Chapter 2Views on the bill
Introduction
2.1This chapter examines stakeholder views on the provisions of the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 (the bill). It is informed by the bill’s explanatory materials, submissions received by the inquiry, evidence provided at a public hearing on 13 November 2023 and additional material submitted to the committee.
2.2The chapter provides an account of the key issues relating to the bill and concludes with the committee’s views and recommendations. The discussion is focused on five of the eight schedules which received comment from stakeholders interested in the inquiry.
Schedule 1 – $20000 instant asset write-off for small business entities
2.3Stakeholders were broadly supportive of this schedule with the AustralianChamber of Commerce and Industry (ACCI) noting the importance of this kind of incentive from government being ‘a catalyst for productivity growth and major driver of economic activity’.
2.4The Australian Automotive Dealer Association (AADA) stated:
These types of incentives encourage businesses to invest, helping to drive productivity and economic activity. Initiatives like the instant asset write-off and similar programs have historically proven effective in stimulating this much needed investment.
2.5At the public hearing, Ms Natalie Heazlewood, Director of Skills, Employment and Small Business at ACCI, expressed a strong preference for the bill to be passed quickly:
…often small-business owners have actually already planned their budget ahead of the financial year. This announcement happened in May, and, at the moment, small-business owners, if they are seeking financial advice from their accountant or trusted brokers, would be aware that this would potentially be coming, but they would be told not to purchase anything, because it needs to actually be enacted and pass the parliament. Unfortunately, people would be holding back on purchasing anything until the legislation does pass.
Calls for increase in the incentive threshold
2.6Some submitters called for increases to the instant asset write-off threshold for small businesses, citing the needs of their specific industries as well as a general needs to further incentivise businesses to install more energy efficient equipment.
2.7The National Electrical and Communications Association (NECA) called for an increase of the threshold to $50000, noting the high costs of the technical equipment required by their industry and that a higher incentive threshold would encourage investment and diversification in their industry. At the same time, they acknowledged there are many assets which could be purchased and written off within the $20000 threshold. Mr Kent Johns, Head of Government Relations and Regulatory Affairs at NECA, commented at the public hearing on 13 November 2023:
Any instant asset write-off is good for our business, but we have expressed an opinion that it could be higher. The main driver behind that, to be quite blunt, is that our industry and sector are going through a huge change. Our expectation is to become larger more quickly, and the investment of any dollar has to be focused on return on investment and return on capital…a lot of our businesses are small businesses with limited opportunities to make those investments, so they make those investments prudently based on what's best for their business. The incentive to push them towards capital investment in this sector is extremely important…
2.8Similarly, Consulting Surveyors National (CSN) called for an increase in the threshold to $30000, explaining that, due to the 3G network being turned off by all the major telecommunications companies in Australia in the coming years, this will require significant capital investment in their industry.
2.9ACCI urged an increase of the threshold to $30000:
Limiting the eligible amount to $20000 may not be sufficient to generate the level of stimulus needed, with many assets exceeding this cost and therefore not eligible. While this amount may enable a small business to purchase small, short-lived assets such as a computer for an office or a fridge for a kitchen, it will not be sufficient for investment in equipment, plant and machinery, which are likely to provide more substantial productivity benefits.
Extension of incentive time period
2.10Several submitters also called for the time the instant asset write-off would be available to small businesses to be extended beyond 30 June 2024. ACCI and NECA called for this incentive to be made permanent, with NECA arguing it was a ‘potent tool’ for encouraging expansion for small businesses and any cost to the Government would be justified by increased economic activity and employment.
2.11Other submitters noted that the year long period of the incentive creates frustration for business owners as some asset purchase have long time frames for delivery.
2.12Energy Consumers Australia (ECA) suggested an extension to 30 June 2025, noting the interactions of the incentives proposed in Schedules 1 and 2 (which can potentially both be claimed by small businesses) and that energy efficient improvements and assets can have a long time frame for installation for small businesses.
2.13CSN recommended the time period be extended to 30 June 2028, again noting the capital investment required in their industry in the coming years due to technological obsolescence.
Industry specific concerns
2.14Some stakeholders also mentioned concerns specific to their industries. NECA called for a 2.5 multiplier to be applied to the instant asset write-off for small and medium businesses working in the renewable energy sector to advance environmental sustainability and encourage growth in this sector.
