Federal Register of Legislation - Australian Government

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A Bill for an Act to amend the law relating to taxation, and for other purposes
Administered by: Treasury
For authoritative information on the progress of bills and on amendments proposed to them, please see the House of Representatives Votes and Proceedings, and the Journals of the Senate as available on the Parliament House website.
Registered 25 Jul 2019
Introduced HR 24 Jul 2019
Table of contents.

2019

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Bill 2019

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

(Circulated by authority of the
Minister for Housing and Assistant Treasurer

the Hon Michael Sukkar MP)

 


Table of contents

Glossary............................................................................................................. 1

General outline and financial impact........................................................... 3

Chapter 1........... Tax treatment of concessional loans involving tax exempt entities          9

Chapter 2........... Enhancing the integrity of the small business CGT concessions in relation to partnerships...................................................................... 25

Chapter 3........... Limiting deductions for vacant land.............................. 33

Chapter 4........... Extending anti-avoidance rules for circular trust distributions       45

Chapter 5........... Disclosure of business tax debts................................... 49

Chapter 6........... Electronic invoicing implementation............................. 67

Chapter 7........... Salary sacrifice integrity.................................................. 71

Chapter 8........... Statement of Compatibility with Human Rights.......... 79

 

 


The following abbreviations and acronyms are used throughout this Explanatory Memorandum.

Abbreviation

Definition

AASB

Australian Accounting Standards Board

ABN

Australian Business Number

ATO

Australian Taxation Office

Bill

Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Bill 2019

CGT

capital gains tax

Commissioner

Commissioner of Taxation

GST Act

A New Tax System (Goods and Services Tax) Act 1999

ITAA 1936

Income Tax Assessment Act 1936

ITAA 1997

Income Tax Assessment Act 1997

OTE

Ordinary Time Earnings

RSA

Retirement Savings Account

SG

Superannuation Guarantee

SGAA

Superannuation Guarantee (Administration) Act 1992

TAA 1953

Taxation Administration Act 1953

TOFA

Taxation of Financial Arrangements

TOFA provisions

Division 230 of the ITAA 1997

 

 


Tax treatment of concessional loans involving tax exempt entities

Schedule 1 to the Bill amends Schedule 2D to the ITAA 1936 (which applies to tax exempt entities that become taxable) to:

       specify the basis for working out the market value of TOFA assets and liabilities entered into on concessional terms held at the transition time for the purposes of applying the TOFA provisions; and

       modify the operation of the TOFA balancing adjustment that is made when the entity ceases to have such a TOFA asset or liability.

Date of effectThe amendments apply from 7.30 pm, by legal time in the Australian Capital Territory, on 8 May 2018.

Proposal announcedThis Schedule fully implements the measure ‘Company tax — Improving the integrity of the tax treatment of concessional loans between tax exempt entities’ from the 2018‑19 Budget.

Financial impactNil.

Human rights implications:  This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights — Chapter 8.

Compliance cost impactNil.

Enhancing the integrity of the small business CGT concessions in relation to partnerships

Schedule 2 to the Bill amends the tax law to prevent the small business CGT concessions in Division 152 of the ITAA 1997 from being available for assignments of the income of a partner and other rights or interests in the income or capital of a partnership that are not a membership interest in the partnership.

Date of effectThese amendments apply for CGT events occurring after 7.30pm legal time in the Australian Capital Territory on 8 May 2018.

Proposal announcedSchedule 2 to the Bill fully implements the measure ‘Tax Integrity — enhancing the integrity of concessions in relation to partnerships’ from the 2018-19 Budget.

Financial impact:  As at the 2018-19 Budget, the measure was estimated to result in a small but unquantifiable gain to revenue over the forward estimates period.

Human rights implications:  This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 8.

Compliance cost impactThis measure is estimated to have a minimal regulatory impact.

Limiting deductions for vacant land

Schedule 3 to the Bill amends the ITAA 1997 to deny deductions for losses or outgoings incurred that relate to holding vacant land. However, the amendments do not apply to any losses or outgoings relating to holding vacant land to the extent to which the land is:

       used or held available for use by the entity in the course of carrying on a business in order to earn assessable income; or

       used or held available for use in carrying on a business by:

      an affiliate, spouse or child of the taxpayer; or

      an entity that is connected with the taxpayer or of which the taxpayer is an affiliate.

