Coalition Senators' Dissenting Report
1.1In the first inquiry into the substantive bill, which reported on 22 September 2023, Coalition Senators made several comprehensive recommendations with respect to the Bill based on feedback from submitters, noting that the Bill as it stood represented a threat to Australian jobs and investment.
1.2The Bill introduced major tax changes, namely the debt deduction creation rules, that had not been subject to an appropriate public consultation. The Committee heard evidence that the Bill—far from being limited to multinationals and tax avoidance—would increase taxes on Australian companies, harm investment in Australian industries, and negatively affect housing affordability in Australia.
1.3Committee has received a considerable amount of submissions expressing serious concern about the viability of the legislation, even with the Government’s amendments which they deem to be insufficient. The consequence of the Bill as it stands is property could become more expensive and Australia becomes less attractive as a destination for capital.
1.4Coalition Senators reiterate their substantive concerns expressed in the Dissenting Report tabled in the Senate as part of the original inquiry’s final report in September 2023.[1]
1.5Although some of the recommendations made by Coalition Senators were taken up by the Government in their amendments to the Bill tabled in the Senate in November 2023, stakeholders have identified numerous significant issues with the Bill which still require rectification.[2]
1.6The Bill, as currently drafted and amended, would diminish housing supply in Australia by making the financing of housing development more expensive through increased capital costs.[3]In his opening statement, the CEO of the Property Council of Australia, Mr Mike Zorbas stated that:
…if passed in its current form, the bill will hurt project feasibility such that the investment returns of many large-scale projects—think housing projects, especially build to rent—will be too low to proceed.[4]
1.7The Property Council detailed numerous problems with the amended bill which, if not addressed, could seriously imperil Australia’s ability to finance housing development and would make the Government’s housing targets unattainable.[5]Numerous further amendments to the Bill are required, particularly around the fixed ratio test and the third party debt test, if we are to avoid further diminishing housing stock. Regarding potential projects that would be threatened, Mr Zorbas told the Committee that:
These could be as large as apartment dwellings potentially housing up to 1,000 people. If you replicate that across the economy, look at different capital and regional cities and put that sort of pressure on the housing supply pipeline, you have a genuine problem. You certainly won't be in a position to set the ambitious delivery targets of 1.2 million homes by 2029. You won't get very close to those, in fact, if you start to create choppy waters in this regard.[6]
1.8When asked about the impact on housing supply during the hearing, the Treasury dodged the question by noting that tax was ‘only one aspect of the considerations for investors in proceeding with investments’ and that it needed to be looked at ‘holistically’.[7]
1.9Furthermore, when asked whether they had commissioned modelling, the Treasury confirmed that they ‘haven't done modelling to analyse the impact’ of the Bill on housing supply.[8]
1.10There was little concern about how the Bill, even as amended, could potentially affect investment in housing construction:
Senator BRAGG: Given the importance of housing to this nation and how difficult it is for young Australians, particularly millennials and gen Zs, to get into a house, why wouldn't you and the government have commissioned modelling to look at the impact of this bill?
Mr Robinson: I think that goes to the difficulty in actually undertaking detailed sectoral analysis in terms of modelling those sorts of effects.[9]
1.11It is baffling how standard commercial arrangements necessary to drive housing supply are captured by Labor’s punitive tax bill. The Property Council further stated that ‘Australian businesses investing in Australia with only Australian assets and debt remain caught in a profit-shifting prevention bill where there is no offshore jurisdiction to shift profit to’.[10]
1.12Driving housing supply should be a main priority of the government, and it's imperative that poorly drafted tax policy does not get in the way of it. Coalition Senators are of the view that all the impediments to housing supply contained with the bill should be excised and rectified, as identified by submitters to this inquiry.
Recommendation 1
1.13That the outstanding issues with the amended bill threatening housing supply and other development should be addressed through amendments as proposed by industry and other submitters.
