while two-way trade with Iceland is ‘modest’ the Convention would ‘provide a foundation for such activities to expand’ and that ratification of the Convention would be in Australia’s national interest.
Legislative Scrutiny
Senate Standing Committee for the Scrutiny of Bills
1.46The Senate Standing Committee for the Scrutiny of Bills reported that it had no comment in relation to the bill.
Parliamentary Joint Committee on Human Rights
1.47The Parliamentary Joint Committee on Human Rights reported that it had no comment in relation to the bill.
Human rights implications
1.48This section provides an overview of the human rights implications of the measures in the bill, as discussed in the Explanatory Memorandum.
Schedule 1
1.49The Explanatory Memorandum states that Schedule 1 ‘is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
1.50Schedule 1 of the bill engages the following human rights:
the right to protection from arbitrary or unlawful interference with privacy under Article 17 of the International Covenant on Civil and Political Rights (ICCPR); and
the right to protection from discrimination under Articles 2(1) and 26 of the ICCPR and Article 2(1) of the International Convention on the Elimination of All Forms of Racial Discrimination.
1.51The Explanatory Memorandum concludes that Schedule 1 is consistent with the right to protection from arbitrary or unlawful interference with privacy ‘as the exchange of information between authorities and release of information to an arbitration panel under the Convention is neither arbitrary or unlawful’. Schedule 1 is said to be consistent with and enhances the right to protection from discrimination as:
Any differential treatment that is permitted by the Convention on the basis of residency is proportionate to the pursuit of a legislate aim and consistent with international tax principles.
Schedules 2 – 5
1.52The Explanatory Memorandum states that schedules 2 – 5, respectively, do not engage any of the applicable human rights or freedoms and are compatible with human rights.
Conduct of the inquiry
1.53The committee advertised the inquiry on its website and wrote to relevant stakeholders to invite them to make a written submission by 20 April 2023.
1.54The committee received 4 submissions, as listed at Appendix 1.
Acknowledgements
1.55The committee thanks the organisations and individuals who assisted the inquiry, particularly those who made written submissions.
Committee view
1.56The committee welcomes the measures proposed by the bill given their potential to reduce administrative and compliance burdens for individuals, businesses and DGR organisations when engaging with the tax system.
1.57The committee notes the matters raised in submissions regarding the potential impact of certain provisions of Schedule 3 on DGR organisations and the committee thanks submitters for bringing those matters to the committee’s attention. The committee would welcome the Australian Government’s further engagement with stakeholders on the implementation of the measures in the bill, particularly in relation to Schedule 3.
1.58The committee recommends that the bill be passed.
Senator Jess Walsh
Chair
Senator for Victoria