The amendments also do not apply to taxpayers that are:

       corporate tax entities, superannuation plans (other than self managed superannuation funds), managed investment trusts or public unit trusts; or

       unit trusts or partnerships of which all the members are entities of the above types.

Date of effectThe amendments made by Schedule 3 apply to losses or outgoings incurred on or after 1 July 2019.

Proposal announcedThis Schedule fully implements the measure announced in the 2018-19 Budget as ‘Tax Integrity deny deductions for vacant land’.

Financial impactAs at the 2018‑19 Budget, the measure is estimated to result in the following gain to revenue over the forward estimates period:

2017-18

2018-19

2019-20

2020-21

2021-22

-

-

-

$25m

$25m

- Nil

Human rights implications:  This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 8.

Compliance cost impactThis Schedule results in some transitional and ongoing compliance costs for affected entities.

Extending anti-avoidance rules for circular trust distributions

Schedule 4 to the Bill amends the ITAA 1936 to extend to family trusts the anti‑avoidance rule that applies to other closely held trusts that undertake circular trust distributions. This allows income tax to be imposed on circular trust distributions at a rate of tax equal to the top marginal tax rate plus the rate of Medicare levy.

Date of effect:  The amendments apply to income years starting on or after 1 July 2019.

Proposal announced:  This Schedule implements the measure announced in the 2018-19 Budget as ‘Tax Integrity — extending anti‑avoidance rules for circular trust distributions’.

Financial impactAs at the 2018-19 Budget, the measure was estimated to result in the following gain to revenue over the forward estimates period:

2017-18

2018-19

2019-20

2020-21

2021-22

-

-

-

$10m

$10m

- Nil

Human rights implications:  This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 8.

Compliance cost impactThis measure is expected to result in no change to the overall compliance cost impact, comprising no implementation impact and no ongoing compliance costs.

Disclosure of business tax debts

Schedule 5 to the Bill amends the TAA 1953 to allow taxation officers to disclose the business tax debt information of a taxpayer to credit reporting bureaus when certain conditions and safeguards are satisfied.

This will allow tax debts to be placed on a similar footing as other debts, strengthening the incentives for businesses to pay their debts in a timely manner and effectively engage with the ATO to avoid having their tax debt information disclosed.

The amendments will reduce unfair financial advantage obtained by businesses that do not pay their tax on time and contributes to more informed decision making within the business community by enabling credit providers to make a more complete assessment of the credit worthiness of a business.

Date of effectThe amendments apply in relation to disclosures of tax debt information on or after the day after the Act receives Royal Assent (whether the information was acquired before, on or after that day). However, a disclosure may only occur on or after the day a legislative instrument made by the Treasurer declaring the class of entity whose tax debt information may be disclosed comes into force.

Proposal announcedThis measure implements the measure ‘Tax integrity – improve the transparency of taxation debts’ from the 2016-17 Mid-Year Economic and Fiscal Outlook and the amendment to that measure in the measure ‘Tax integrity – disclosure of business tax debts – amendments’ announced in the 2018-19 Mid-Year Economic and Fiscal Outlook.

Financial impactThe measure is estimated to result in a gain to the budget of $30 million in underlying cash balance terms over the forward estimates period. This includes an estimated increase in goods and services tax receipts of $10 million, paid to the States and Territories. There is no revenue impact in fiscal balance terms as the tax liabilities have already been recognised.

2017-18

2018-19

2019-20

2020-21

2021-22

-

-

$15.0m

$7.5m

$7.5m

- Nil

Human rights implications:  Schedule 5 to the Bill raises human rights issues. See Statement of Compatibility with Human Rights —Chapter 8.

Compliance cost impactRegulatory costs are expected to be minimal. While the ATO will develop internal system functionality to exchange data with credit reporting bureaus, any cost to credit reporting bureaus is expected to be minimal as infrastructure is already established. Any potential impact for business clients with tax-related debts is excluded from the Regulatory Burden Measurement framework as a cost of non‑compliance.

 

 

 

Electronic invoicing implementation

Schedule 6 to the Bill amends the TAA to confer on the Commissioner functions and powers to develop and/or administer a framework or system for electronic invoicing.

Date of effectThe day after Royal Assent.

Proposal announcedSchedule 6 to the Bill implements the measure ‘Electronic Invoicing Adoption’ from the 2019‑20 Budget.

Financial impactNil.

Human rights implications:  Schedule 6 to the Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 8.

