Chapter 1Introduction

Referral of the inquiry

1.1The Treasury Laws Amendment (2023 Measures No. 1) Bill 2023 (the bill) was introduced into the House of Representatives and read a first time on 16February 2023.[1]

1.2On 9 March 2023, the Senate referred the provisions of the bill to the SenateEconomics Legislation Committee (the committee) for inquiry and report by 26May 2023.[2]

Purpose of the bill

1.3The bill proposes to make amendments to several Acts to implement five broad ranging measures. These amendments are contained in five schedules:

Schedule 1—Registration of providers and assisted decision making;

Schedule 2—Sustainability standards;

Schedule 3—Government response to the Review of the Tax Practitioners Board;

Schedule 4—Off-market share buy-backs; and

Schedule 5—Franked distributions funded by capital raisings.

1.4The overall intent of the bill was explained by the Assistant Treasurer and Minister for Financial Services, the Hon Stephen Jones MP, on 16 February 2023. The Minister stated that the bill contains several integrity measures to ensure both Australia’s financial services and tax system are working as intended.[3]

1.5Details of each of the measures contained in the five schedules are outlined below.

Schedule 1 – Registration of providers and assisted decision making

1.6Schedule 1 of the bill seeks to make technical amendments the Corporations Act 2001 (CorporationsAct) to:

allow the Australian Securities and Investments Commission (ASIC) to approve applications from one or more licensees to register on the Financial Advisers Register the same relevant provider; and

allow assisted decision-making to be used for any purpose for which ASIC may make decisions in the performance or exercise of ASIC’s functions or powers to register a relevant provider.[4]

Registration of financial advice providers

1.7On 21 October 2021, the Australian Parliament passed the Financial Sector Reform (Hayne Royal Commission Response—Better Advice) Act 2021 and introduced into the Corporations Act, a requirement for all relevant financial advice providers who provide personal advice on complex financial products to consumers, to be registered on the Financial Advisers Register (the Register). Managed by ASIC, the Register was established in 2015 and provides information on financial advisers and their licensing status in Australia with the objective of enhancing transparency and improving accountability of relevant providers.[5]

1.8The public register allows consumers to check information relating to a financial adviser (including if they are authorised to provide financial advice) prior to engaging their services.[6] The Register also allows employers greater ability to assess the qualifications, experience and employment history of financial advisers and improves ASIC's ability to identify and monitor the profession in Australia.[7]

1.9The proposed amendments in Schedule 1 (Part 1) of the bill seek to amend the Corporations Act so that, as of 1 July 2023, it would be an offence for financial advisers (referred to as relevant providers) to provide financial advice while unregistered.[8]

1.10In summary, the amendments would have the following impact on the registration of relevant providers:

permit ASIC to approve an application from a licensee to register a relevant provider, including when the relevant provider has an existing registration in force;

provide that a relevant provider may be registered multiple times in relation to different licensees;

clarify the period that a registration is in force and the effect of certain events on registrations where there is more than one registration for a relevant provider;

clarify that any orders made by a Financial Services and Credit Panel will have effect on all current and future registrations in relation to that relevant provider; and

outline circumstances where ASIC must refuse an application to register a relevant provider.[9]

1.11By enabling ASIC to approve applications to register the same relevant provider when they have an existing registration in force, the schedule would address a current technical limitation experienced by ASIC. This is relevant in circumstances where a relevant provider is authorised by more than one licensee to provide financial advice and is necessary to minimise the risk of an inadvertent breach of the law.[10] As outlined in the EM:

Without these amendments, when the licensee who registered a relevant provider revokes their authorisation, the relevant provider could become unregistered and unknowingly give advice while authorised by another licensee.[11]

Assisted decision-making

1.12Part 2 of Schedule 1 of the bill would amend the Corporations Act to allow ASIC to use assisted decision-making processes for any purpose for which ASIC may make decisions in the performance or exercise of ASIC’s functions or powers to register a relevant provider under Division 8C of Part 7.6 of the CorporationsAct.[12]

1.13Assisted decision-making is also known as automated or computer-assisted decision-making. It refers to the use of computer technologies and systems to aid or replace the judgement of human decision-makers.[13]

