Glossary

Purpose of the Bill

The purpose of the Treasury Laws Amendment (2023 Measures No. 1) Bill 2023 (the Bill) is to amend various existing taxation and corporations laws across a number of Commonwealth Acts.

Structure of the Bill

The Bill comprises 5 Schedules:

• Schedule 1 has 2 Parts, both of which amend the Corporations Act 2001. Part 1 will allow for multiple registrations of financial advisers. Part 2 will allow the Australian Securities and Investments Commission (ASIC) to make decisions using assisted decision-making technology.
• Schedule 2 amends the Australian Securities and Investments Commission Act 2001 (ASIC Act) so that the functions of the Financial Reporting Council include monitoring sustainability standards.
• Schedule 3 has 3 Parts, all of which amend the Tax Agent Services Act 2009 (TAS Act) in relation to the provision of tax agent services.
• Schedule 4 has 2 Parts which amend the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the taxation of off-market share buy-backs.
• Schedule 5 amends the ITAA 1997 to prevent certain distributions that are funded by capital raisings from being frankable.

Structure of this Bills Digest

As the matters covered by each of the Schedules are independent of each other, the relevant background, stakeholder comments (where available) and analysis of the provisions are set out under each Schedule number.

Committee consideration

Selection of Bills Committee

At the time of writing this Bills Digest, the Bill had not been referred to Committee for inquiry and report.

Senate Standing Committee for the Scrutiny of Bills

At the time of writing this Bills Digest, the Senate Standing Committee for the Scrutiny of Bills had not considered the Bill.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[1]

Parliamentary Joint Committee on Human Rights

At the time of writing this Bills Digest the Parliamentary Joint Committee on Human Rights has not commented about the Bill.

Schedule 1: Registration of providers and assisted decision-making

Background

Registration of finance advice providers

The Financial Advisers Register (the Register) is a public register of financial advisers. It was established in 2015 and is managed by ASIC.[2] The Register provides information on financial advisers and their licensing status in Australia.

According to former ASIC Deputy Chairman, Peter Kell, ‘the Register enables consumers to find out information about their adviser before they receive financial advice. It also gives employers greater ability to assess new financial advisers and will improve ASIC’s ability to identify and monitor financial advisers.’[3]

From 1 July 2023, it will be an offence for financial advisers (referred to as relevant providers in section 921Z of the Corporations Act)[4] to provide financial advice while unregistered.[5] This means that all financial advisers must be registered to avoid contravening a civil penalty provision.[6]

Financial advisers on the Register are all natural persons, operating as sole traders who hold their own Australian Financial Services (AFS) licence. Alternatively, financial advisers can be employees or authorised representatives of a larger corporate entity that holds an AFS licence.

By way of an example, during weekdays Shannon is a financial adviser employed by the ANZ Bank (an AFS licensee). On weekends Shannon also works as a financial adviser for her family-owned business (a separate AFS licensee). Both the ANZ Bank and Shannon’s family business have obligations to inform ASIC and update the correct information about Shannon on the Financial Advisers Register. In practice, this means different AFS licensees have to apply to ASIC to register the same financial adviser.

Part 1 of Schedule 1 makes technical amendments to the Corporations Act to improve the registration process for financial advisers. According to the Explanatory Memorandum to the Bill, the technical amendments are necessary to minimise:

… the risk of an inadvertent breach of the law if the licensee who registered the relevant provider ceases to authorise them. 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.[7]

To continue with the previous example, if the ANZ Bank ceases to employ Shannon, she could become unregistered and unknowingly give advice even though she is still a financial adviser employed by her family-owned business. The technical amendments minimise this risk by enabling ASIC to approve applications from an AFS licensee to register a financial adviser, including when the financial adviser has an existing registration (by a different AFS licensee) in force.[8]

Assisted decision-making

Assisted 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.[9]

Many Australian Government agencies utilise computerised systems to support government decision-making. Typically, these agencies employ coded logic and data-matching to make, or assist in making, decisions.[10] These computerised systems may be integrated at different stages of a decision-making process with differing degrees of human oversight and verification.[11]

It is important to ensure that the decisions made by computerised systems are lawful because unlawful decisions (for example, the ‘Robodebt’ scheme) can have severe impacts on people.[12] Federal Court Justice Melissa Perry said:

Ensuring that decisions made by pre-programmed systems are made within lawful boundaries raises a number of specific challenges … One of the greatest challenges is to ensure accuracy in the substantive law applied by such processes …

While acknowledging that employing automated decision-making can promote consistency, accuracy, cost effectiveness and timeliness in the making of decisions by government, we must also ensure that those systems are dynamic and recognise that we are responsible for the inputs and the outputs. Achieving efficiencies should not be allowed to compromise society's commitment to an administrative law system that is fair, transparent and accountable and that operates according to the rule of law. Safeguards need to be in place in order to ensure that the individual's right to hold decision makers to their obligations is preserved.[13] [emphasis added]

Policy position of non-government parties/independents

At the time of writing, the positions of non-government parties and independents on Schedule 1 of the Bill could not be identified.

Position of major interest groups

At the time of writing, no stakeholder comment on the amendments in Schedule 1 could be found.

Key issues and provisions

Registration of relevant providers

Currently, section 921ZC of the Corporations Act sets out the rules for the registration of relevant providers. Item 11 in Part 1 of Schedule 1 amends section 921ZC to ensure that a relevant provider can be registered multiple times to different licensees: proposed subsections 921ZC(1A) and (1B).

Item 18 repeals and replaces section 921ZE of the Corporations Act so that registration of a relevant provider in relation to a licensee comes into force when ASIC records the relevant provider in the Register. The registration continues in relation to the licensee until the earliest of the following:

• a registration prohibition order comes into force
• a banning order against the relevant provider takes effect
• the licensee stops authorising the relevant provider to provide advice to retail clients on their behalf: proposed paragraph 921ZE(b).