Compliance cost impactNil.

 

 

 

Salary sacrifice integrity

Schedule 7 to this Bill amends the SGAA to improve the integrity of the superannuation system by ensuring that an individual’s salary sacrifice contributions cannot be used to reduce an employer’s minimum superannuation guarantee (SG) contributions.

Date of effect1 July 2020.

Proposal announced:  This measure was announced in the Minister for Revenue and Financial Services’ media release of 14 July 2017: Government takes action to address superannuation guarantee non‑compliance.

Financial impact:  This measure has a small but unquantifiable impact on the fiscal and underlying cash balances.

Human rights implications:  This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights — Chapter 8.

Compliance cost impact:  Low.

 

 

 


Outline of chapter

1.1                  Schedule 1 to the Bill amends Schedule 2D to the ITAA 1936 (which applies to tax exempt entities that become taxable) to:

       specify the basis for working out the market value of TOFA assets and liabilities entered into on concessional terms held at the transition time for the purposes of applying the TOFA provisions; and

       modify the operation of the TOFA balancing adjustment that is made when the entity ceases to have such a TOFA asset or liability.

1.2                  All references in this Chapter are to provisions in Schedule 2D to the ITAA 1936 unless otherwise stated.

Context of amendments

1.3                  When an entity is government owned, the entity’s income is exempt from income tax under Division 1AB of Part III of the ITAA 1936. If that entity is subsequently transferred to the private sector, the entity’s income ceases to be exempt. When this happens, Division 57 in Schedule 2D to the ITAA 1936 is triggered.

1.4                  Division 57 operates to ensure that any income or expenses are properly allocated between the pre and post-transition time. The income and expenses allocated to the pre‑transition time are disregarded for income tax purposes. Income allocated to the post-transition time becomes assessable income of the transition taxpayer. Similarly, the transition taxpayer can deduct relevant expenses allocated to the post-transition time.

1.5                  Division 57 also operates to determine the appropriate tax cost of the assets and liabilities of the transition taxpayer.

1.6                  An inappropriate outcome arises on the privatisation of a government owned entity that, for example, holds a loan that is provided on more favourable terms than the borrower could obtain in the market place. The favourable terms could be in the form of, for example, concessional interest rates or concessional repayment schedules.

1.7                  The effect of the concessional nature of the loan is that the market value of the loan at the transition time will, ordinarily, be less than the loan’s face value.

1.8                  Under the current TOFA provisions, the quantum of the financial benefits received by the transition taxpayer (as the borrower) is worked out based on the value of the loan receivable held by the lender — being the market value of the loan at the transition time (as worked out under Division 57). However upon repayment of the concessional loan, the transition taxpayer will have provided financial benefits equal to the face value of the loan. The difference between these amounts will be available as a tax deduction for the transition taxpayer over the life of the loan resulting in a deduction that relates to the repayment of the loan principal.

1.9                  The deduction for repaying the principal under a concessional loan in these circumstances is unintended. The excessive deduction arises due to the discounted value placed on a concessional loan that effectively reduces the market value of the loan at the transition time.

1.10              These amendments are necessary to overcome this integrity concern and protect the revenue base.

Summary of new law

1.11              Schedule 1 to the Bill amends Schedule 2D to the ITAA 1936 (which applies to tax exempt entities that become taxable) to:

       specify the basis for working out the market value of TOFA assets and liabilities entered into on concessional terms held at the transition time for the purposes of applying the TOFA provisions; and

       modify the operation of the TOFA balancing adjustment that is made when the entity ceases to have such a TOFA asset or liability.

1.12              When a tax exempt entity is transferred to the private sector, for the purpose of applying the TOFA provisions to an asset or a liability that is a Division 230 financial arrangement that is entered into on concessional terms, the market value of the relevant asset (including an asset that corresponds to a liability) is taken to be the amount that the holder provided in relation to starting to have the asset:

       reduced by repayments of principal made before the transition time and the amount of any impairment; and

       increased by the amount of the cumulative amortisation (worked out using the effective interest method) of any difference between the initial amount and the amount payable on the maturity of the asset.

1.13              This market value is used to determine the amount of the financial benefits that the transition taxpayer is taken to have received or provided in relation to the Division 230 financial arrangement that it holds at the transition time for the purposes of applying the TOFA provisions after that time.

