Referral of the inquiry
1.1
The Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Bill 2019 (the bill) was introduced in the House of Representatives and read a first time on 24 July 2019.
1.2
On 25 July 2019, the Senate referred the provisions of the bill to the Economics Legislation Committee (the committee) for inquiry and report by 5 September 2019.
Purpose of the bill
1.3
The bill is an omnibus bill with measures designed to generally improve the integrity of Australia's tax system, save businesses time and money through implementing an electronic invoicing framework and protect workers' superannuation.
Provisions of the bill
1.4
The bill contains seven schedules:
Schedule 1: Tax treatment of concessional loans involving tax exempt entities
Schedule 2: Enhancing the integrity of the small business capital gains tax (CGT) concessions in relation to partnerships
Schedule 3: Limiting deductions for vacant land
Schedule 4: Extending anti-avoidance rules for circular trust distributions
Schedule 5: Disclosure of business tax debts
Schedule 6: Electronic invoicing implementation
Schedule 7: Salary sacrifice integrity
1.5
In his second reading speech, the Hon. Michael Sukkar MP, Assistant Treasurer, provided an overview of the above schedules noting that:
This bill contains a package of important measures designed to importantly improve the integrity of Australia’s tax system, save businesses time and money— (Quorum formed) through implementing an electronic invoicing framework and protect workers’ superannuation.
The bill in more detail
Schedule 1
1.6
Schedule 1 amends schedule 2D to the Income Tax Assessment Act 1936 (ITAA 1936) (which applies to tax exempt entities that become taxable) to:
specify the basis for working out the market value of Taxation of Financial Arrangements (TOFA) assets and liabilities entered into on concessional terms held at the transition time for the purposes of applying the TOFA provisions; and
modify the operation of the TOFA balancing adjustment that is made when the entity ceases to have such a TOFA asset or liability.
Summary of new law
1.7
The following table provides a summary of the new law.
Table 1.1: Schedule 1: Comparison of key features of new law and current law
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When a tax exempt entity is transferred to the private sector, for the purpose of applying the TOFA provisions to an asset or a liability that is a Division 230 financial arrangement that is entered into on concessional terms, the market value of the relevant asset (including an asset that corresponds to a liability) is taken to be the amount that the holder provided in relation to starting to have the asset:
reduced by repayments of principal made before the transition time and the amount of any impairment; and
increased by the amount of the cumulative amortisation (worked out using the effective interest method) of any difference between the initial amount and the amount payable on the maturity of the asset.
This market value is used to determine the amount of the financial benefits that the transition taxpayer is taken to have received or provided in relation to a Division 230 financial arrangement that it holds at the transition time for the purposes of applying the TOFA provisions after that time.
When the entity ceases to have the asset, the amount of the TOFA balancing adjustment is adjusted by an amount that ensures that the balancing adjustment of the transition taxpayer is not attributable to any extent to the concessional terms and conditions of the financial arrangement.
Concessional terms and conditions relevant to this determination include:
the parties to the arrangement were not dealing at arm’s length in relation to the asset; and
if the arrangement gives rise to an interest that is not an equity interest in an entity, the interest rate departed from the benchmark rate of return
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When a tax exempt entity is transferred to the private sector, the tax costs of the entity’s assets and liabilities are reset based on their market value at the transition time.
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Source: Explanatory Memorandum, pp. 11—12.
Financial impact
1.8
The Explanatory Memorandum (EM) states that there is no expected financial impact.
Application and transitional provisions
1.9
The amendments apply to a transition taxpayer if the transition time is at or after 7.30pm, by legal time in the Australian Capital Territory, on 8 May 2018.
1.10
The EM states that the amendments apply from the time of the announcement because they:
overcome an integrity concern that allows affected taxpayers to obtain an unintended benefit; and
will protect the revenue base.
Schedule 2
1.11
Schedule 2 amends the tax law to prevent the small business capital gains tax (CGT) concessions in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) from being available for assignments of the income of a partner and other rights or interests in the income or capital of a partnership that are not a membership interest in the partnership.
Summary of new law
1.12
Schedule 2 creates an additional basic condition that must be satisfied in relation to a capital gain in order to access the small business CGT concessions under Division 152 for that gain.