1.14The requirement for relevant providers to be registered requires ASIC to make a large number of decisions in response to registration applications. The amendments would therefore enable ASIC to use a wide variety of processes and technologies for this purpose (including computer applications and systems).[14]

1.15To promote the appropriate use of assisted decision-making processes, the schedule would include provisions to ensure that:

the use of such processes must be arranged by ASIC and used under its control;

any decision made by such processes must comply with all of the requirements of the legislative provisions under which the decision was made; and

ASIC may change a decision made by an assisted decision-making process if it is satisfied that the decision is wrong.[15]

1.16The measure is expected to enable ‘ASIC to deliver a high standard of service in an effective and efficient manner’ and would provide a sound legislative basis to ensure that the benefits could be realised.[16]

Schedule 2—Sustainability standards

1.17Schedule 2 of the bill seeks to amend the Australian Securities and Investments Commission Act 2001 (ASIC Act) to introduce foundations to implement sustainability reporting standards in Australia.

1.18In his second reading speech, the Hon Stephen Jones MP explained the purpose of the amendments:

Growing awareness of the financial risks and opportunities of climate change and broader sustainability issues has promoted a range of international financial system responses. Many key markets for Australian companies are introducing measures to improve transparency, manage systemic risks and align capital flows towards climate and sustainability goals. A common and important component of this is company disclosure of sustainability and climate-related financial risks and information… The ASIC Act currently does not explicitly grant our standards bodies the function to develop and formulate sustainability standards.[17]

1.19The schedule proposes to empower the Australian Accounting Standards Board (AASB) with functions to develop and formulate sustainability standards, clarify the Auditing and Assurance Standards Board’s (AUASB) function to develop and maintain relevant auditing and assurance standards for sustainability purposes, and empowers the Financial Reporting Council (FRC) to provide strategic oversight and governance functions in relation to the AASB’s and AUASB’s sustainability standards functions.[18]

1.20The amendments would therefore allow the AASB to establish non-binding reporting requirements for sustainability that would, as far as practicable, align with significant international developments, including the standards under development by The International Sustainability Standards Board (ISSB).[19]

1.21The schedule would partially implement the Restoring Treasury’s Capability on Climate Risks and Opportunities—modelling and reporting standards measure from the 2022—23 Budget.[20]

1.22As sustainability reporting in Australia is currently undertaken on a voluntary basis, the proposed sustainability standards would provide general guidance, assisting relevant industries to prepare systems and processes for eventual transitions to mandatory climate-related financial disclosures. The objective of which is to ensure entities provide Australians and investors with greater transparency and accountability in relation to their climate-related plans, financial risks, and opportunities.[21]

Schedule 3—Government Response to the Review of the Tax Practitioners Board

1.23In 2019, the former Coalition Government announced an independent review into the effectiveness of the Tax Practitioners Board (TPB) and the Tax Agent Services Act 2009, to ensure that tax agent services are provided to the public in accordance with the appropriate professional and ethical standards.[22]

1.24On 27 November 2020, the former Coalition Government released the final report of the TPB Review. The final report provided options to improve the effectiveness of the TPB—responsible for the registration of tax practitioners—and made 28 recommendations.[23] A response to the review, endorsing the findings was released by the government on 27November 2020. Twenty of the recommendations were supported and a commitment was made to achieve three key objectives:

increasing the independence and effectiveness of the TPB;

ensuring high standards in the tax profession; and

streamlining the regulation of tax practitioners.[24]

1.25The proposed amendments are expected to ensure high standards of ethics and competency in the tax profession by ‘creating a stronger, more independent and effective TPB through the implementation of recommendations from the TPB Review’.[25]

1.26To achieve this this, the schedule would:

implement Recommendation 2.1 of the TPB Review, and updates and modernises the object of the Tax Agent Services Act 2009;[26]

in accordance with Recommendation 3.1 of the TPB Review, establish a Special Account for the TPB, meaning funding would be largely independent from the ATO;[27]

implement Recommendation 4.6 by introducing new internal governance requirements;[28]

implement Recommendations 4.7 and convert the registration period from at least every three years to at least every year;[29] and

implement Recommendation 5.1, to enable the Minister to specify, in a legislative instrument, additional obligations that registered tax agents and Business Activity Statement Agents (BAS Agent) must comply with.[30]