1.14              When the entity ceases to have the asset, the amount of the TOFA balancing adjustment is adjusted by an amount that ensures that the balancing adjustment of the transition taxpayer is not attributable to any extent to the concessional terms and conditions of the financial arrangement.

1.15              Concessional terms and conditions relevant to this determination include:

       the parties to the arrangement were not dealing at arm’s length in relation to the asset; and

       if the arrangement gives rise to an interest that is not an equity interest in an entity, the interest rate departed from the benchmark rate of return.

1.16              This ensures that any gain or loss under the balancing adjustment method is not attributable, to any extent, to the concessional terms of the TOFA asset or corresponding liability.

Comparison of key features of new law and current law

New law

Current law

When a tax exempt entity is transferred to the private sector, for the purpose of applying the TOFA provisions to an asset or a liability that is a Division 230 financial arrangement that is entered into on concessional terms, the market value of the relevant asset (including an asset that corresponds to a liability) is taken to be the amount that the holder provided in relation to starting to have the asset:

       reduced by repayments of principal made before the transition time and the amount of any impairment; and

       increased by the amount of the cumulative amortisation (worked out using the effective interest method) of any difference between the initial amount and the amount payable on the maturity of the asset.

This market value is used to determine the amount of the financial benefits that the transition taxpayer is taken to have received or provided in relation to a Division 230 financial arrangement that it holds at the transition time for the purposes of applying the TOFA provisions after that time.

When the entity ceases to have the asset, the amount of the TOFA balancing adjustment is adjusted by an amount that ensures that the balancing adjustment of the transition taxpayer is not attributable to any extent to the concessional terms and conditions of the financial arrangement.

Concessional terms and conditions relevant to this determination include:

       the parties to the arrangement were not dealing at arm’s length in relation to the asset; and

       if the arrangement gives rise to an interest that is not an equity interest in an entity, the interest rate departed from the benchmark rate of return.

When a tax exempt entity is transferred to the private sector, the tax costs of the entity’s assets and liabilities are reset based on their market value at the transition time.

 

Detailed explanation of new law

1.17              Schedule 1 to this Bill amends Schedule 2D to the ITAA 1936 (which applies to tax exempt entities that become taxable) to:

       specify the basis for working out the market value of TOFA assets and liabilities entered into on concessional terms held at the transition time for the purposes of applying the TOFA provisions; and

       modify the operation of the TOFA balancing adjustment that is made when the entity ceases to have such a TOFA asset or liability.

TOFA assets and liabilities held at the transition time

1.18              The amendments apply to set the value of an asset (the subject asset) held by an entity (the holder) if:

       Subdivision 57‑E applies to the subject asset — that is, the subject asset is:

      covered by subsection 57‑25(1); or

      a right or other asset corresponding to a liability covered by subsection 57‑30(1);

       the subject asset, or the corresponding liability, is or is part of a Division 230 financial arrangement (that is, it is a TOFA asset or liability) at the transition time; and

       when the Division 230 financial arrangement was entered into:

      the parties to the arrangement were not dealing at arm’s length in relation to the subject asset; or

      if the subject asset gives rise to an interest that is not an equity interest in an entity — the return on the interest would reasonably be expected to be less than the benchmark rate of return for the interest (worked out under section 974‑145 of the ITAA 1997).

[Schedule 1, item 3, subsection 57‑32(1)]

1.19              If the asset is covered by subsection 57‑25(1), the holder of the asset will be the transition taxpayer.

1.20              Alternatively, if the asset is a right or other asset corresponding to a liability covered by subsection 57‑30(1), the holder of the asset will be another party to the Division 230 financial arrangement. For example, if the transition taxpayer holds a liability that is a concessional loan, the holder of the asset (including the asset that corresponds to the liability) will be the lender under the concessional loan.

1.21              In determining whether parties are dealing with each other at arm’s length, it is necessary to consider any connection between them and any other relevant circumstances (see the definition of arm’s length in subsection 995‑1(1) of the ITAA 1997).

1.22              Subdivision 57‑E applies to work out the adjusted market value of the subject asset at the transition time.

1.23              In the case of an asset held by the transition taxpayer, the adjusted market value is, broadly, the market value of the asset at the transition time reduced or increased by certain amounts of income received or receivable by the transition taxpayer in respect of the asset after that time (subsection 57‑25(3)).