With consideration given to the following changes, among others:
That the fixed ratio test be amended to reduce the transferring excess tax EBITDA threshold from 50% to 10% to align with the associate entity threshold.[11]
That the fixed ratio test be amended to exclude prior year tax losses prior to commencement from carry forward taxes losses as part of the tax EBITDA calculation.[12]
That the third party debt test conditions be amended to clarify what constitutes a ‘minor or insignificant asset’ in relation to the exception to the ‘Australian asset only’ recourse requirement, through an objective test and/or a safe harbour limit.[13]
That the third party debt test conditions be amended to include a definition of “Australian assets” as part of the recourse requirements.[14]
Expand the development carve out in the third party debt test to permit credit support provided by foreign associate entities of the borrower two years beyond the date of completion.[15]
That the conduit financier rules as part of the third party debt test be amended so that associate entity equity is excluded from ‘relevant debt interest’, to permit on-lending which does not give rise to a debt deduction.[16]
Amend the third party debt test to allow for conduit swap arrangements, by expanding the conditions under which swap payments and costs are considered attributable to debt interests.[17]
Amend the third party debt test so that a cross-stapled entity is only deemed to make an election where it is a member of the obligor group in respect of the of the relevant debt interests.[18]This issue was not rectified after the first inquiry.
1.14Submitters have indicated that the debt deduction creation rules still apply retrospectively, even as amended. This is because they apply to commercial arrangements entered into prior to commencement. As Chartered Accountants Australia and New Zealand and the Tax Institute have noted:
There remains … an ongoing compliance burden for taxpayers to review historical transactions for any debt arrangements that remain in existence at the commencement of the new rules to ascertain whether or not the initial funding was associated with the acquisition of a relevant asset from an associate pair or with funding the targeted payments or distributions to associate pairs. This is effectively a retrospective application of the law.[19]
1.15Numerous other submitters concurred with this assessment.[20]
1.16Furthermore, the broader thin capitalisation rules are set to apply retrospectively from 1 July 2023, despite the fact that it is now February 2024. It is only reasonable given the countless problems with the consultation and drafting of the legislation over the last year, that the rules apply only from 1 July 2024. There was broad consensus on this across submissions.[21]As CPA Australia noted in their submission:
The new thin capitalisation rules should not have a retrospective application. They have been developed in haste, poorly conceived and still have significant issues that if not addressed, will drive investment offshore to jurisdictions with more favourable and simpler thin capitalisation rules.[22]
Recommendation 2
1.17That the thin capitalisation rules in Schedule 2 of the Bill commence on 1 July 2024, to avoid retrospective application.
Recommendation 3
1.18That the debt deduction creation rules should not apply to existing arrangements entered into prior to 1 July 2024.
1.19The amended debt deduction creation rules still capture ordinary transactions and arrangements that have commercial justification.
1.20For instance, the Corporate Tax Association raised the issue of debt funded trading stock acquisition as potentially captured by the rules, which they describe as a fairly routine commercial transaction:
The way the rules currently operate is that you'll get a permanent denial of interest deductions if you borrow to acquire trading stock. And trading stock is not just widgets; it could be parts of widgets, when you're buying those to assemble in Australia and then on sell. And in some circumstances companies will be incurring interest expenses associated with the buying of that trading stock. To deny a deduction for ordinary commercial transactions such as that just doesn't make commercial sense. The reality will be that organisations will either have to possibly look to a third-party debt or try to trace their existing arrangements so that cash is separated from their pool of cash to ensure they don't fall foul of the rules. So that's a simple practical example.[23]
1.21CPA Australia agreed, noting that debt deductions ‘will likely be denied where an entity uses related party debt to fund the acquisition of trading stock from an associate. This is likely to capture situations where intercompany payables on stock purchases are left outstanding and begin to accrue interest.’[24]
1.22In response to the concerns around trading stock raised by Toyota Material Handling Pty Ltd in their submission, the Treasury was not able to provide assurance that it wouldn’t be captured by the rules, arguing that ‘the subset of entities that would fall into scope as a result of that specific arrangement is relatively small.’[25]However, introducing uncertainty in this respect is entirely necessary. As the Corporate Tax Association has argued, ‘these are ordinary transactions with no debt creation or integrity concern that are impacted by these rules and will require organisations to restructure their operations unnecessarily.’[26]
Recommendation 4
1.23That the debt deduction creation rules be further amended to mitigate their impact on ordinary commercial arrangements and transactions, as identified by numerous submitters.