Assisted decision-making

Part 2 of Schedule 1 amends the Corporation Act to allow ASIC to use assisted decision-making processes when considering applications for financial advisers to be registered.[14]

Item 25 of Schedule 1 inserts proposed section 921ZF into the Corporations Act so that:

• the use of assisted decision-making processes may be arranged by ASIC and used under its control
• any decision made by assisted decision-making processes must comply with all of the requirements of the legislative provisions under which the decision was made
• ASIC may change a decision made by an assisted decision-making process if it is satisfied that the decision is incorrect.[15]

ASIC is required to make a large number of decisions regarding registration applications for financial advisers. The Explanatory Memorandum argues that the use of assisted decision-making systems will enable ASIC to deliver a high standard of service in an efficient manner. This is because the circumstances in which ASIC must approve or refuse an application are prescribed by law, therefore ‘the decision-making process lends itself to automation’.[16]

Importantly though, academics and lawyers have raised questions about the legality of computer‑assisted decision-making. For example, Dr Anna Huggins of the Queensland University of Technology has posed the question: To what extent are administrative law rules, developed on the assumption that decisions are made by humans and not computers, compatible with computerised government decision-making?[17]

In addition, there are debates about whether further regulatory reforms are needed to address the new and distinctive challenges that automation poses for administrative law.[18] In 2004, the Administrative Review Council published a report Automated Assistance in Administrative Decision-Making.[19] The report contains best practice principles for the development and operation of computerised systems used to make or assist in the making of administrative decisions.[20]

Financial implications

The Explanatory Memorandum states that the financial impact of Schedule 1 will be nil.[21]

Schedule 2: Sustainability standards

Background

Currently, sustainability reporting in Australia is undertaken on a voluntary basis.

In his second reading speech to the Bill (p. 5), Assistant Treasurer Stephen Jones explained:

Growing awareness of the financial risks and opportunities of climate change and broader sustainability issues has prompted 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 Albanese government has committed to ensuring large businesses provide Australians and investors with greater transparency and accountability when it comes to their climate-related plans, financial risks and opportunities. The ASIC Act currently does not explicitly grant our standards bodies the function to develop and formulate sustainability standards.

The Assistant Treasurer confirmed that Schedule 2 to the Bill proposes to empower three Australian Government agencies—the Australian Accounting Standards Board (AASB), the Auditing and Assurance Standards Board (AUASB), and the Financial Reporting Council (FRC)—to be responsible for:

• developing sustainability standards, which ‘will not be enforceable until further legislative changes are made to apply the standards’
• developing and maintaining auditing and assurance standards for sustainability purposes
• providing strategic oversight and governance functions, respectively.[22]

The Legislative and Governance Forum for Corporations was notified as required under the Corporations Agreement 2002.[23]

In its 2022 Federal Election policy ‘Powering Australia’ (p. 2), the Australian Labor Party (ALP) announced that, if elected to Government, it would ‘work with large businesses to provide greater transparency on their climate related risks and opportunities.’

Schedule 2 partially implements the ‘Restoring Treasury’s Capability on Climate Risks and Opportunities – modelling and reporting standards’ measure from the Budget October 2022–23: Budget paper no. 2 (p. 190), in which the Government announced it

… will provide $36.1 million over 4 years from 2022–23 (and $6.9 million per year ongoing) to support the delivery of Government priorities related to climate modelling and the development of climate reporting standards. Funding includes:

• $29.8 million over 4 years from 2022–23 (and $6.9 million per year ongoing) for the Treasury to restore capability to model climate risks and opportunities
• $6.2 million over 4 years from 2022–23 for the Treasury and the Australian Accounting Standards Board to develop and introduce climate reporting standards for large businesses and financial institutions, in line with international reporting requirements [emphasis added].

Laying the foundations

In his address to the Australian Sustainable Finance Institute on 12 December 2022, Treasurer Jim Chalmers announced:

… our first priority is getting the disclosure piece right.

Although there’s still some work to do on the International Sustainability Standards Board framework – there’s now a broad consensus around it, which presents an opportunity for critical global consistency.

… It’s our view that once developed, these disclosure requirements will start with the largest entities – most of which are already disclosing voluntarily and are well placed to lead the way.

And our initial view is that mandatory reporting requirements should be phased in over time – both in terms of entities covered and the reporting that is required.

… we are starting with some clear principles.

First, we think the standards should be mandatory for large firms.

Second, they should be aligned as far as possible with global standards.

And third, they should apply not just to firms, but to financial institutions as well – and there will be similar requirements for comparable Commonwealth entities.

The Explanatory Memorandum (p. 15) states that ‘this measure leverages the existing bodies’ experience [emphasis added] to facilitate the development of sustainability standards while longer-term governance arrangements for sustainability-related financial reporting, including climate disclosure, are developed and implemented.’

To appreciate how Schedule 2 lays the foundation for sustainability reporting standards in Australia, this Digest briefly explains:

• domestically, the current practice and relationships among the AASB, AUASB and FRC on the development of the Australian accounting, auditing and assurance standards, so one can comprehend how existing experience can be leveraged for developing and implementing sustainability standards in the future
• internationally, the practice of aligning Australian standards with the international standards set by the International Financial Reporting Standards Foundation (IFRS Foundation), which is ‘a not-for-profit, public interest organisation established to develop high-quality, understandable, enforceable and globally accepted accounting and sustainability disclosure standards—IFRS Standards—and to promote and facilitate adoption of the standards’
• concurrently, how the development of sustainability standards internationally and domestically has led to Schedule 2.

Key bodies

IASB

Internationally, the IFRS Standards set by the IFRS Foundation are developed by two independent boards – the International Accounting Standards Board (IASB) and the newly created International Sustainability Standards Board (ISSB). (See Figure 1 below for the IFRS Foundation’s structure.)

Figure 1: IFRS Foundation’s three-tier structure

Source: ‘Our structure’, International Financial Reporting Standards Foundation.

The IASB is an independent private-sector organisation based in London (p. 6), and is responsible for developing and publishing a single set of high‑quality, transparent and comparable global accounting standards, called the IFRS Accounting Standards. The IASB co-operates with national accounting standard-setters (like the AASB) to achieve convergence in accounting standards around the world. The Australian Government provides (p. 6) a significant annual monetary contribution to the activities of the IASB.