1.24              In the case of a liability held by the transition taxpayer, the adjusted market value is, broadly, the market value of the asset or other right that corresponds to the liability at the transition time reduced or increased by certain amounts that are paid or that become payable by the transition taxpayer in respect of the asset after that time (subsection 57‑30(2)).

1.25              If the amendments apply in relation to the subject asset, the market value of the subject asset is modified for the purpose of applying the TOFA provisions to the subject asset or to the corresponding liability for the subject asset. [Schedule 1, item 3, subsection 57‑32(3)]

1.26              That is, for the purpose of applying the TOFA provisions, the adjusted market value of the subject asset is worked out as if, at the transition time, the market value of the subject asset is the total amount (the initial amount) of the financial benefits that the holder provided in relation to the subject asset before the transition time:

       reduced by:

      repayments of principal made in relation to the subject asset before the transition time; and

      the amount of any impairment (within the meaning of the accounting principles (as defined in the ITAA 1997)) of the subject asset at the transition time; and

       increased by the amount of the cumulative amortisation (worked out using the effective interest method recognised by the accounting principles) of any difference at the transition time between:

      the initial amount; and

      the amount payable on the maturity of the subject asset.

[Schedule 1, item 3, subsection 57‑32(2)]

1.27              In this regard, the amount of cumulative amortisation (worked out using the effective interest method) of any difference at the transition time between the initial amount and the amount payable on maturity broadly reflects any accrued but unpaid interest, or amounts in the nature of interest, at the transition time.

1.28              The accounting principles are defined in subsection 995‑1(1) (as defined in the ITAA 1997) to mean:

       the accounting standards; or

       if there are no accounting standards applicable to the matter — authoritative pronouncements of the AASB that apply to the preparation of financial statements.

1.29              The concepts of impairment and the effective interest method are defined in Accounting Standard AASB 9.

1.30              Section 57‑32 applies to an asset that is or is part of a Division 230 financial arrangement. If that asset is covered by subsection 57‑25(1), then for the purposes of applying the TOFA provisions, the transition taxpayer is taken to have acquired the asset at the transition time in return for the transition taxpayer starting to have an obligation to provide one or more financial benefits in relation to the Division 230 financial arrangement. [Schedule 1, item 3, paragraphs 57‑33(1)(a) and (2)(a)]

1.31              This ensures that the adjusted market value of the asset worked out under subsection 57‑25(2) meshes appropriately with section 230‑60 (which specifies when a financial benefit is provided or received under a financial arrangement).

1.32              Section 57‑32 also applies to a liability that is or is part of a Division 230 financial arrangement. If that liability corresponds to a right or other asset covered by subsection 57‑30(1), then for the purposes of applying the TOFA provisions, the transition taxpayer is taken to have started to have the liability at the transition time in return for the transition taxpayer starting to have a right to receive one or more financial benefits under the Division 230 financial arrangement. [Schedule 1, item 3, paragraphs 57‑33(1)(b) and (2)(b)]

1.33              This ensures that the adjusted market value of the corresponding right or other asset worked out under subsection 57‑30(2) meshes appropriately with section 230‑60 (which specifies when a financial benefit is provided or received under a financial arrangement).

1.34              The modification to the market value of an asset, or of an asset or other right that corresponds to a liability, made by section 57‑32 only affects the operation of the TOFA provisions. This modified market value (after being adjusted under subsection 57‑25(2) or 57‑30(2)) is used to determine the financial benefits that the transition taxpayer is taken to have received or provided in relation to a Division 230 financial arrangement that it holds at the transition time for the purposes of applying the TOFA provisions after that time.

1.35              Section 57‑32 does not affect the market value of an asset, or of an asset or other right that corresponds to a liability, for the purpose of applying other provisions in the income tax law (such as, the debt and equity provisions in Division 974 of the ITAA 1997 and the thin capitalisation provisions in Division 820 of the ITAA 1997).

Example 1.1: Loan issued on concessional terms

Lion Co is a wholly owned company of State Enterprise (a tax exempt entity). On 1 July 2018, Lion Co borrowed $50,000 from State Enterprise for a term of five years at a fixed rate of 3 per cent with the principal to be repaid in equal instalments of $10,000 each year on 30 June.