That the debt deduction creation rules be amended to include an overarching purpose test, namely where the predominant purpose of such arrangements is to increase debt deductions in Australia or reduce accessible interest income in Australia.[27]
That the debt deduction creation rules be amended to exclude related party debt funding of trading stock from the application of the rules. [28]
That the proposed exemptions for ADIs from the debt deduction creation rules be expanded to other entities that are non-ADI financial entities in order to capture non-bank lenders.[29]
That the debt deduction creation rules be amended to exclude application to purely domestic debt arrangements.[30]
That the debt deduction creation rules be amended to exclude application to entities not currently subject to thin capitalisation rules, under the 90% Australian asset exemption.[31]
That the debt deduction creation rules be amended to clarify that entities not subject to tax EBITDA rules at the time of a relevant transaction should not be included within the application of the debt deduction creation rules.[32]
1.24In their submission to the Committee, AFPA noted that although the amendments to the Bill are welcome, the Bill as it stands ‘will result in effectively ceasing plantation forestry expansion in Australia’.[33]
1.25During the public hearing, the Committee heard that without forestry expansion, the Government was acting against their own commitments:
The bill, even with the government amendments, is completely contrary to the Albanese government's $300 million of election commitments, underpinned by a commitment to expand the plantation forestry estate. The bill, even with the amendments, is contrary to the national Forestry Ministers Meeting in relation to plantation forestry expansion. The bill, even with amendments, is contrary to international commitments made by the Australian government as recently as last month. As it stands, if the bill with amendments is passed, the plantation forestry sector will have more barriers in its way than it had a year ago.
1.26In an example scenario detailed in their submission, AFPA outlined how a plantation forestry estate’s tax bill could potentially rise by $3.15 million in one year as result of the new deduction method required by the Bill[34].
1.27It is completely unclear why legislation designed to address multinational tax avoidance has been drafted such that it negatively impacts the plantation forestry sector, which the Government has insisted they support.
Recommendation 5
1.28That the Treasury consult with industry to propose a possible carve out for the plantation forestry sector to minimise the impact of the thin capitalisation rules.
1.29Given the complexity of the legislation and the potential for unintended consequences, it is necessary that the new thin capitalisation regime and the debt deduction creation rules are subject to a review after the legislation is passed.
1.30As Infrastructure Partnerships Australia have noted, there is a need for ‘an ongoing and real time post implementation review as there remain many issues and uncertainties and it is expected that further issues will arise.’[35]
1.31Furthermore, as Deloitte has argued, it may be that further legislative amendments will be needed as a result of such a review, and ‘it is not appropriate to leave such matters to the ATO and taxpayers to resolve where a legislative response is more appropriate’.[36]
1.32Other submitters such as King & Wood Mallesons and the Tax Institute have also agreed that a ‘contemporaneous’ post-implementation review will be required. [37]
Recommendation 6
1.33That the Bill be amended to include a requirement for the new rules to be subject to an ongoing and real-time post-implementation review.
Senator Andrew BraggSenator Dean Smith
Deputy ChairMember
Liberal Senator for NSWLiberal Senator for WA
Footnotes
[1]Economics Legislation Committee, Inquiry into Treasury laws Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Bill 2023 [Provisions], September 2023, pp. 48–81.
[2]Tom McIlroy, ‘Business whacked by multinational tax crackdown,’ Australian Financial Review 4December 2023, https://www.afr.com/politics/federal/business-whacked-by-multinational-tax-crackdown-20231204-p5eorp (accessed 2 February 2024).