Schedule 4—Off-market share buy-backs

1.27Schedule 4 of the bill seeks to amend the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 (ITAA 1997) so that no part of an off-market share buy-back can be taken to be a dividend. The measure also seeks to insert new provisions into the income tax legislation in respect of selective share cancellations. This will align the income tax treatment across capital management activities for listed public companies.[31]

1.28Under the Taxation Laws Amendment (Company Distributions) Act 1987, share buy-back provisions provide different income tax treatment for shareholders who participate in share-buy backs undertaken by companies off-market compared with those undertaken on market. Part of the purchase price in respect of an off-market share buy-back can be taken to be a dividend in the hands of the shareholder. For on-market buy-backs, no part of the purchase price is taken to be a dividend for shareholders.[32]

1.29For both off-market and on-market share buy-backs, the buy-backs and any subsequent share cancellation is disregarded for the purposes of determining whether an amount is assessable income, deductable, or gives rise to a capital gain or loss for the company. This ensures that a buy-back is tax neutral for the company.[33]

1.30The purpose of the amendments in Schedule 4 is to align the tax treatment of off-market share buy-backs with the tax treatment of on-market share-buy backs for listed public companies.[34] As outlined in the EM, such alignment would ensure that listed public companies can no longer use off-market purchases and selective reductions of capital to take advantage of the concessional tax status of shareholders as part of their capital management activities. Schedule 4 would also amend the income tax treatment for selective reductions of capital which may be used to achieve similar outcomes.[35]

1.31The schedule would implement the government’s Improving the integrity of off-market share buy-back’s measure during the 2022–23 Budget and is expected to improve the integrity of the tax system so that ‘listed public companies will no longer be able to exploit the tax rules to buy back their own shares at a discount subsided by the Australian taxpayer.’[36]

Schedule 5—Franked distributions funded by capital raisings

1.32Schedule 5 of the bill seeks to amend the ITAA1997 to prevent certain distributions that are funded by capital raisings from being frankable. The proposed amendments would ensure that arrangements cannot be put in place to release franking credits that would otherwise remain unused where they do not significantly change the financial position of the entity.[37]

1.33In May 2015, the Australian Taxation Office (ATO) issued the Taxpayer Alert TA205/2 in relation to franked distributions funded by capital raisings. The alert outlined concerns that arrangements are being used by companies for the purposes of, or for the purposes which include, releasing franking credits or streaming dividends to shareholders. One of the purported effects of these arrangements was noted by the ATO, as being the release of franking credits that may otherwise have been retained by the company.[38]

1.34To address concerns raised in the Taxpayer Alert TA2015/2, the purpose of the amendments in Schedule 5 is to:

…prevent entities from manipulating the imputation system to facilitate the inappropriate release of franking credits. They prevent the use of artificial arrangements under which capital is raised to fund the payment of franked distributions (including by way of non-share dividends) to shareholders to enable the accelerated release of franking credits.[39]

1.35Schedule 5 fully implements the Tax integrity—franked distributions funded by capital raising measures from the 2016–17 Mid-Year Economic and Fiscal Outlook (MYEFO).[40]

1.36To achieve this, the schedule adds distributions funded by capital raisings to the list of distributions that are un-frankable, defined in section 960-120 of the ITAA 1997.

1.37As stipulated in the schedule, a distribution by an entity would be funded by capital raising if:

(i)the distribution is not consistent with an established practice of the entity of making distributions of that kind on a regular basis;

(ii)there is an issue of equity interests in the entity; and

(iii)it is reasonable to conclude, having regard to all relevant circumstances, that:

• the principal effect of the issue of any of the equity interests was to directly or indirectly fund all or part of the distribution; and
• any entity that issued or facilitated the issue of the interests did so for a purpose of funding all or part of the distribution.[41]

Relevant reviews and inquiries

Independent Review of the Tax Practitioners Board

1.38On 5 March 2019, the former government announced an independent review into the effectiveness of the TPB and the Tax Agent Services Act 2009 to ensure that the tax agent services are provided to the public in accordance with appropriate professional and ethical standards.