2.15The AADA recommended that the instant asset write-off incentive be made available to all businesses regardless of size or turnover. They made the point that their member organisations, despite having very thin profit margins, often fell outside of the definitions of small or medium businesses due to employee count and turnover.
Schedule 2 – Small business energy incentive
2.16As with Schedule 1, stakeholders were broadly highly supportive of the measures contained within Schedule 2 and the introduction of the small business energy incentive.
2.17Stakeholders noted that business owners were often highly aware of the need to move to more energy efficient equipment but small businesses often required support to make these changes. ECA stated:
Our June 2023 Energy Consumer Sentiment Survey shows that 63% of small business consumers are concerned that their electricity and gas will become unaffordable in the next three years. However, while small business support for net zero is relatively strong, with 53% of consumers supportive or very supportive (and a further 33% neutral), only 13% are confident that they fully understand the net zero implications for their business. It is therefore crucial that the small business community is considered at the codesign phase of energy policy.
2.18Ms Melissa Dimovski, Director of Policy and Advocacy at the AADA, stated that this incentive would be particularly helpful in allowing automotive dealers to purchase electric vehicle chargers, which can be quite expensive.
2.19Ms Alexi Boyd, Small Business Strategist from ECA, was highly supportive of the bill’s quick passage through Parliament.
Increase to the incentive
2.20Similarly to Schedule 1, some stakeholders called for an increase in the cap of the incentive, expressing a view that the maximum bonus deduction of $20000 (based on a maximum eligible expenditure of $100000) may not fully incentivise businesses to invest in extensive energy-related improvements to their equipment. For example, NECA explained:
Many energy-efficient upgrades, especially in sectors such as renewable energy and advanced technology, often come with higher upfront costs. By raising the cap to $50000, businesses will have more financial room to invest in larger and more impactful energy projects. This not only encourages the adoption of more comprehensive solutions but also empowers SMEs to make substantial progress towards greener and more sustainable practices, which is in alignment with broader environmental goals.
Extension of incentive time period
2.21Other submitters stated that the 12 month period of the small business energy incentive may not be sufficient time for a business to plan, design, finance, and commission a significant upgrade to their energy assets. ACCI claimed that the relatively short time frame of the incentive introduced a risk that businesses would only make minor upgrades, or would implement low quality upgrades which were not as energy efficient as they could be.
2.22NECA echoed these views and recommended an extension of the scheme by three years ‘…to grant businesses ample time to not only capitalise on its benefits, but ensure rigorous analysis of the benefits both social and financial while ensuring a robust and well considered investment’.
2.23ECA, NECA and ACCI recommended extending the incentive to at least 30June2025.
Exclusions
2.24Other submitters raised concerns about the technology and assets which would be excluded under the proposed energy incentive.
2.25In particular, the Institute of Public Accountants (IPA) raised concerns about the exclusion of assets that have the sole or predominant purpose of generating electricity (such as solar panels) from the small energy business incentive, noting this appeared to be at odds with the ability to claim the incentive for batteries used with solar panels. They highlighted that many State and Territory-based incentives for the installation of solar panels exclude small businesses and argued that small businesses should also be incentivised to invest in renewables.
2.26The Mortgage and Finance Association of Australia (MFAA) expressed a similar view about the exclusion of motor vehicles and recommended that this section of the bill be expanded to include these assets. They reasoned that many of their members’ small businesses were reliant on car transportation for their businesses. The MFAA also echoed the point that seeking State or Territory based rebates for the purchase of electric vehicles often presented difficulties for small businesses.
2.27Ms Tina Smith, Director, Personal and Small Business Tax Branch at the Department of the Treasury, explained that the decision to exclude solar panels in the incentive reflected the ‘range of existing support available for solar panels, both at the Commonwealth and state and territory level, through things such as the Small-scale Renewable Energy Scheme’.
Other comments
2.28ECA commented on the importance of providing advice from trusted pathways to small businesses and suggested that this incentive should be aligned with other small businesses energy efficiency schemes. They also stressed the importance of long-term planning for ensuring small business needs are met as the transition to net zero continues.