[3]Mr Steve Whittington, Partner, Ashurst, ProofCommitteeHansard, 31 January 2024, p. 5.
[4]Mr Mike Zorbas, CEO, Property Council of Australia, Proof Committee Hansard, 31 January 2024, p. 2.
[5]Eleanor Campbell, ‘’Flawed’ new laws threaten 1m homes, property developers warn,’ The Australian, 31 January 2024, https://www.theaustralian.com.au/breaking-news/flawed-new-laws-threaten-1m-homes-property-developers-warn/news-story/f846ec0c516c22bcd750faa606e26636 (accessed 2 February 2024).
[6]Mr Mike Zorbas, CEO, Property Council of Australia, Proof Committee Hansard, 31 January 2024, p. 4.
[7]Mr Marty Robinson, First Assistant Secretary, Corporate and International Tax Division, Department of the Treasury, Proof Committee Hansard, 31 January 2024, p. 18.
[8]Mr Marty Robinson, First Assistant Secretary, Corporate and International Tax Division, Department of the Treasury, Proof Committee Hansard, 31 January 2024, p. 19.
[9]Proof Committee Hansard, 31 January 2024, p. 19.
[10]Mr Mike Zorbas, CEO, Property Council of Australia, Proof Committee Hansard, 31 January 2024, p. 2.
[11]Infrastructure Partnerships Australia, Submission 1, p. 4; Property Council of Australia, Submission 2, p. 6; CPA Australia, Submission 11, pp 1 & 4; QIC, Submission 8, p. 3; Public Sector Pension Investment Board and New Zealand Superannuation Fund, Submission 14, p. 3; CAANZ & the Tax Institute, Submission 16, p. 5; Deloitte, Submission 17, p. 2; King & Wood Mallesons, Submission 24, p. 7; AUB Group, Submission 26, p. 3.
[12]CAANZ & the Tax Institute, Submission 16, p. 5; Deloitte, Submission 17, p. 2; King & Wood Mallesons, Submission 24, p. 8.
[13]QIC, Submission 8, p. 3; CAANZ & the Tax Institute, Submission 16, p. 6; Ontario Municipal Employees' Retirement System, Caisse de dépôt et placement du Québec, British Columbia Investment Management Corporation and the Ontario Teachers' Pension Plan, Submission 19, p. 5; King & Wood Mallesons, Submission 24, p. 7.
[14]Infrastructure Partnerships Australia, Submission 1, p. 7; CAANZ & the Tax Institute, Submission 16, p. 6; Pitcher Partners, Submission 22, p. 13.
[15]Infrastructure Partnerships Australia, Submission 1, p. 6; Property Council of Australia, Submission 2, p. 6; QIC, Submission 8, p. 3; Deloite, Submission 17, p. 4; Ontario Municipal Employees' Retirement System, Caisse de dépôt et placement du Québec, British Columbia Investment Management Corporation and the Ontario Teachers' Pension Plan, Submission 19, pp. 4-5; King & Wood Mallesons, Submission 24, p. 5.
[16]Property Council of Australia; Submission 2, p. 7; Ontario Municipal Employees' Retirement System, Caisse de dépôt et placement du Québec, British Columbia Investment Management Corporation and the Ontario Teachers' Pension Plan, Submission 19, p. 6.
[17]Property Council of Australia, Submission 2, p. 7; SW Accountants & Advisors, Submission 6, pp. 2-3; Ontario Municipal Employees' Retirement System, Caisse de dépôt et placement du Québec, British Columbia Investment Management Corporation and the Ontario Teachers' Pension Plan, Submission 19, p. 3.
[18]Property Council of Australia, Submission 2, p. 8; CAANZ & the Tax Institute, Submission 16, p. 8; Pitcher Partners, Submission 22, p. 14.
[19]CAANZ & The Tax Institute, Submission 16, p. 6.