1.13
The table below provides a summary of the new law.
Table 1.2: Schedule 2: Comparison of key features of new law and current law
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The small business CGT concessions are only available for a capital gain arising from a CGT event that involves the creation, transfer, variation or cessation of an interest or right that entitles an entity to the income or capital of a partnership (or to an amount calculated by reference to a partner’s entitlements) if the right or interest is a membership interest held by the entity with the entitlement.
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The small business CGT concessions are available for a capital gain arising from a CGT event that involves an interest in or right to the income or capital of a partnership (or to an amount calculated by reference to distributions received by a partner) where the basic conditions are satisfied.
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Source: Explanatory Memorandum, p. 27.
Financial impact
1.14
The EM states that at the 2018—19 Budget, the measure was estimated to result in a small but unquantifiable gain to revenue over the forward estimates period.
Application and transitional provisions
1.15
The amendments commence from the start of the first quarter after Royal Assent and apply to CGT events that occur after 7.30pm legal time in the Australian Capital Territory on 8 May 2018.
1.16
The EM states that the retrospective application of the amendments is in accordance with the Budget announcement by the government on 8 May 2018. Exposure Draft legislation was released for public consultation from 12 October 2018 to 31 October 2018.
1.17
The EM argues that retrospective application is necessary as the amendments are an important integrity measures to prevent inappropriate access to the CGT small business concessions for arrangements undertaken to reduce partner’s tax liabilities. If the amendments did not apply from announcement, partners would be able to enter into such arrangements during the period between announcement and the passage of legislation and avoid the operation of the measure.
Schedule 3
1.18
Schedule 3 amends the ITAA 1997 to deny deductions for losses or outgoings incurred that relate to holding vacant land. However, the EM notes that amendments do not apply to any losses or outgoings relating to holding vacant land to the extent to which the land is:
used or held available for use by the entity in the course of carrying on a business in order to earn assessable income; or
used or held available for use in carrying on a business by;
an affiliate, spouse or child of the taxpayer; or
an entity that is connected with the taxpayer or of which the taxpayer is an affiliate.
1.19
The amendments also do not apply to taxpayers that are:
corporate tax entities, superannuation plans (other than self-managed superannuation funds), managed investment trusts or public unit trusts; or
unit trusts or partnerships of which all the members are entities of the above types.
Summary of new law
1.20
Schedule 3 amends the ITAA 1997 to deny deductions for losses or outgoings incurred to the extent they relate to a taxpayer holding vacant land.
Table 1.3: Schedule 3: Comparison of key features of new law and current law
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A taxpayer cannot claim deductions for losses or outgoings incurred that relate to holding vacant land.
However, the amendments do not apply to any losses or outgoings relating to holding vacant land to the extent the land was:
used or held available for use by the taxpayer in the course of a business the taxpayer carries on; or
used or held available for use by an affiliate, spouse or child of the taxpayer, or an entity that is connected with the taxpayer or of which the taxpayer is an affiliate, in carrying on a business.
The amendments do not apply to:
corporate tax entities, superannuation plans (other than self-managed superannuation funds), managed investment trusts or public unit trusts; and
unit trusts or partnerships of which all the members are entities of the above types.
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A taxpayer can claim deductions for losses or outgoings incurred that relate to holding vacant land if:
the losses or outgoings were incurred in gaining or producing their assessable income; or
the losses or outgoings relate to the taxpayer carrying on a business in order to derive assessable income.
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Source: Explanatory Memorandum pp. 34—35.
Financial Impact
1.21
As at the 2018—19 Budget, the measure is estimated to result in the following gain to revenue over the forward estimates period:
Table 1.4: Schedule 3: financial impact over the forward estimates
Source: Explanatory Memorandum, p. 4.
Application and transitional provisions
1.22
The amendments commence from the start of the first quarterly period commencing after the day of Royal Assent of the bill.
1.23
The measure applies to losses and outgoings incurred on or after 1 July 2019 regardless of whether the land was first held prior to this date.
1.24
This measure was announced by the government in the 2018—19 Budget on 8 May 2018. Exposure draft legislation was released for public consultation from 15 October 2018 to 31 October 2018.