Lion Co had the following projected cash flows under the loan:

       1 July 2018 — Lion Co receives $50,000;

       30 June 2019 — Lion Co pays $11,500 (including $1,500 interest);

       30 June 2020 — Lion Co pays $11,200 (including $1,200 interest);

       30 June 2021 — Lion Co pays $10,900 (including $900 interest);

       30 June 2022 — Lion Co pays $10,600 (including $600 interest); and

       30 June 2023 — Lion Co pays $10,300 (including $300 interest).

On 31 December 2020, Dragon Co (a taxpaying entity) acquires 100 per cent of the shares in Lion Co from State Enterprise. Consequentially, Lion Co becomes a taxable entity at the transition time (31 December 2020).

The loan is a Division 230 financial arrangement. The loan was not entered into on arm’s length terms (and is therefore a concessional loan) because of the concessional 3 per cent interest rate on the loan. This compares with a market interest rate of 10 per cent.

The market value of the concessional loan at the transition time calculated under subsection 57‑32(2) is worked out as follows:

 

$

Total financial benefits provided by State Enterprise before the transition time

50,000

reduced by repayments of principal made by Lion Co before the transition time ($10,000 on each of 30 June 2019 and 30 June 2020)

(20,000)

reduced by any impairments of the loan at the transition time

0

increased by the amount of cumulative amortisation (worked out using the effective interest method) of any difference at the transition time between the initial amount ($50,000) and the amount payable on maturity ($50,000)

447

Market value of the concessional loan at the transition time

30,447

In this regard, in relation to working out the amount of cumulative amortisation (worked out using the effective interest method) of any difference at the transition time between the initial amount and the amount payable on maturity, although there is no difference between the initial amount and maturity amount, the effective interest method allocates interest payments over the terms of the loan.

Therefore, for the purpose of applying the TOFA provisions to the loan, Lion Co is taken to receive $30,447 at the transition time.

As a result, under the accruals method in the TOFA provisions Lion Co will deduct the following losses:

       year ending 30 June 2021 — $453;

       year ending 30 June 2022 — $600; and

       year ending 30 June 2023 — $300.

TOFA balancing adjustment

1.36              If an entity ceases to have a Division 230 financial arrangement, a TOFA balancing adjustment may arise in relation to the Division 230 financial arrangement (Subdivision 230‑G of the ITAA 1997). The amount of the TOFA balancing adjustment is worked out by applying the method statement in section 230‑445 of the ITAA 1997.

1.37              The operation of the method statement is modified if:

       section 57‑32 was applied to work out the market value of an asset (the subject asset);

       the transition taxpayer is a party to the Division 230 financial arrangement to which the subject asset, or the corresponding liability for the subject asset, is or is part of; and

       a TOFA balancing adjustment is made (under Subdivision 230‑G of the ITAA 1997) after the transition time in relation to the financial arrangement.

[Schedule 1, item 4, subsection 57‑135(1)]

1.38              In these circumstances, the amount of the TOFA balancing adjustment (worked out disregarding section 57‑135) in relation to the financial arrangement is adjusted. The nature of the adjustment depends on:

       whether the transition taxpayer is the holder of the subject asset or the holder of the corresponding liability for the subject asset; and

       whether a gain or loss arises as a result of applying the TOFA balancing adjustment method statement to the financial arrangement.

[Schedule 1, item 4, subsection 57‑135(2)]

1.39              If the transition taxpayer is the holder of the subject asset:

       the amount of any gain that arises for the transition taxpayer under the TOFA balancing adjustment method statement is increased by the adjustment amount; or

       the amount of any loss that arises for the transition taxpayer under the TOFA balancing adjustment method statement is reduced by the adjustment amount.

[Schedule 1, item 4, paragraph 57‑135(2)(a)]

1.40              However, if the amount of the adjustment amount exceeds the amount of the loss to be reduced under paragraph 57‑135(2)(a), the transition taxpayer is, for the purposes of making the balancing adjustment, taken to have made a gain equal to the amount of the excess. [Schedule 1, item 4, paragraph 57‑135(3)(a)]

1.41              Further, if no balancing adjustment is made under the TOFA balancing adjustment method statement, the transition taxpayer is taken to have made a gain equal to the amount of the adjustment amount. [Schedule 1, item 4, subparagraph 57‑135(3)(c)(i)]

1.42              If the transition taxpayer is the holder of the corresponding liability for the subject asset:

       the amount of any gain that arises for the transition taxpayer under the TOFA balancing adjustment method statement is reduced by the adjustment amount; or

       the amount of any loss that arises for the transition taxpayer under the TOFA balancing adjustment method statement is increased by the adjustment amount.