Currently, 159 of the 167 profiled jurisdictions (p. 4) worldwide have a commitment to IFRS Accounting Standards. 145 jurisdictions (p. 4) require IFRS Standards to be used by ‘all or most domestic publicly accountable entities (listed companies and financial institutions) in their capital markets’. 15 of the G20 economies (p. 7) require the use of IFRS Standards.

In Australia, under the direction of the FRC, the AASB adopted IFRS Accounting Standards for application by entities reporting under the Corporations Act 2001 for annual reporting periods beginning on or after 1 January 2005 (p. 7).

AASB

The AASB is responsible (p. 1) for developing, issuing and maintaining accounting standards that apply under Australian company law. The AASB accounting standards can have the force of company law (p. 2) for entities preparing financial reports under that law. The AASB reports (p. 6) to the Parliamentary Secretary to the Treasurer. The AASB receives (p. 6) its principal funding via Parliamentary appropriation under the Australian Treasury portfolio, and from the states and territories.

As illustrated in Figure 2 below, the AASB follows 5 steps (p. 8) of due process to develop accounting standards with the IASB:

1.  communicating its views and proposals to a broad range of interested parties via media releases, alerts, publications and other items on its website;

2.  inviting public comment on proposed pronouncements via exposure drafts, invitations to comment, proposed interpretations and other open-for-comment documents;

3.  meeting with interested parties, including holding roundtable discussions and meeting with its Consultative Group;

4.  publishing selected Board papers and discussing technical issues in Board meetings that are open to public observation;

5.  publishing Action Alerts following Board meetings and minutes of Board meetings.

Figure 2:  AASB Standard-Setting Process

Source: General FAQ, ‘How does the AASB develop standards and interpretations’, AASB webpage.

Auditing and Assurance Standards Board (AUASB)

The AUASB is responsible for developing, issuing and maintaining auditing and assurance standards. These standards:

… are necessary to reinforce the credibility of the auditing and assurance processes for those who use financial and other information. The AUASB standards are legally enforceable for audits or reviews of financial reports required under the Corporations Act 2001.

The AUASB’s role extends to liaison with other standards setters and participation in standard-setting initiatives.

Financial Reporting Council (FRC)

The FRC is responsible for overseeing the effectiveness of the financial reporting framework in Australia. Its key functions include the oversight of the accounting and auditing standards setting processes for the public and private sectors, providing strategic advice in relation to the quality of audits conducted by Australian auditors, and advising the Minister on these and related matters to the extent that they affect the financial reporting framework in Australia.

The FRC monitors the development of international accounting and auditing standards, works to further the development of a single set of accounting and auditing standards for world-wide use and promotes the adoption of these standards. It is a statutory body under Part 12–The Australian Financial Reporting System of the ASIC Act (Part 12).

Current relationships—AASB, AUASB, FRC, ASIC, APRA and ASX

The AASB explains (p. 5):

The FRC provides broad oversight of the process for setting accounting standards in Australia. The FRC appoints the members of the AASB, other than the Chairman, and can issue broad strategic directions to the AASB. However, the Australian Securities and Investments Commission Act 2001 limits the FRC’s ability to become involved in the technical deliberations of the AASB.

Like the AASB, the Auditing and Assurance Standards Board (AUASB) also operates under the Australian Securities and Investments Commission Act 2001 and is subject to oversight by the Financial Reporting Council. The AUASB develops auditing standards that apply under Australian company law. There is no direct relationship between the AASB and the AUASB, other than sharing offices and facilities.

The Australian Securities and Investments Commission (ASIC) is responsible for the enforcement of the accounting standards issued by the AASB under the Corporations Act 2001. ASIC has the power to issue class orders, or specific orders to a company, to give relief from certain requirements of the Act, including the application of AASB standards, where it is satisfied that the statutory requirements for relief are met. ASIC may refer significant issues that it sees in practice to the AASB for consideration.

The Australian Prudential Regulation Authority (APRA) is responsible for the regulation of banks, insurers and other authorised deposit-taking institutions. APRA considers the compliance of entities with AASB accounting standards as part of its oversight processes.

The Australian Stock Exchange (ASX) provides facilities for the listing and transfer of equities of listed public companies. The ASX expects listed entities to produce comparable general purpose financial statements in accordance with AASB accounting standards.

Making sustainability standards for environmental, social and governance matters

International Sustainability Standards Board (ISSB)

On 3 November 2021, the IFRS Foundation created the ISSB (a sister board to the IASB) at COP26 in Glasgow, to meet the increasing demand among international investors for high-quality, transparent, reliable and comparable reporting by companies on climate and other environmental, social and governance (ESG) matters.[24] The ISSB is responsible for developing IFRS Sustainability Disclosure Standards, which are intended to be ‘in the public interest—standards that will result in a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets’ (p. 2).

The ISSB’s work to develop the Sustainability Disclosure Standards is backed (p. 3) by the G7, the G20, the International Organization of Securities Commissions (IOSCO), the Financial Stability Board, the Task Force for Climate-related Financial Disclosures (TCFD), World Economic Forum, the African Finance Ministers and Finance Ministers and Central Bank Governors from more than 40 jurisdictions. Among them, Australia, Brazil, Canada, Japan and South Korea (p. 7) are establishing—or have established—sustainability standards boards that enable them to cooperate with the ISSB.

The Sustainability Disclosure Standards are not mandatory (p. 7) for companies to use. However, consistent with the approach taken for IFRS Accounting Standards issued by the IASB, it is for jurisdictional authorities to decide (p. 7) whether to mandate use of IFRS Sustainability Disclosure Standards issued by the ISSB.

ISSB and Global Reporting Initiative (GRI)

The ISSB works closely with Global Reporting Initiative (GRI), the leading provider of sustainability standards aimed at broader stakeholders. The ISSB considers this collaboration with the GRI (p. 4) will ensure ‘compatibility and interconnectedness between the ISSB’s investor-focused baseline sustainability information designed to meet the needs of the capital markets, and GRI’s information intended to serve the needs of a broader range of stakeholders’, and help ‘reduce the reporting burden for companies and further harmonise the sustainability reporting landscape at an international level.’