1.25
The EM argues that retrospective application is necessary as the amendments are an important integrity measure to prevent deductions being claimed in relation to vacant land that may not be genuinely held for the purpose of gaining or producing assessable income. However, given taxpayers have received advance notice of over a year of the changes and the period of retrospectivity is expected to be resolved well before the end of the 2019—20 income year, in practice any disadvantage is likely to be minimal.
Schedule 4
Summary of the new law
1.26
Schedule 4 amends the ITAA 1936 to extend to family trusts the anti-avoidance rule that applies to other closely held trusts that undertake circular trust distributions. This allows income tax to be imposed on circular trust distributions at a rate of tax equal to the top marginal tax rate plus the rate of the Medicare levy.
Table 1.5: Schedule 4: Comparison of key features of new law and current law
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Trustee beneficiary non-disclosure tax applies to the untaxed part of a circular trust distribution to which the trustee of the closely held trust, including a family trust, becomes presently entitled.
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Trustee beneficiary non-disclosure tax applies to the untaxed part of a circular trust distribution to which the trustee of the closely held trust (other than a family trust) becomes presently entitled.
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Source: Explanatory Memorandum, p. 46.
Financial impact
1.27
As at the 2018—19 Budget, the measure is estimated to result in the following gain to revenue over the forward estimates period:
Table 1.6: Schedule 4: Financial impact
Source: Explanatory Memorandum, p. 4.
Application and transitional provisions
1.28
The amendments made by Schedule 4 commence from the first day of the first quarterly period that occurs after the day the bill receives the Royal Assent and apply to income years starting on or after 1 July 2019.
1.29
This measure was announced by the government in the 2018—19 Budget on 8 May 2018. Exposure draft legislation was released for public consultation from 12 October 2018 to 31 October 2018.
1.30
The EM argues that retrospective application is necessary. The amendments are an important integrity measure that will better enable the Australian Taxation Office (ATO) to pursue family trusts that engage in circular trust distributions by extending an anti-avoidance rule that applies to other closely held trusts. As taxpayers have had significant notice about the change and trust distributions are normally determined at the end of the income year, in practice any effects are expected to be minimal.
Schedule 5
Summary of the new law
1.31
Schedule 5 amends the Taxation Administration Act 1953 (TAA 1953) to allow taxation officers to disclose the business tax debt information of a taxpayer to credit reporting bureaus when certain conditions and safeguards are satisfied.
1.32
This will allow tax debts to be placed on a similar footing as other debts, strengthening the incentives for businesses to pay their debts in a timely manner and effectively engage with the ATO to avoid having their tax debt information disclosed.
1.33
The amendments will reduce unfair financial advantage obtained by businesses that do not pay their tax on time and contributes to more informed decision making within the business community by enabling credit providers and businesses to make a more complete assessment of the credit worthiness of a business.
Table 1.7: Schedule 5: Comparison of key features of new law and current law
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Ability of taxation officers to disclose protected information to credit reporting bureaus
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The exceptions to the confidentiality of taxpayer information offences are expanded, such that if certain conditions and safeguards are met, taxation officers can disclose protected information relating to a particular taxpayer’s tax debts to credit reporting bureaus.
The disclosure must be for the purpose of enabling the credit reporting bureau to prepare, update or issue a credit worthiness report in relation to a particular taxpayer.
Generally, the taxpayer whose information is to be disclosed must be within the class of entity declared in a legislative instrument made by the Treasurer. However, this does not apply if the taxpayer is no longer in the declared class of entity, but the disclosure relates to the reasons why the entity is no longer included in the declared class and is for the purpose of enabling the credit reporting bureau to update or correct credit worthiness reports in relation to that taxpayer.
In addition, a disclosure will only be permitted if all of the following procedural conditions are met:
the Commissioner has notified the taxpayer at least 21 days before disclosure; and
the Commissioner has consulted with the Inspector General of Taxation.
However, these procedural conditions do not apply for disclosures to update, correct or confirm information previously disclosed.
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It is an offence (punishable by two years imprisonment) for a taxation officer to disclose protected information, such as information relating to a particular taxpayer’s tax debt unless an exception to the offence applies.