2.29ACCI also pointed out that often a key factor in which government programs are taken up by industry is the ease with which these programs are understood. They urged the Government to consider a consistent definition of ‘small business’ between all government incentives and programs.
Schedule 6 – Income tax amendments for updates to accounting standards for general insurance contracts
2.30Schedule 6 did not receive extensive comment, but some stakeholders expressed their support for these measures.
2.31ACCI was supportive of the changes made in the schedule, noting the lengthy consultation process between government and industry, and the reduction in compliance burden which the changes would bring about.
2.32The Insurance Council of Australia (ICA) was also supportive of the measures and recommended the swift passage of the bill.
Schedule 7 – Non-arm’s length expenses of superannuation funds
Support for the bill.
2.33The Association of Superannuation Funds Australia (ASFA) was highly supportive of Schedule 7 and the changes it would introduce to the non-arm’s length expenses (NALE) rules:
Currently, even inadvertent breaches of the NALE rules can have disproportionately severe outcomes. Under the current rules and the compliance approach outlined by the Australian Taxation Office (ATO), where an amount determined to be a non-arm's length general expense is incurred by a fund, this could cause all the ordinary and statutory income of the fund to be subject to tax at the highest marginal tax rate – currently 45%. This would severely and directly impact the returns that flow through to fund members.
Stakeholder views on the broader NALE rules
2.34Despite this support, there were several submissions from industry stakeholders who expressed concerned about the changes proposed in Schedule7 being unsatisfactory, indicating their dissatisfaction with the NALE rule in general.
2.35The SMSF Association conceded that the changes proposed by the bill were a ‘vast improvement on the current law’ but stressed their view that the NALE regime introduced in 2019 should be repealed. A joint submission from Chartered Accountants Australia and New Zealand, CPA Australia, the Institute of Public Accountants and The Tax Institute (the Joint Submission) expressed similar views.
2.36This submission and other submissions outlined various concerns with the bill and the NALE rules which are outlined below.
Abolition of NALE rules
2.37The submitters with concerns about the changes to the NALE regime went as far as to state that the NALE rules should be repealed and the Australian tax laws in this area be taken back to their pre-1 July 2018 state.
2.38The Joint Submission argued that any non-arm’s length transactions in relation to superannuation funds could be adequately dealt with by the ATO through its Taxation Ruling 2010/1 or through amending the Superannuation Industry (Supervision) Act 1993 to introduce additional safeguards to section 109, which prohibits trustees from engaging in non-arm’s length transactions with any party.
Original intent of legislation
2.39Several submitters made the claim that the NALE rules were initially introduced to discourage superannuation funds from entering into low or no interest limited recourse borrowing arrangements (LRBAs).
2.40The SMSF Association stated further that this problem had been dealt with through the ATO’s Practical Compliance Guidelines PCG 2016/5 which requires related party LRBAs to be conducted on arm’s length terms. It claimed that PCG2016/5 had been very successful in achieving compliance in this area.
2.41ASFA disagreed with this point, stating that non-arm’s length income (NALI) rules had been a long-standing feature of Australian tax law and the NALE regime was an extra layer of integrity to these rules:
The explanatory material at the time made it clear that a primary objective was to prevent circumvention of the contribution caps and the threshold at which the higher rate of tax applies to a person's contributions in a way that would benefit one or more members of the fund.
2.42In evidence before the committee, Mr Adam Hawkins, Assistant Secretary, Tax and Transfers Branch at the Department of the Treasury, clarified the original intent of the 2019 NALI/NALE rules:
The previous evidence referred to TAC determinations introduced in 2016 by the ATO, which are directly targeted to limited recourse borrowing arrangements. While that may have had an effect on that type of behaviour, other types of behaviour…could also serve to undermine the purpose of the contribution caps. The provisions are still required for that purpose. I note that the non-arms-length income rules, which exist on the income side of the provisions, have existed in some form for about 40 years. The expenditure rules that were introduced in 2019 were intended to provide a mirroring compliance on expenditures as much as it has existed in relation to income for over 40 years.
Tax neutrality concerns
2.43A further concern raised by submitters was that the changes introduced by Schedule 7 went against the concept of tax neutrality, noting that large Australian Prudential Regulation Authority (APRA)-regulated funds would be exempted from the NALE rules.