ISSB Draft Standards

The ISSB published its first two Draft Standards (pp. 4–5) for consultation in March 2022 and intends to finalise and issue them by the end of second quarter of 2023:

• IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information
• IFRS S2: Climate-related Disclosures.

AASB adopts ‘climate first’ approach

The AASB met in public via video conference on 1 February 2023 and stated its decisions as follows:

To address the demand for climate-related financial disclosure requirements while permitting the Board sufficient time to redeliberate its approach to broader sustainability reporting, the Board supported a “climate first” approach and decided to add a separate project to the Board’s work program to develop climate-related financial disclosure requirements for Australia.

The Board also decided to continue applying the preliminary decisions made at its February 2022 and April 2022 meetings and the [draft] Sustainability Reporting project plan to its work on developing climate-related financial disclosure requirements. Those decisions are:

(a) to develop a separate suite of sustainability reporting standards alongside the existing Australian Accounting Standards, and address climate as the first sustainability reporting topic;

(b)  to use the work of the IFRS Foundation’s International Sustainability Standards Board (ISSB) as a foundation, with modifications for Australian matters and requirements;

(c)  to focus initially on the development of reporting requirements for sustainability-related financial information, which is consistent with the scope of the ISSB’s work

(d)  the initial scope of the project relates to the for-profit sectors, with not-for-profit sectors being considered at a later stage; and

(e)  to apply its existing Due Process Framework for Setting Standards to preliminary work on the Sustainability Reporting project.

Deloitte Australia summarised the list of the AASB criteria that could see a departure from IFRS Sustainability Disclosure standards in Australia, including where:

• user benefits do not outweigh any undue cost or effort for preparers
• the IFRS Sustainability Disclosure Standards will not achieve international alignment or conflict with global sustainability reporting practices
• equivalent disclosure requirements already exist in Australia (for example, the National Greenhouse and Energy Reporting Act 2007)[25]
• Australia-specific matters are not addressed and diversity in practice warrants Australia-specific requirements or guidance
• transition would impose additional costs and/or time, warranting a deferral of application dates.

Consultation

On 16 December 2022, the Treasury completed a very broad consultation on the draft proposed legislation relating to ‘empowering the AASB to deliver sustainability standards’. (The draft legislation is mostly identical to Schedule 2.) Treasury has received and published 22 submissions, which reflect broad support among stakeholders. (See section headed Position of major interest groups, below).

Consultation paper on climate-related financial disclosure

On 17 February 2023, the Treasury completed another public consultation on ‘climate-related financial disclosure’ in Australia. The Treasurer explained:

the paper seeks initial views on questions like:

• who must apply the new requirements and when
• how they will interact with other financial reporting obligations
• and what body will provide long‑term governance for these standards.

The Government has proposed that standardised climate-related financial disclosure requirements would initially apply to certain listed entities covered by the Corporations Act 2001 (subject to size thresholds) and large financial institutions, such as banks, insurers, credit unions and superannuation funds.[26] The submissions to Treasury in relation to this consultation paper are not available on the Treasury website.

Position of major interest groups

While all the submitters to the Treasury’s consultation express broad support for the proposed measures that are now contained in Schedule 2, some stakeholders expressed differing views on the details of proposed legislation. For example:

• Australian Accounting Academics (AAA) submits that, amongst views on other matters advocated, in addition to aligning with the ISSB Standards, Australia should also align with the GRI Standards. The AAA points out that ‘KPMG (2022) found that 77% of the ASX companies use GRI Standards and that they are the most used sustainability reporting standard in Australia.’
• Australian Council of Superannuation Investors (ACSI) submits (p. 2) that the extension of qualification requirements in ‘science, sustainability or climate change’ for the AASB and AUASB proposed in the Bill should also apply to FRC member appointments. The Council further recommends (p. 2) that ‘a sufficient proportion of board members in the AASB, AUASB and FRC have relevant knowledge about sustainability matters … different areas of sustainability expertise will be required, including considering human rights and nature-based risks and opportunities.’
• Institute of Public Accountants (IPA) submits (pp. 1­–2) that ‘SMEs [small and medium enterprises] will have difficulties implementing the proposed requirements, as this sector does not currently disclose or assure sustainability reporting information’. The IPA suggested that ‘the application of sustainability standards be phased in for different tiers of entities.’

Key issues and provisions

Item 1 of Schedule 2 to the Bill inserts a new definition into subsection 5(1) of the ASIC Act— international sustainability standards—being ‘sustainability standards’ made by the ISSB or ‘another body specified by the regulations’. The term ‘sustainability standards’ is not defined in the ASIC Act, but includes ‘standards relating to climate’.[27] According to the Explanatory Memorandum, ‘Standards made in Australia can therefore align with the climate-related disclosure and sustainability standards developed by the ISSB’.[28]

The amendments in Schedule 2 insert new functions and powers relating to sustainability standards or international sustainability standards into the ASIC Act.

Australian financial reporting system (AFRS)

Items 2 to 4 of Schedule 2 expand the objectives of Part 12 of the ASIC Act, which deals with the AFRS, to include the development of ‘sustainability standards’ that require the provision of ‘financial and other related information’ under proposed paragraph 224(a) of the ASIC Act. This is in addition to the existing objects relating to accounting, auditing and assurance standards. The Explanatory Memorandum explains:

An example of other related information for the purposes of sustainability standards may include emissions reporting. This ensures consistency and clarity of the AASB functions for both accounting and sustainability standards.[29]

Financial Reporting Council (FRC)

Items 5 to 14 of Schedule 2 amend section 225 of the ASIC Act to expand the functions and powers of the Financial Reporting Council. In particular, item 8 inserts proposed subsection 225(1A) which gives the FRC oversight of the process of developing sustainability standards, in addition to accounting standards and auditing standards.

Australian Accounting Standards Board (AASB)

Currently, the AASB’s functions, as set out in the ASIC Act,[30] include to:

• develop a conceptual framework for the purpose of evaluating proposed accounting standards and international standards[31]
• make accounting standards under section 334 of the Corporations Act (and these standards are given legal effect by the Corporations Act)[32]
• formulate accounting standards for other purposes[33]
• advancing and promoting the main objects of Part 12 of the ASIC Act.