There are no exceptions relating to disclosing protected information relating to a particular taxpayer’s tax debts to credit reporting bureaus
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Ability of third parties to on-disclose protected information in the form of a credit worthiness report
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It is an exception to the offence for an entity other than a taxation officer to on disclose protected information (such as an entity’s tax debt information) if:
the information was originally disclosed by a taxation officer under the new exception to the confidentiality of taxpayer information offences (see above); and
the entity making the record or disclosure is not the credit reporting bureau to which the information was originally disclosed or an entity appointed or employed by, or otherwise performing services for, a credit reporting bureau.
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It is an offence (punishable by two years imprisonment) for an entity (other than a taxation officer) to, on disclose or record protected information acquired from a taxation officer.
However, the offence does not apply in certain specified circumstances. For example, the offence does not apply if the information was already available to the public.
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Source: Explanatory Memorandum, pp. 53—54.
Financial impact
1.34
The EM explains that this measure is estimated to result in a gain to the budget of $30 million in underlying cash balance terms over the forward estimates period. This includes an estimated increase in goods and services tax receipts of $10 million, paid to the states and territories. There is no revenue impact in fiscal balance terms as the tax liabilities have already been recognised.
Table 1.8: Schedule 5: Financial impact
Source: Explanatory Memorandum, p. 6.
Application and transitional provisions
1.35
The amendments apply in relation to records and disclosures of information on or after the day after the bill receives Royal Assent (regardless of whether the information was acquired before, on or after that day).
1.36
Additionally, the EM notes that the amendments do not authorise records or disclosures of information until a legislative instrument determining the class of entity whose tax debt information may be disclosed by the Commissioner of Taxation (the Commissioner) is in force.
1.37
A number of submitters to the inquiry noted that this schedule of the bill refers to a legislative instrument that will determine whether a taxpayer can be subject to the new disclosure arrangements. Paragraph 5.8 and 5.20 of the bill's EM note that the ATO still have to complete administrative arrangements and approaches that will provide taxpayers with access to their tax debt information. This information has not yet been finalised.
Schedule 6
Summary of the new law
1.38
Schedule 6 amends the TAA 1953 to confer on the Commissioner, functions and powers to develop and/or administer a framework or system for electronic invoicing.
Table 1.9: Schedule 6: Comparison of key features of new and current law
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The Commissioner’s functions include the functions of developing and/or administering a framework or system for electronic invoicing. The Commissioner’s powers include the power to do all things necessary or convenient to be done for or in connection with the performance of those functions.
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The Commissioner does not have specific functions and powers related to electronic invoicing
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Source: Explanatory Memorandum, p. 68.
Financial impact
1.39
The EM argues that this schedule has no financial impact.
Application and transitional provisions
1.40
The amendments made by schedule 6 commence and apply from the day after Royal Assent.
Schedule 7
Summary of the new law
1.41
Schedule 7 amends the Superannuation Guarantee (Administration) Act 1992 to prevent employers from using their employees’ salary sacrifice superannuation contributions to reduce their [employer's] own Superannuation Guarantee (SG) contributions and ensure that SG is paid on the pre-salary sacrifice base.
1.42
The EM notes that the amendments improve the integrity of the superannuation system by ensuring that an individual’s salary sacrifice contributions cannot be used to reduce an employer’s minimum SG contributions.
1.43
The government announced the changes on 14 July 2017 as part of its response to the Cross-Agency Working Group’s Report, Superannuation Guarantee Non-Compliance.
Table 1.10: Schedule 7: Comparison of key features of new law and current law
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Amounts that an employee salary sacrifices to superannuation cannot reduce an employer’s SG charge. Salary sacrificed amounts also do not form part of any late contributions an employer makes that are eligible to be offset against the SG charge
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Amounts that an employee salary sacrifices to superannuation may reduce an employer’s SG charge. Salary sacrificed amounts, if paid late, may also be offset against the SG charge
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To avoid a shortfall an employer must contribute at least 9.5 per cent of an employee’s ordinary time earnings (OTE) base to a complying superannuation fund or retirement savings account (RSA). An employee’s OTE base is comprised of their OTE and any amounts sacrificed into superannuation that would have been OTE, but for the salary sacrifice arrangement.