2.44The SMSF Association argued that this ‘unlevel playing field’ would increase costs and complexity for their sector and create more red tape for SMSFs.
2.45The Joint Submission was also concerned by the ‘dual tax regime’ created by the bill:
This differential treatment raises concerns, particularly since the trustees of all superannuation funds are held to the same standard regarding legal obligations, such as the statutory best financial interests duty, common law fiduciary duties, and the sole purpose test, making the inconsistency in treatment questionable. We do not endorse the unnecessary, disparate treatment of superannuation funds.
2.46ASFA disagreed with this interpretation and made the point that the integrity measures envisioned by the NALE rules cannot arise in relation to large APRA-regulated funds (as well as exempt public sector superannuation schemes, approved deposit funds and pooled superannuation trusts which are also exempt from the changes in the bill). As such, they welcomed the changes proposed by the bill.
2.47When questioned about this at the public hearing, Mr Peter Burgess, ChiefExecutive Officer of the SMSF Association, did concede that the kind of non-arm’s length transactions the bill was seeking to address were less likely to occur in large APRA-regulated superannuation funds.
2.48This view was reinforced by evidence from Mr Hawkins of the Departmentofthe Treasury:
APRA regulated funds, as stepped through earlier, don't face the same incentives to try to inflate the value of their funds, whereas, with self-managed super funds, as the trustee and the member are the same person, there is that incentive. For an APRA regulated fund, the compliance cost of having to document the arms-length nature of all of their transactions is quite a significant burden relative to self-managed funds because they have a much larger set of expenditure, which they'll have to justify or have documentation to prove is arms-length. So the exclusion of APRA regulated funds is consistent with that principle of proportionality in the rules.
Specific vs general expenses
2.49Many submitters took the view that general and specific expenses of SMSF should be treated the same under the NALE rules, something which is not proposed in the bill.
2.50The SMSF Association noted that only the rules for general expenses of SMSF and small APRA funds are addressed in the bill, not specific expenses, and that this presents a particular challenge for SMSFs. They claimed that under the current law small capital expense (done under non-arm’s length circumstances) relating to a particular asset can taint the entire capital gain of a fund when the asset in question is sold. They stated further that the retrospective application of these rules could taint the capital gains made over the life of the asset prior to the expense being incurred and even prior to the introduction of the NALE rules.
2.51The Institute of Financial Professionals Australia (IFPA) took the view that both specific and general expenses of SMSFs should be taxed at the NALI tax rate of 45 per cent and that this rate should only apply to the amount of underpayment or non-payment of the expense in question and should be applied on a proportionate basis, that is, only the underpayment of the expense (or the additional income) should be subject to the 45 per cent tax rate.
2.52The Joint Submission considered the proposed changes an improvement on the previous rules, and was pleased to see that bill was proposing a ‘two-times multiple’ instead of the ‘five-times multiple’ that was proposed in Treasury’sConsultation Paper for calculating the penalty. However, these submitters were still cautious about the changes to tax rules relating to general expenses.
2.53IFPA also took the view that the changes proposed were an improvement over the five-times multiple initially proposed in Treasury Consultation but still felt that there were sufficient regulatory measures already in place to disincentivise non-arm’s length transactions.
Capital Gains Tax
2.54Several submitters were concerned by the interactions between the NALE rules, both as they currently exist and the changes proposed by Schedule 7 of the bill, and current capital gains tax law.
2.55The SMSF Association brought the committee’s attention to the ATO’s recent release of the draft Tax Determination TD 2023/D1 and stated that this document has highlighted the interaction of NALI/NALE rules and capital gains tax:
The operation of the current law risks tainting arm’s length capital gains received during an income year as NALI, if the fund has also received NALI in that same income year. This is clearly an unintended consequence. An urgent legislative solution is required to remediate this outcome, and to allow for the apportionment of capital gains, separately recognising the proportion of the net assessable capital gains that are not arm’s length income.
2.56The Joint Submission also raised concerns about Draft TD 2023/D1, also commenting that the interaction of NALI/NALE rules and capital gains tax could lead to the ‘tainting’ of the entire capital gains of an asset. They stated this was ‘…a disproportionate outcome and unfairly taxes arm’s length capital gains at a penal rate’ and recommended that this issue be addressed through legislative change.