[20]QIC, Submission 8, p. 3; Public Sector Pensions Investment Board and New Zealand Superannuation Fund, Submission 14, p. 7; PKF, Submission 15, p. 1; Ontario Municipal Employees' Retirement System, Caisse de dépôt et placement du Québec, British Columbia Investment Management Corporation and the Ontario Teachers' Pension Plan, Submission 19, p. 2; Tax Astute, Submission 20, p. 12; Pitcher Partners, Submission 22, p. 5; King and Wood Mallesons, Submission 24, p. 7.
[21]CPA Australia, Submission 11, p. 1; QIC, Submission 8, p. 3; Corporate Tax Association, Submission 12, p. 17; Public Sector Pensions Investment Board and New Zealand Superannuation Fund, Submission 14, p. 2; CAANZ & the Tax Institute, Submission 16, p. 4; Ontario Municipal Employees' Retirement System, Caisse de dépôt et placement du Québec, British Columbia Investment Management Corporation and the Ontario Teachers' Pension Plan, Submission 19, p. 2; Tax Astute, Submission 20, p. 3; King & Wood Mallesons, Submission 24, p. 3; Business Council of Australia, Submission 27, p. 3.
[22]CPA Australia, Submission 11, p. 1.
[23]Mr Paul Suppree, Assistant Director, Corporate Tax Association, Proof Committee Hansard, 31 January 2024, p. 10.
[24]CPA Australia, Submission 11, p.3.
[25]Mr David Hawkins, Director, Corporate and International Tax Division, Department of the Treasury, Proof Committee Hansard, 31 January 2024, p. 19.
[26]Mr Paul Suppree, Assistant Director, Corporate Tax Association, Proof Committee Hansard, 31 January 2024, p. 9.
[27]Perpetual Limited, Submission 3, p. 2; Financial Services Council, Submission 9, p. 4; CPA Australia, Submission 11, p. 3; QIC, Submission 8, p. 2; Ontario Municipal Employees' Retirement System, Caisse de dépôt et placement du Québec, British Columbia Investment Management Corporation and the Ontario Teachers' Pension Plan, Submission 19, p. 7; King & Wood Mallesons, Submission 24, p. 3.
[28]Corporate Tax Association, Submission 12, p. 5; PKF, Submission 15, pp. 1-2; CAANZ & The Tax Institute, Submission 16, p. 7; Deloitee, Submission 17, p. 4; Toyota Material Handling Australia Pty Ltd, Submission 23, p. 7; Business Council of Australia, Submission 27, p. 3.
[29]Australian Financial Markets Association, Submission 5, p. 2; King & Wood Mallesons, Submission 24, p. 7.
[30]Property Council of Australia, Submission 2, p. 3; QIC, Submission 8, p. 2; CAANZ & the Tax Institute, Submission 16, p. 7; Pitcher Partners, Submission 22, p.5; King & Wood Mallesons, Submission 24, p. 6.
[31]QIC, Submission 8, p. 3; CAANZ & Tax Institute, Submission 16, p. 7; King & Wood Mallesons, Submission 24, pp. 6-7.
[32]Corporate Tax Association, Submission 12, p. 10; Business Council of Australia, Submission 27, p. 3.
[33]Australian Forest Products Association, Submission 25, p. 6.
[34]Australian Forest Products Association, Submission 25, p. 16.
[35]Infrastructure Partnerships Australia, Submission 1, p. 7.
[36]Deloitte, Submission 17, p. 5.
[37]King & Wood Mallesons, Submission 24, p. 4; Ms Julie Abdalla, Senior Counsel, Tax and Legal, The Tax Institute, Proof Committee Hansard, 31 January 2024, pp. 7-8; Ms Michelle de Neise, Executive Director, Corporate Tax Association, Proof Committee Hansard, 31 January 2024, p. 11; QIC, Submission 8, p. 3.
An inquiry into the Government Amendments to the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share-Integrity and Transparency) Bill 2023 [Provisions].
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