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To avoid a shortfall an employer must contribute at least 9.5 per cent of an employee’s OTE to a complying superannuation fund or RSA. The employer may choose whether or not to include salary sacrificed amounts in the OTE.
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If an employer has a shortfall, the amount of the shortfall is calculated by reference to their employee’s total salary or wages base. An employee’s salary or wages base is comprised of their salary and wages, and any amounts sacrificed into superannuation that would have been salary or wages, but for the salary sacrifice arrangement.
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If an employer has a shortfall, the amount of the shortfall is calculated by reference to their employee’s total salary and wages. The employer may choose whether or not to include salary sacrificed amounts in the employee’s salary or wages.
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Source: Explanatory Memorandum, pp. 72—73.
Financial impact
1.44
The EM argues that this measure has a small but unquantifiable impact on the fiscal and underlying cash balances.
Application and transitional provisions
1.45
The amendments made by this schedule apply in relation to calculating an employer’s superannuation guarantee shortfall for quarters beginning on or after 1 July 2020.
Compatibility with human rights
1.46
Besides schedule 5, the EM claims that all other schedules in the bill are 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.
1.47
The EM explains that the amendments in schedule 5 engage the prohibition on arbitrary or unlawful interference with privacy contained in Article 17 of the International Covenant on Civil and Political Rights (ICCPR). Article 17 states:
No one shall be subjected to arbitrary or unlawful interference with his privacy, family, home or correspondence, nor to unlawful attacks on his honour and reputation.
Everyone has the right to the protection of the law against such interference or attacks.
1.48
The EM argues that the engagement of schedule 5 with the prohibition on interference with privacy is lawful as the amendments authorise the disclosure of a taxpayer’s tax debt information where certain conditions and safeguards are satisfied. This, the EM claims, is achieved by providing exceptions to the offences protecting the confidentiality of taxpayer information contained in Division 355 in schedule 1 to the TAA 1953.
1.49
In conclusion, the EM states that schedule 5 is consistent with Article 17 of the ICCPR on the basis that its engagement of the prohibition on interference with privacy will neither be unlawful (including by virtue of the amendments to Australia’s taxation legislation set out in the bill) nor arbitrary. To this extent, the EM claims the schedule complies with the provisions, aims and objectives of the ICCPR.
1.50
The Joint Committee on Human Rights expressed no concerns about the bill.
Legislative scrutiny
1.51
The Scrutiny of Bills Committee expressed concern about the provisions with retrospective commencement:
Retrospective commencement, when too widely used or insufficiently justified, can work to diminish respect for law and the underlying values of the rule of law. The explanatory memorandum does not detail whether any person will be detrimentally affected by the amendments having a retrospective application.
1.52
The Scrutiny of Bills Committee requested:
more detailed advice from the Assistant Treasurer as to how many individuals will be detrimentally affected by the retrospective application of the legislation, and the extent of their detriment; and
the Assistant Treasurer's advice as to the extent to which the bill as introduced is consistent with the measures announced on 8 May 2018.
Regulatory impact
1.53
The EM notes that almost all of the schedules had little or no compliance cost or regulatory impact.
1.54
However, the EM also notes that schedule 3 is expected to result in some transitional and ongoing compliance costs for affected entities, and that schedule 5's regulatory costs are expected to be minimal. While the ATO will develop internal system functionality to exchange data with credit reporting bureaus, any cost to credit reporting bureaus is expected to be minimal as infrastructure is already established. Any potential impact for business clients with tax-related debts is excluded from the Regulatory Burden Measurement framework as a cost of non-compliance.
Conduct of the inquiry
1.55
The committee advertised the inquiry on its website and wrote to relevant stakeholders and interested parties inviting written submissions by Thursday, 15 August 2019.
1.56
The committee received 23 submissions which are listed at Appendix 1.
1.57
The committee held one public hearing for the inquiry on Monday, 19 August 2019 at Parliament House, Canberra. The names of witnesses who appeared at the hearing can be found at Appendix 2.
Acknowledgements
1.58
The committee thanks all individuals and organisations who assisted with the inquiry, especially those who made written submissions and appeared at the public hearing.