Remediation
2.57Several of the submissions also noted that the proposed NALE regime offers no opportunity for trustees to rectify breaches of these rules. The IFPA observed that SMSF compliance rules allow for trustees to rectify breaches brought to their attention through an audit and that this opportunity should be extended to breaches of the proposed NALE rules.
2.58The Joint Submission reiterated this, describing the lack of an opportunity for remediation as ‘excessively harsh and [the NALE rules] does not offer a fair avenue for trustees genuinely seeking to rectify their unintentional mistakes or inadvertent errors’.
2.59The SMSF Association also agreed that trustees of SMSFs should be given the opportunity to rectify the breach of the NALE rules through ‘making good’ the expense shortfall amount.
2.60Mr Hawkins of the Department of the Treasury explained why there was no option for remediation either in the bill or the wider NALE rules:
These provisions are anti-avoidance provisions. They are intended to disincentivise the behaviour or the mischief that they're designed to prevent. If a trustee had the ability to rectify any non-arms-length expenditure then there would be, in effect, no disincentive for that behaviour. It's appropriate that when the ATO discovers that someone has engaged in non-arms-length expenditure behaviour that a penalty apply in those circumstances, and a make-good provision would effectively remove that from the bill.
Schedule 8 – AFCA scheme
2.61There was also stakeholder interest in Schedule 8, relating to proposed amendments to the Corporations Act 2001 (the Corporations Act) to reinstate AFCA’s jurisdiction to hear superannuation complaints after the decision of Metlife v Australian Financial Complaints Authority (the Metlife Decision).
2.62Both submitters concerned with this schedule, ASFA and the Council of Australian Life Insurers (CALI), were supportive of there being increased certainty for consumers about external dispute resolution (EDR) arrangements provided by AFCA. However, both also raised concerns about the changes proposed by the bill.
Jurisdictional matters
2.63CALI was firm in its view that complaints relating to superannuation should be heard within the superannuation jurisdiction and expressed concerns that complaints heard in the general jurisdiction would tie AFCA to legal principles, limiting AFCA’s ability to apply principles of fairness and potentially leading to poor consumer outcomes.
2.64To remedy this, CALI recommended that the government legislate that member complaints in relation to life insurance under superannuation policies be only heard in the superannuation jurisdiction and also that the jurisdictional time limit in which a complaint could be made be extended to six years, making them in line with AFCA’s general jurisdictional time limits.
Retrospective application
2.65AFSA observed that the retrospective application of the amendments contained within Schedule 8 may raise some legal and practical considerations for impacted superannuation trustees and insurers.
2.66While AFSA acknowledged that the retrospective nature of the amendments was intended to allow AFCA to progress a number of claims it had placed on hold due to the Metlife Decision, they pointed out that total and permanent disability claims (TPD claims), which are likely to have their origin many years in the past, will present a particular challenge for superannuation trustees and insurers to contest if these amendments were to pass.
2.67AFCA noted that due to the long time since the originating incident, records and supporting documentation, as well as relevant personnel may not be available or easily accessible which will present a challenge to parties contending superannuation insurance complaints.
2.68They also made the point that retrospective amendments, in effectively changing the potential of a claim being payable, may mean that insurance premiums may have been mispriced. In the future, insurers may start to factor in the possibility of retrospective amendments into the pricing of their policies, resulting in higher insurance premiums being passed on to superannuation funds and their members.
2.69CALI raised concerns about the interaction of the proposed amendments and section 1703 of the Corporations Act and recommended that the Government ‘limit the application of section 1703 in invalidating previous determinations to those already registered with AFCA without a determination having being made’.
Certainty and clarity
2.70ASFA also raised concerns about the number of claims which may be affected by the proposed changes. They noted that the EM makes clear that any determination made invalid by the Metlife Decision could be redetermined by AFCA after commencement of the bill and were concerned about the number of claims which may be eligible for redetermination and how this could affect how insurers and superannuation funds assess liability.
2.71They went on to say that it would be important that consumers are not given unrealistic expectations that AFCA will be able to re-examine previously declined complaints. ASFA urged AFCA to release clear messaging about the amendments contained within the bill at the time of commencement in order to prevent complaints with little likelihood of success being lodged after the changes come into effect.