1.39The review involved extensive consultation with representatives from the accounting and taxation, consumer advocacy and education sectors, as well as with professional bodies, government regulators and agencies, and the public. Feedback was received via roundtable sessions as well as a submission process concluding on 30 August 2019, with a total of 66 submissions received, including 13 confidential submissions.[42]

House of Representatives Standing Committee on Economics Inquiry into the implications of removing refundable franking credits

1.40On 19 September 2018, the former Treasurer, the Hon Josh Frydenberg MP, referred an inquiry into the implications of removing refundable franking credits to the House of Representatives Standing Committee on Economics.

1.41The committee held a series of 19 public hearings across the country to allow Australians to have their say in light of policy proposed to be introduced on 1July 2019. A total of 1777 submissions were published as well as additional information and answers to questions on notice.[43]

Consultation

Sustainability standards

1.42To inform the exposure draft legislation and accompanying explanatory materials, the Department of the Treasury (Treasury) sought feedback from stakeholders on the proposed reforms in Schedule 2 of the bill through two consultation processes.

1.43Treasury sought stakeholder views on tasking the AASB to deliver sustainability standards between 28 November and 16 December 2022, with a total of 22 submissions received.[44]

1.44A detailed consultation process was undertaken between 22 December 2022 and 17February 2023, with a total of 208 submissions received (including 14 confidential submissions), from a broad range of industry and community stakeholders.[45]

Government response to the Review of the Tax Practitioners Board

1.45A consultation process on Schedule 3 of the bill was undertaken by Treasury on the exposure draft legislation and accompanying explanatory material on recommendations contained in the independent review into the effectiveness of the TPB and Tax Agent Services Act 2009.[46] The consultation process was undertaken from 18 November to 11December2022.[47]

Improving the integrity of off-market share buy-backs

1.46In relation to Schedule 4, a consultation process was undertaken by Treasury between 17 November and 9 December 2022 on the exposure draft legislation and accompanying explanatory material to align the tax treatment of off-market share buy-backs undertaken by listed public companies with the tax treatment of on-market share buy-backs.[48]

Franked distributions funded by capital raisings

1.47Treasury sought feedback from stakeholders on the proposed Schedule 5 to prevent the distribution of franking credits where a distribution to shareholders is funded by particular capital raising activities. A public consultation process on the exposure draft legislation and accompanying explanatory materials was undertaken between 14 September and 5 October 2022.[49]

Commencement

1.48The various schedules of the bill come into effect as outlined in the table below:

Source: Explanatory Memorandum, pp. 1-6.

Financial impact

1.49According to the EM, the measures within the bill are estimated to have the following financial impact over the forward estimates period:

Source: Explanatory Memorandum, pp. 1-6.

Legislative scrutiny

1.50In its Scrutiny of Digest 2 of 2023, the Senate Standing Committee on the Scrutiny of Bills (the Scrutiny Committee) raised concerns in relation to Schedule 1 of the bill, outlined in more detail below.[50]

Automated decision making

1.51Schedule 1 of the bill seeks to introduce proposed section 921ZF into the Corporations Act to allow ASIC to use assisted decision making. Proposed subsection 921ZF(1) provides that ASIC may arrange for the use of processes to assist decision making (such as computer applications and systems) for any purposes for which ASIC may make decisions in the performance or exercise of ASIC's functions or powers under Division 8C of the Corporations Act. Division 8C relates to the registration of relevant providers. Proposed subsection 921ZF(2) provides that a decision made under subsection 921ZF(1) using assisted decision making is taken to be a decision made by ASIC. Proposed subsection 921ZF(3) provides that ASIC may substitute a decision for a decision made with the assistance of a process under subsection 921ZF(1) if ASIC is satisfied that the initial decision is incorrect.[51]