Items 15 to 19 of Schedule 2 amend section 227 of the ASIC Act which sets out the powers and functions of the AASB. The provisions expand the AASB’s functions to include:

• developing non-binding conceptual frameworks for evaluating proposed international and domestic sustainability standards (that are within the objects and Division 2 of Part 12)
• formulating non-binding sustainability standards (which may be applied or adopted by some other authority)
• participating and contributing to the development of a single set of sustainability standards for world-wide use.

In particular, item 19 repeals and replaces existing subsections 227(4) and (5) to update the manner of making or formulating standards.

Item 25 inserts proposed subsection 229(3) so that, in formulating sustainability standards, the AASB:

• must have regard to the suitability of a proposed standard for different types of entities and
• may apply different sustainability requirements to different types of entities.

Auditing and Assurance Standards Board (AUASB)

Item 20 of Schedule 2 empowers the AUASB with new function relating to formulate auditing and assurance standards for sustainability purposes.

Administration matters

Current subsection 236A requires the AASB to hold a meeting in public if the meeting or part of it concerns domestic or international accounting standards. Item 29 of Schedule 2 extends that requirement to also apply to domestic or international sustainability standards.

Currently, to be eligible for appointment to the AASB or AUASB, a person must have knowledge or experience in business, accounting, auditing, law or government. Items 30 and 31 of Schedule 2 extend the qualification requirement for a person to be appointed as member of AASB and AUASB to include knowledge of, or experience in, science, sustainability or climate change.

Subsection 237(1) of the ASIC Act requires the AASB, AUASB and FRC to take all reasonable measures to protect from unauthorised use or disclosure information given to it in confidence. Subsection 237(2) then provides a list of circumstances in which the disclosure of information is taken to be authorised. One of those circumstances is where information is disclosed to bodies that set international accounting standards or international auditing standards. Item 32 of Schedule 2 additionally authorises the disclosure of information to bodies that set international sustainability standards.

Financial implications

The Explanatory Memorandum to the Bill states that the financial impact of the Schedule 2 will be nil.[34]

Compliance cost impact

According to the Explanatory Memorandum, the Schedule 2 amendments are expected to have minimal regulatory impact.

Comment

The amendments in Schedule 2 to the Bill are intended to lay the foundation for the development of Australian sustainability standards. The new standards (when made) will be based on the significant progress that has already been made in international sustainability standards, and Australia’s existing practice and drive to align with international standards as far as practicable.

Importantly the foundation laid out in the Bill is expected to lead to the development and implementation of the longer-term governance arrangements for sustainability-related financial reporting, including climate disclosure. This has the potential to affect many Australian businesses.

Schedule 3: Government response to the Review of the Tax Practitioners Board

Background

The Assistant Treasurer explained in his second reading speech to the Bill (pp. 5–6)

Schedule 3 of the bill increases the independence and effectiveness of the Tax Practitioners Board to ensure high standards of ethics and competency in the tax profession and streamline the regulation of tax practitioners.

These changes will implement recommendations from the final report of the Tax Practitioners Board review and uphold high standards in the tax profession, enhancing community confidence in the regulation of tax practitioners and the integrity of the system as a whole.

The Albanese government is a government of consultation—we want to consult with the tax profession about improving the tax system, but we can't do that if they use that information for commercial benefit. We can't be consulting with industry, particularly with tax professionals, for the purpose of improving the technical operation of the law if the tax practitioners involved in that consultation then go and use that information for a commercial benefit ahead of any changes in the law. We've put the industry on notice—there can't be a repeat of recent confidentiality breaches. These long overdue reforms to the TPB are an important start but they won't be the end of it. The previous government turned a blind eye to these issues. The Albanese government will not.

These are just the first steps in that process. We'll be consulting in coming months on further changes to ensure our regulators can appropriately respond to emerging issues.

Key issues and provisions

Key Issue

Schedule 3 might be regarded as aiming to address the tax gap (which is partly contributed to by the role of some tax agents) so that Australia’s tax system in a self-assessment regime can retain its integrity, efficiency, equity and simplicity.

Schedule 3 to the Bill implements 5 recommendations of the TPB Review.

A copy of the TPB Review is reproduced in Attachment 1 of the Explanatory Memorandum (pp. 75–194).

Recommendation 2.1

Reasons for the recommendation

The TPB Review (p. 21, paragraph 2.6) points out that tax practitioners ‘play an integral role in the tax system and it is important that the community has confidence that this role is being performed by all tax practitioners for the benefit of all taxpayers, in accordance with appropriate standards of professional and ethical conduct’.

The Review (paragraph 2.7) acknowledges the ATO’s concern that ‘one of the contributors to the size of the tax gaps is the role of some tax agents and this has led to growing concerns in the community about the integrity of the tax system.’

The Review observed that as the objects clause (paragraphs 2.8 and 2.11) is used in legislation to underlie the purpose of the legislation and to resolve any uncertainty or ambiguity that may arise, there is value in updating the clause by clearly expressing that the community should have confidence in the integrity of the tax system. The updated clause will underlie and affirm the principle that the tax system (particularly one in a self-assessment regime) is only effective if it is trusted by the community (paragraph 2.11).

The Review also observed that the objects clause should also be rephrased to reflect that the TPB and TAS Act are well established and the Government is no longer ‘establishing a national Board’ as it is currently written in section 2-5 of the TAS Act (paragraph 2.13).

What the Bill does

Item 1 in Part 1 of Schedule 3 to the Bill repeals and replaces section 2-5 of the TAS Act, which is the objects clause. Under the proposed section the object of the TAS Act is to support public trust and confidence in the integrity of the tax profession and of the tax system by ensuring that tax agent services are provided to the community in accordance with appropriate standards of professional and ethical conduct. The amendment is consistent with Recommendation 2.1.[38]

Recommendation 3.1

Reasons for the recommendation

The TPB Review (p. 23, paragraph 3.6) formed the view that ‘the governance arrangements and structural framework that underpin the TPB are no longer fit for purpose. The lack of independence from the ATO is considered to have impaired the TPB’s functionality in some vital areas.’