Committee view
2.72The committee would again like to thank all submitters and witnesses who gave evidence before the committee and notes, in particular, the tight timeframe for this inquiry. The work of stakeholders to provide feedback on such important matters so quickly is appreciated.
2.73For ease of reference, the committee’s view on each schedule will be presented separately below.
Schedule 1
2.74The committee recognises the important role Australian small business enterprises play as significant contributors to the economy and as employers.
2.75The committee is in agreement with submitters to the inquiry who welcomed Schedule 1 as important support for small businesses.
2.76The committee was pleased to see the widespread support for this schedule from a broad cross section of industries and was encouraged to hear what impacts and benefits this schedule will have for small business.
2.77Stakeholder feedback that the scheme should be extended and expanded is a testament to the direct benefits the scheme will have for small businesses, as well as its utility in supporting cash-flow.
2.78Despite these calls, the committee is strongly of the view that the government has struck the right balance between targeting this scheme at businesses that will benefit the most, while maintaining sustainable budget management.
Schedule 2
2.79The committee welcomes views expressed in submissions from small and medium businesses of their eagerness to take part in the energy transition to net zero and appreciates that the small business energy incentive will play one part of that larger task.
2.80The committee is encouraged by the multiple examples of how this schedule will allow businesses to invest in and upgrade to energy efficient and electrified products, benefit from reduced electricity bills as a result, all the while reducing emissions.
2.81As with Schedule 1, it is a testament to this incentive that the stakeholder feedback was to expand and extend the scheme. The committee understands these calls but is confident that the government has balanced its obligations to manage the budget responsibly while also supporting small and medium businesses in electrifying and increasing energy efficiency of their operations.
Schedule 3
2.82The committee welcomes the resounding support this schedule has received and the impact it will have for Australia’s community foundations.
2.83It is encouraging that this new class of DGR will support and incentivise greater donations to community foundations and the important work that they do.
2.84The committee welcomes this schedule as a part of the government’s commitment to support charities and community foundations, and the role this new class of DGR will have in supporting the government’s goal of doubling philanthropic giving by 2023.
Schedule 4
2.85The committee is pleased to see the extension of DGR eligibility of the VictorianPrice Centre Limited and the Australian Sports Foundation Charitable Fund, and that Justice Reform Initiative Limited and Transparency International Australia will become DGR eligible.
Schedule 5
2.86The committee also welcomes the minor, administrative extension to the arrangements in support of the Global Infrastructure Hub which is consistent with the actions of other G20 nations.
Schedule 6
2.87The committee welcomes the sentiments of stakeholders who took part in the inquiry who support the changes proposed by this schedule in aligning current tax law with new accounting standards. This is a small but important change which will reduce compliance burdens for this industry.
Schedule 7
2.88The committee believes the NALE rules are an important and required integrity measure within the broader Australian tax law. They are complimented by other laws, regulations, and obligations to ensure that super funds are not inflating earnings to take advantage of the concessional tax rate that applies to them.
2.89The committee is of the view that this schedule is a welcome and simple change to ensure that penalties for breaches of the rules are proportionate to the benefit gained and shares the view of submitters that they are an improvement on the rules originally introduced in 2018/19.
2.90While the committee recognises the views held by witnesses on the NALE rules more broadly, feedback on this schedule is that the more proportionate penalty is a welcome change.
2.91The committee agrees with the evidence provided by representatives of the Department of the Treasury that alternative approaches to deterring the kind of mischief envisioned by the NALE rules would not be effective.
2.92The committee is reassured by evidence from inquiry participants that APRA-regulated funds exempted from this change are still subject to significant prudential oversight, including regulations, reporting requirements, and other obligations.
Schedule 8
2.93The committee considers that the changes in this schedule are an important and required clarification to ensure that AFCA can hear all complaints related to superannuation, in line with the original intent of the AFCA scheme.
2.94AFCA plays an important role in settling complaints and disputes that arise in the finance services sector and this bill will ensure that they continue to do this effectively.
2.95The committee notes the feedback this inquiry received on this schedule and is reassured that the application of the bill is appropriate.
2.96The committee recommends that the bill be passed.
Senator Jess Walsh
Chair
Labor Senator for Victoria