[Schedule 1, item 4, paragraph 57‑135(2)(b)]

1.43              However, if the amount of the adjustment amount exceeds the amount of the gain to be reduced under paragraph 57‑135(2)(b), the transition taxpayer is, for the purposes of making the balancing adjustment, taken to have made a loss equal to the amount of the excess. [Schedule 1, item 4, paragraph 57‑135(3)(b)]

1.44              Further, if no balancing adjustment is made under the TOFA balancing adjustment method statement, the transition taxpayer is taken to have made a loss equal to the amount of the adjustment amount. [Schedule 1, item 4, subparagraph 57‑135(3)(c)(ii)]

1.45              The adjustment amount is the difference between:

       the additional amount that the transition taxpayer would need to receive or pay under the financial arrangement without an amount being assessable income of, or deductible to, the transition taxpayer if the subject asset, or the corresponding liability for the subject asset, were disposed of at the time the balancing adjustment is made; and

       the additional amount that the transition taxpayer would need to receive or pay under the financial arrangement without an amount being assessable income of, or deductible to, the transition taxpayer if the subject asset, or the corresponding liability for the subject asset, were disposed of at the time the balancing adjustment is made on the assumption that, at the time the financial arrangement was entered into:

      the parties to the arrangement were dealing at arm’s length in relation to the arrangement; and

      if the arrangement gives rise to an interest that is not an equity interest in an entity, the return on the interest would reasonably be expected to be equal to the benchmark rate of return for the interest.

[Schedule 1, item 4, subsections 57‑135(4) and (5)]

1.46              In essence, the adjustment amount reflects the value of the concessional terms relating to the Division 230 financial arrangement that remains at the time the TOFA balancing adjustment is made.

1.47              In this regard, if the Division 230 financial arrangement comes to an end on its maturity date, then the value of the concessional terms relating to the financial arrangement will be nil. This is because the value of the concession is expected to reduce over time and the concession will no longer exist at the time of maturity.

1.48              However, if the Division 230 financial arrangement comes to an end prior to its maturity date, then there is likely to be some remaining value that is attributable to the concessional terms relating to the financial arrangement that will give rise to an adjustment amount.

Example 1.2: TOFA balancing adjustment

Assume the facts are the same as in Example 1.1.

On 1 July 2022 (year 4), Lion Co disposes of its concessional loan liability to Wolf Co for the market value of the loan — that is, $9,364 ($10,300/(1 + 10 per cent). As a result, a balancing adjustment event arises for Lion Co under the TOFA provisions.

Under the TOFA balancing adjustment method statement (subsection 230‑445(1) of the ITAA 1997), the amount of the balancing adjustment is a gain of $636 — calculated as follows:

       Step 1(a) — financial benefits received: $30,447

       Step 1(b) — deductions allowed: $1,053 ($453 + $600)

       Step 2 (a) — financial benefits provided: $30,864
($10,900 + $10,600 + $9,364)

       Step 3 — the step 1 amount of $31,500 ($30,447 + $1,053) exceeds the step 2 amount of $30,864 by $636. Therefore, Lion Co makes a gain of $636.

Applying section 57‑135, the difference between the following amounts must be compared:

       the additional amount that Lion Co would need to receive or pay without an amount being assessable or deductible to it if the loan was disposed of at the time of the balancing adjustment; and

       the additional amount that Lion Co would need to receive or pay without an amount being assessable or deductible to it if the loan was disposed of at the time of the balancing adjustment assuming that the loan was entered into on arm’s length terms.

The additional amount that Lion Co would need to pay without an amount being assessable or deductible to it if the loan was disposed of at the time of the balancing adjustment is the amount of the repayment of principal and interest based on a 3 per cent interest rate — that is, $636 calculated as follows:

       Step 1(a) — financial benefits received: $30,447

       Step 1(b) — deductions allowed: $1,053 ($453 + $600)

       Step 2(a) — financial benefits provided: $30,864
($10,900 + $10,600 + $9,364)

       Step 3 — the amount that Lion Co would need to pay to ensure that no balancing adjustment arises is $636
($30,864 — ($30,447 + $1,053)).