Overall, submissions to the TPB Review were supportive of the way the TPB has been operating. However, there is ongoing concern regarding independence (paragraph 3.12). The Review concluded (paragraph 3.16) that making the TPB a stand-alone agency is a fundamental component of improving the standards of behaviours expected by the community of tax practitioners, and assisting to reduce the tax gaps.

What the Bill does

Item 14 in Part 3 of Schedule 3 establishes the Tax Practitioners Board Special Account (the Special Account) for the TPB to achieve financial independence: proposed section 60-145.

The purposes of the Special Account are:

• paying or discharging the costs, expenses and other obligations incurred by the Commonwealth in the performance of the Board’s functions
• paying any remuneration and allowances payable to any person under the TAS Act including certain specified APS employees
• reducing the balance of the account (and therefore the available appropriation for the account) without making a real or notional payment.

The establishment of the Special Account is consistent with Recommendation 3.1 that the Tax Practitioners Board is independent from the ATO.[40]

Recommendation 4.6

Reasons for the recommendation

The TPB Review (p. 43, paragraph 4.45) considers that the same standards that apply to lawyers should also apply to tax practitioners. In that case, similar standards used to consider a lawyer to be a ‘disqualified person’ should be used to disqualify a tax practitioner (paragraph 4.46). The TPB will be given similar discretion to the legal profession’s treatment of lay associates[42] to approve engagement of a disqualified entity. Consequences for engaging a disqualified entity without approval can affect the practitioner’s eligibility for registration and/or constitute a breach of the Code of Professional Conduct (paragraphs 4.47 to 4.50).

What the Bill does

Item 4 in Part 1 of Schedule 3 to the Bill inserts proposed Part 4A—Disqualified entities into the TAS Act. Within new Part 4A, proposed subsection 45-5(2) sets out a broad definition of the term disqualified entity. Proposed section 45-10 inserts a requirement that a disqualified entity who seeks to provide tax agent services on behalf of a registered tax agent or BAS agent notifies the registered tax agent or BAS agent, in writing, that he or she is a disqualified entity before entering into a contract of employment with, or to provide services for, that tax agent.

Item 2 inserts proposed subsection 30-10(15) into the TAS Act so that tax practitioners must not employ, use or enter into an arrangement with a disqualified entity without TPB approval. This is consistent with Recommendation 4.6.[43]

Recommendation 4.7

Reasons for the recommendation

The TPB Review considers the benefits of converting the registration period to an annual period would ‘ensure that the TPB has ongoing and regular visibility as to whether it is appropriate for a tax practitioner to remain registered and therefore creating a level playing field’; and consumer confidence would increase that registered practitioners are meeting ongoing registration requirements (paragraph 4.51). Annual registration is practical due to the advancements in technology and online services (paragraph 4.53).

What the Bill does

Items 10–13 in Part 2 of Schedule 3 amends various sections of Part 2—Registration of the TAS Act to convert the minimum registration period from three years to one year. This is consistent with the terms of Recommendation 4.7.[45]

Recommendation 5.1

Reasons for the recommendation

Section 30-10 of the TAS Act provides the Code of Professional Conduct which is made up of 14 conducts under 5 categories of core principles: honesty and integrity, independence, confidentiality, competence and other responsibilities. The TPB Review finds that the ‘Code’ is appropriate (p. 54, paragraph 5.12), but also maintains the view that the Code should be made ‘a more dynamic instrument, that can adjust to changes in a more contemporary manner than is permitted when it is enshrined in the Act’ (paragraph 5.11). The ATO also supports the TPB’s view (paragraph 5.7).

Currently, any changes to the Code require legislative change. The Review observed: ‘[t]his can be time consuming and is not conducive to creating a proactive regime where changes to the environment can be promptly adapted to by the regulator (paragraph 5.11).’ Acknowledging feedback, the Review recommends any legislative instrument power should be given to the Minister rather than the TPB, and will only allow the Minister to supplement, not modify, the existing legislated Code (paragraph 5.12). It is also critical that in developing any possible changes to the Code that the TPB collaborates and consults with other regulators, professional associations, tax practitioners and other key stakeholders (paragraph 5.12).

What the Bill does

Item 3 in Part 1 of Schedule 3 inserts proposed section 30-12 into the TAS Act to enable the Minister to supplement the existing Code of Professional Conduct. Item 2 inserts proposed subsection 30-10(17), which provides that any obligations determined by the Minister under proposed section 30-12 must be complied with as part of the Code of Professional Conduct.

Other provisions

Item 8 in Part 1 of Schedule 3 extends the definition of a BAS service under section 90-10 of the TAS Act to include services related to the superannuation guarantee charge under section 5 of the Tax Agent Services (Specified BAS Services No. 2) Instrument 2020 for the purpose of ensuring consistency in the definition.[47]

Financial implications

According to the Explanatory Memorandum (p. 3), there are no financial impacts for four of the five recommendations addressed by Schedule 3. The Tax Practitioners Board registration fees will require further consultation with industry and accordingly the financial impact of Recommendation 4.7 is unquantifiable.[48]

Regulation impact statement

The Explanatory Memorandum (p. 3) states that the ‘TPB Review has been certified as a process and analysis equivalent to an Impact Analysis.’

The Office of Impact Analysis further states:

The Treasury has certified the final report of the Review of the Tax Practitioners Board, as a process and analysis equivalent to a Regulation Impact Statement (RIS). The Office of Best Practice Regulation (OBPR) does not assess the quality of independent reviews, but does assess whether the options analysed in the independent review are relevant to the regulatory proposal. The OBPR assessed that the options analysed in the independent review are sufficiently relevant to the regulatory proposal.

The regulatory costs for this proposal are estimated at $0.4 million per year. A regulatory offset has not been identified.

Compliance cost impact

The Explanatory Memorandum (p. 3) states that Schedule 3 ‘is expected to have a low increase in compliance costs. It is expected that the measure will increase regulatory costs for businesses by approximately $400,000 per year.’