1.52The Scrutiny Committee acknowledged the high volume of decisions ASIC is required to make to register relevant providers. Notwithstanding this, the Scrutiny Committee expressed concerns as to why the power to allow assisted decision-making could not be narrowed to particular decisions. The Scrutiny Committee is concerned that these provisions allow ASIC to use assisted decision making for any purposes for which ASIC may make decisions under Division 8C.[52]

1.53Although certain safeguards are included within the schedule to ensure the appropriate use of assisted decision-making processes, the Scrutiny Committee noted that due to the breadth of decisions that the schedule may apply to, it is unclear whether the safeguards will be effective in all cases.[53]

1.54As such, the Scrutiny Committee sought the Treasurer’s advice as to:

why it is considered necessary and appropriate to allow the use of automated decision-making for any decision;

what processes ASIC has in place to ensure the integrity and transparency of any assisted decision-making process, and whether these will be included in law or policy;

whether all of the relevant decisions made using assisted decision-making processes will be non-discretionary and, if not, what processes are in place to ensure decision-making will comply with administrative law requirements (for example, the requirement to consider relevant matters and the rule against fettering of discretionary power); and

what processes ASIC has in place to identify potentially incorrect decisions made through an assisted decision-making process.[54]

Human rights implications

1.55As discussed in the EM, the Statement of Compatibility with Human Rights argues that the bill is compatible with human rights and freedoms recognised in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2022, and thus does not raise any human rights concerns.[55]

1.56In its Report 2 of 2023, the Parliamentary Joint Committee on Human Rights reported that the bill did not raise any human rights concerns.[56]

Regulatory impact statements

1.57In relation to Schedule 3, the TPB Review has been certified as a process and analysis equivalent to an Impact Analysis. The full text of the TPB Review has been provided at Attachment 1 to the EM.[57]

Conduct of the inquiry

1.58The committee advertised the inquiry on its website and wrote to relevant stakeholders and interested parties inviting written submissions by 31March2022.

1.59The committee received 122 submissions (including 10 confidential submissions), as well as additional information and answers to questions on notice, which are listed at Appendix 1.

1.60The committee held one public hearing for the inquiry in Sydney on Tuesday, 2May 2023. The names of witnesses who appeared at the hearing can be found at Appendix 2.

Acknowledgements

1.61The committee thanks all individuals and organisations who assisted with the inquiry, especially those who made written submissions and participated in the public hearing.

Footnotes

[1]House of Representatives Votes and Proceedings, No. 39, 16 November 2023, p. 515.

[2]Journals of the Senate, No. 36, 9 March 2023, p. 1088.

[3]The Hon Stephen Jones MP, House of Representatives Hansard, 16 February 2023, p. 1047.

[4]Explanatory Memorandum (EM), p. 1.

[5]Australian Securities and Investments Commission (ASIC), Financial Advisers Register, https://asic.gov.au/for-finance-professionals/afs-licensees/financial-advisers-register/ (accessed12April 2023); EM, p. 7.

[6]ASIC, Financial Advisers Register, https://asic.gov.au/for-finance-professionals/afs-licensees/financial-advisers-register/#:~:text=The%20Register%20is%20a%20public,getting%20financial%20advice%20from%20them, (accessed 8 May 2023).

[7]ASIC, 15-071MR ASIC launches Financial Advisers Register, Media Release, 31 March 2015, https://asic.gov.au/about-asic/news-centre/find-a-media-release/2015-releases/15-071mr-asic-launches-financial-advisers-register/ (accessed 12 April 2023).

[8]EM, p. 8. Relevant providers is defined in section 921Z of the Corporations Act 2001 as all natural persons, operating as sole traders who hold their own Australian Financial Services (AFS) licence. Under Schedule 1, offences would also apply to licensees if a relevant provider whom they have authorised, provides financial advice while unregistered.

[9]EM, pp. 8–10.

[10]EM, p. 8.

[11]EM, p. 9.

[12]EM, p. 10.

[13]Commonwealth Ombudsman, Automated Decision-making—Better Practice Guide, 2020, p. 5, https://www.ombudsman.gov.au/__data/assets/pdf_file/0029/288236/OMB1188-Automated-Decision-Making-Report_Final-A1898885.pdf (accessed 12 April 2023).