Schedule 4: Off-market share buy-backs

Background

About franking credits

Franking credits (also known as dividend imputation) were introduced by the Taxation Laws Amendment (Company Distributions) Act 1987.

According to the Australian Taxation Office:

When corporate tax entities distribute, to their members, profits on which income tax has already been paid – such as when a company pays a dividend to its shareholders – they have the option of passing on, or 'imputing', credits for the tax.

This is called ‘franking’ the distribution. The franking credits are attached to the distribution and can be used by the recipients as tax offsets.

The imputation system also applies to a non-share dividend paid to a non-share equity interest holder in the same way as it applies to a membership interest.

Although the recipients are taxed on the full amount of the profit represented by the distribution and the attached franking credits, they are allowed a credit for the tax already paid by the corporate tax entity.

This prevents double taxation – that is, the taxation of profits when earned by a corporate tax entity, and again when a recipient receives a distribution.

Introduction of franking credits

The then Treasurer, Paul Keating, announced the government’s intention to legislate dividend imputation in a Ministerial statement, Reform of the Australian Taxation System, on 19 September 1985.

According to the Explanatory Memorandum to the originating Bill:

With the company tax rate and the top personal tax rate aligned from 1 July 1987 at 49 per cent, the rebate allowable in respect of a franked dividend received by an individual taxpayer subject to the top marginal rate … will completely offset the tax payable on the total of the dividend and the imputation credit. For a resident individual shareholder … subject to lower marginal personal tax rates, any excess rebate will be offset against income tax on other income, including capital gains … (p. 3)

Franking credits and off market share buy-backs

Companies receive franking credits based on the tax they pay, but rarely distribute all their franking credits by way of dividends to shareholders. Surplus franking credits can be carried over from one year to the next. This has resulted in a collective accumulation of more than $429 billion in franking credits as at 30 June 2020.[49]

One way some companies can make use of these franking credits is by structuring off-market share buy-backs as part capital and part franked dividend. As shareholders can use the franked dividend to offset their tax liabilities, the company can buy-back its shares for less than the on‑market price.

This apparent inconsistency has been permitted since the enactment of the Taxation Laws Amendment Act (No. 3) 1990 which inserted Division 16K –Effect of Buy-backs of Shares into Part 3 of the ITAA 1936.

According to the Explanatory Memorandum to the originating Bill:

The Bill will … permit companies to buy back their own shares. New arrangements will provide for the tax treatment of transactions when companies buy-back their own shares and the vendor-shareholders sell shares back to the companies.

The proposed amendments will apply where a company buys a share in itself from a shareholder. If the share is listed on the stock exchange and the purchase is made in the ordinary course of business of that stock exchange, the buy-back will be an on-market purchase. All other buy-backs will be treated as off-market purchases … (p. 4) [emphasis added]

Announcing the proposed changes the Treasurer, Paul Keating, explained the existing law:

… any payment made by a company to its shareholders will, broadly speaking, be treated as a dividend for tax purposes, unless the payment is made from the company’s paid-up capital or share premium account. Therefore, on a share buy-back, any component of the amount paid for a shareholder’s shares that is drawn from the company’s distributable profits would be a dividend to the shareholder. (p. 1)

Whilst it was considered that the law was appropriate for most share buy-backs, an exception was warranted for buy-backs which took place on-market. This was:

… necessary to ensure that no part of the amount paid to the shareholder [for an ‘on-market’ buy back] is treated as a dividend. The full amount paid will, instead, be taken to be the disposal proceeds of the sale of the shares and, on that basis, any income tax or CGT consequences of the sale will be determined.[50]

Reviews of the off-market buy-back laws

2006 Coalition Government

In 2006 the Treasurer, Peter Costello, commissioned the Board of Taxation (the Board) to review the taxation treatment of off-market share buy-backs so that the Government would be better able ‘to determine whether the taxation treatment of off-market share buy-backs should be changed with a view to increasing certainty for businesses and reducing compliance costs’.[51]

Subsequently the ATO issued Practice Statement Law Administration 2007/9 which detailed its concerns about the possibility of the structure of off-market share buy-backs triggering the anti‑streaming provisions of section 177EA of ITAA 1936.

The Board’s report Review of the Taxation Treatment of Off-Market Share Buybacks was given to the Treasurer in 2008 following a lengthy consultation process. The Board recommended that off‑market share buy-backs should be retained as they ‘provide a mechanism for companies to generate positive returns through distributing excess cash where investment opportunities are declining’.[52] The Board acknowledged that off-market buy-backs created significant compliance work for the ATO and recommended that a ratio of capital return and dividends for off-market buy-backs be legislated.[53]

2009 Labor Government

In 2009 the Assistant Treasurer, Chris Bowen, announced that the Government would amend the off-market share buy-back rules, accepting all of the Board of Taxation recommendations in this area.[54] However, the measures were never legislated and in 2013 the Coalition Government Assistant Treasurer, Arthur Sinodinos, announced that they would not be implemented.[55]

2022 Labor Government

In November 2022 Treasury opened a consultation on Improving the Integrity of Off-market Share Buy-backs. Submissions to this consultation are not available on the website.

The Explanatory Material to the Exposure Draft is somewhat circumspect in explaining the reason for the proposed amendment:

The buy-back provisions in Division 16K were inserted into the income tax law in 1990. Changes to the income tax laws since the commencement of Division 16K now makes the distinction between off-market and on-market buy-backs for listed public companies inappropriate [paragraph 1.12].

Policy position of non-government parties/independents

At the time of writing this Bills Digest, none of the non-government parties and independents have made any detailed comment on the proposed changes to franking credits.

Position of major interest groups

In its submission to the Treasury consultation, the Australian Shareholders’ Association asserted that the amendments could have a negative impact on some self-funded retirees, would be retrospective in nature and that piecemeal changes to the taxation system create uncertainty amongst investors.[56]

Key issues and provisions

Currently section 159GZZZP of the ITAA 1936 operates so that where a company undertakes an off-market buy-back of a share or non-share equity interest, part of the purchase price in respect of the buy-back may be treated as a dividend in the hands of shareholders depending on whether the company debits any part of the purchase price to its share capital account or non-share capital account.

Item 3 in Schedule 4 to the Bill amends the ITAA 1936, by inserting proposed section 159GZZZPA which provides that no part of an off-market share buy-back by a listed public company is taken to be a dividend.[57] This effectively aligns ‘the income tax treatment of off-market share buy-backs undertaken by listed public companies with on-market share buy-backs’.[58]

Items 6 to 9 amend Division 205 of the ITAA 1997 which relates to franking accounts, franking deficit tax liabilities and the related tax offset. Section 205-30 sets out in table form when a debit arises in the franking account of an entity and the amount of the debit. Table item 9 sets out when a franking debit arises if there is an on-market buy-back by a company of a membership interest in the company. It provides that the franking debit will be an amount equal to the debit that would have arisen for the company if the on-market buy-back had instead been an off-market buy-back and all or part of the purchase price was subsequently treated as a franked dividend. As proposed section 159GZZZPA precludes any part of the off-market purchase price being treated as a dividend for buy-backs undertaken by listed public companies, in determining the franking debit that would have arisen in the franking account of a listed public company had the buy-back instead been off-market, it is necessary to assume that the company were not a listed public company, otherwise no franking debit could arise.[59] Table item 9 is amended by items 6 and 7 to achieve this result. Item 8 inserts proposed table item 9A to deal with off-market buy-backs.

Item 20 in Part 2 to Schedule 4, inserts proposed table item 9B into the table in section 205-30 of the ITAA 1997 to apply similar treatment to selective share cancellation. This means that if a company cancels some of its shares, then it must debit its franking credit account to the amount that the cancelled shares would have been entitled to. This prevents companies from increasing the amount of franking credits per share by consolidating the number of shares on offer.

Financial implications

Schedule 4 to the Bill is estimated to impact receipts over four years to 2025­–26 ($m) as shown in the table below.

Table 1: Financial impact of Schedule 4

.. not zero, but rounded to zero.

Source: Explanatory Memorandum, 4.

Schedule 5: Franked distributions funded by capital raisings

Background

The nature of the problem

In May 2015 the ATO issued Taxpayer Alert 2015/2 about franked distributions funded by capital raisings, stating that it was reviewing arrangements that display all or most of the following features:

• A company with a significant franking credit balance raises new capital from existing or new shareholders. This may occur through issuing renounceable rights to shareholders. Shareholders may include large institutional superannuation funds.
• At a similar time to the capital raising, the company makes franked distributions to its shareholders, in a similar amount to the amount of capital raised. This may occur as a special dividend or through an off-market buy-back of shares, where the dividend forms part of the purchase price of the shares.
• Overall:
1.  there is minimal net cash inflow to or outflow from the company
2.  the net asset position of the company remains essentially unchanged (in a buy-back variant, the number of shares on issue following the transaction may be marginally reduced due to the difference between the buy-back price and the issue price of the new shares) but their franking account is significantly reduced, and
3.  there is minimal impact on the shareholders, except in some cases they may receive refunds of franking credits, and in the case of buy-backs they may also get improved capital gains tax outcomes.
• The franked distributions (or franked component of buy-back consideration) may be unusually large compared to ordinary dividends previously declared and paid by the company (as distinct from a typical dividend reinvestment plan applicable to an ordinary regular dividend).
• The franked distribution may be receivable by all existing shareholders of the company, or shareholders may have a choice as to whether to participate (for example, in a buy-back scenario).

Of particular concern was that such distributions might be prohibited under the anti-avoidance rule in section 177EA of the ITAA 1936 which deals with the creation of franking debits or cancellation of franking credits.

Announcement and consultation

At the time of the 2016–17 Mid-Year Economic and Fiscal Outlook, the Coalition Government announced its decision to introduce legislation preventing the use of franking credits on distributions funded by capital raisings.[60] However this did not immediately occur.

Following the election of 2022 Treasury opened a consultation on Franked distributions and capital raising. Submissions to this consultation are not available on the Treasury website. Although the commencement date for the proposed changes as set out in the Exposure Draft of the Bill was consistent with the current Bill, the application date was to be 19 December 2016, which was the date the 2016–17 Mid‑Year Economic and Fiscal Outlook was released (p. 10).[61] This was the cause of some consternation. The provisions of Schedule 5 will apply to relevant distributions made on or after 15 September 2022, to align with the release of the Exposure Draft for public consultation on 14 September 2022.

Policy position of non-government parties/independents

At the time of writing this Bills Digest, none of the non-government parties and independents have made any detailed comment on the proposed changes to franked distributions.

Position of major interest groups

The Australian Shareholders’ Association (ASA) made a submission to the Treasury consultation on this matter. It expressed concerns about the retrospective nature of the proposed amendment—that is, that the measure was to apply to relevant distributions 19 December 2016. The ASA also raised concerns about the potentially subjective nature of the test and in particular its application to companies that did not pay regular dividends. As well, the ASA warned about possible unintended consequences of the proposed legislation, such as companies with large cash reserves becoming takeover targets.[62]

Key issues and provisions

Item 1 in Schedule 5 to the Bill inserts proposed paragraph 202-45(ea) into the ITAA 1997, to make certain distributions funded by capital raising (covered by proposed subsection 207-159(1)) unfrankable.

Item 2 inserts proposed subsection 207-159(1) to set out the rules used to determine whether a distribution by an entity (called the relevant distribution) is covered by the section and is therefore unfrankable:

• the distribution is not consistent with an established practice of the entity of making distributions of that kind on a regular basis: proposed paragraph 207-159(1)(a)
• there is an issue of equity interests in the entity or any other entity: proposed paragraph 207‑159(1)(b) and
• 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 (other than an incidental purpose) of funding all or part of the distribution: proposed paragraph 207‑159(1)(c).

Financial implications

Schedule 5 to the Bill is estimated to impact receipts over 5 years to 2026–27 ($m) as shown in the table below.

Table 2: Financial impact of Schedule 5

Source: Explanatory Memorandum, 5.