[14]EM, p. 10.

[15]EM, p. 11.

[16]EM, p. 11.

[17]The Hon Stephen Jones MP, House of Representatives Hansard, 16 February 2023, p. 1047.

[18]EM, p. 13.

[19]EM, p. 15.

[20]Commonwealth of Australia, Budget Measures: Budget Paper No. 2 2022–23, p. 190.

[21]EM, p. 14.

[22]EM, p. 22.

[23]Department of the Treasury (Treasury), Independent Review of the Tax Practitioners Board, Final Report, 31 October 2019, https://treasury.gov.au/sites/default/files/2020-11/independentreviewofthetaxpractitionersboardfinalreport.pdf (accessed 13 April 2023).

[24]EM, p. 22.

[25]EM, p. 22.

[26]EM, p. 23.

[27]EM, p. 23.

[28]EM, p. 25.

[29]EM, p. 35.

[30]EM, p. 36.

[31]EM, p. 39. For a detailed comparison between the features of the current law and proposed changes refer to p. 41 of the EM.

[32]EM, p. 39.

[33]EM, p. 39.

[34]EM, p. 39.

[35]EM, p. 42.

[36]ATO, Improving the integrity of off-market share buybacks, 27 October 2022, https://www.ato.gov.au/General/New-legislation/In-detail/Other-topics/International/Improving-the-integrity-of-off-market-share-buybacks/ (accessed 13 April 2023);The Hon Stephen Jones MP, House of Representatives Hansard, 16 February 2023, p. 1048.

[37]EM, p. 49.

[38]Australian Taxation Office (ATO), Taxpayer Alert 2015/2, https://www.ato.gov.au/law/view/document?docid=TPA/TA20152/NAT/ATO/00001 (accessed 8May 2023).

[39]EM, p. 52.

[40]EM, p. 5.

[41]EM, p. 52.

[42]Treasury, Review of the Tax Practitioners Board, Review of the Tax Practitioners Board | Treasury.gohttps://treasury.gov.au/review/tax-practitioners-boardv.au (accessed 8 May 2023).

[43]House of Representatives Standing Committee on Economics, Inquiry into the implications of removing refundable franking credits, 4 April 2019, https://www.aph.gov.au/Parliamentary_Business/Committees/House/Economics/FrankingCredits/Report (accessed 8 May 2023).

[44]Department of the Treasury (Treasury), Empowering the AASB to deliver sustainability standards, Consultation, December 2022, https://treasury.gov.au/consultation/c2022-340878 (accessed8May2023).

[45]Treasury, Climate-related financial disclosure, Consultation, February2023, https://treasury.gov.au/consultation/c2022-314397 (accessed 4 May 2023).

[46]Note, the Treasury consultation process focused on recommendations 2.1, 3.1, 4.6, 4.7 and 5.1.

[47]Treasury, Implementation of the Government’s response to the Review of the Tax Practitioners Board, Consultation, December 2022, https://treasury.gov.au/consultation/c2022-338098 (accessed4May2023).

[48]Treasury, Improving the integrity of off-market share buy-backs, Consultation, December 2022, https://treasury.gov.au/consultation/c2022-336731 (accessed 4 May 2023).

[49]Treasury, Franked distributions and capital raisings, Consultation, October 2022, https://treasury.gov.au/consultation/c2022-314358 (accessed 4 May 2023).

[50]Scrutiny of Bills Committee, Scrutiny Digest 2/23, 8 March 2023, p. 18.

[51]Scrutiny of Bills Committee, Scrutiny Digest 2/23, 8 March 2023, p. 18.

[52]Scrutiny of Bills Committee, Scrutiny Digest 2/23, 8 March 2023, p. 20.

[53]Scrutiny of Bills Committee, Scrutiny Digest 2/23, 8 March 2023, p. 20.

[54]Scrutiny of Bills Committee, Scrutiny Digest 2/23, 8 March 2023, p. 20.

[55]EM, pp. 63–73.

[56]Parliamentary Joint Committee on Human Rights, Human Rights Scrutiny Report—Report 2 of 2023, 8 March 2023, p. 5.

[57]EM, p. 3.