The additional amount that Lion Co would need to pay without an amount being assessable or deductible to it if the loan was disposed of assuming that the loan was entered into on arm’s length terms (that is, assuming Lion Co borrowed $41,536 (the market value of the loan on 1 July 2018)) is $0, calculated as follows:

       Step 1(a) — financial benefits received: $27,697 (that is, the market value of the loan under section 57‑25
($10,900/1.10.5 + $10,600/1.11.5 + $10,300/1.12.5))

       Step 1(b) — deductions allowed (based on the compounding accruals): $3,167 ($1,352 + $1,815)

       Step 2(a) — financial benefits provided: $30,864
($10,900 + $10,600 + $9,364)

       Step 3 — the amount that Lion Co would need to pay to ensure that no balancing adjustment arises is $0
($30,864 — ($27,697 + $3,167)).

The difference between these amounts is $636 (that is, the difference between $636 and $0). Therefore, Lion Co’s balancing adjustment gain is reduced to nil.

Example 1.3: TOFA balancing adjustment

Assume the facts are the same as in Example 1.1.

On 30 June 2023 (year 5), the concessional loan is repaid in full and ceases. As a result, a balancing adjustment event arises for Lion Co under the TOFA provisions.

Under the TOFA balancing adjustment method statement (subsection 230‑445(1) of the ITAA 1997), the amount of the balancing adjustment is nil — calculated as follows:

       Step 1(a) — financial benefits received: $30,447

       Step 1(b) — deductions allowed: $1,353 ($453 + $600 + $300)

       Step 2 (a) — financial benefits provided: $31,800
($10,900 + $10,600 + $10,300)

       Step 3 — the step 1 amount of $31,800 ($30,447 + $1,353) equals the step 2 amount of $31,800. Therefore, the amount of the TOFA balancing adjustment is nil.

Applying section 57‑135, the difference between the following amounts must be compared:

       the additional amount that Lion Co would need to receive or pay without an amount being assessable or deductible to it if the loan was disposed of at the time of the balancing adjustment; and

       the additional amount that Lion Co would need to receive or pay without an amount being assessable or deductible to it if the loan was disposed of at the time of the balancing adjustment assuming that the loan was entered into on arm’s length terms.

The additional amount that Lion Co would need to receive or pay without an amount being assessable or deductible to it if the loan was disposed of at the time of the balancing adjustment is the amount of the repayment of principal and interest based on a 3 per cent interest rate — that is, $0 calculated as follows:

       Step 1(a) — financial benefits received: $30,447

       Step 1(b) — deductions allowed: $1,353 ($453 + $600 + $300)

       Step 2(a) — financial benefits provided: $31,800
($10,900 + $10,600 + $10,300)

       Step 3 — the amount that Lion Co would need to receive or pay to ensure that no balancing adjustment arises is $0
($31,800 — ($30,447 + $1,353)).

The additional amount that Lion Co would need to receive or pay without an amount being assessable or deductible to it if the loan was disposed of assuming that the loan was entered into on arm’s length terms (that is, assuming Lion Co borrowed $41,536 (the market value of the loan on 1 July 2018)) is $0, calculated as follows:

       Step 1(a) — financial benefits received: $27,697 (that is, the market value of the loan under section 57‑25
($10,900/1.10.5 + $10,600/1.11.5 + $10,300/1.12.5))

       Step 1(b) — deductions allowed (based on the compounding accruals): $4,103 ($1,352 + $1,815 + $936)

       Step 2(a) — financial benefits provided: $31,800
($10,900 + $10,600 + $10,300)

       Step 3 — the amount that Lion Co would need to receive or pay to ensure that no balancing adjustment arises is $0
($31,800 — ($27,697 + $4,103)).

The difference between these amounts is nil (that is, the difference between $0 and $0). Therefore, Lion Co’s balancing adjustment is nil.

Application and transitional provisions

1.49              The amendments apply to a transition taxpayer if the transition time is at or after 7.30 pm, by legal time in the Australian Capital Territory, on 8 May 2018. [Schedule 1, item 5]

1.50              The amendments apply from the time of the announcement because:

       the amendments overcome an integrity concern that allows affected taxpayers to obtain an unintended benefit; and

       the amendments will protect the revenue base.

 


Outline of chapter

2.1                  Schedule 2 to the Bill amends the tax law to prevent the small business CGT concessions in Division 152 of the ITAA 1997 from being available for assignments of the income of a partner and other rights or interests in the income or capital of a partnership that are not a membership interest in the partnership.

2.2                  All legislative references in this chapter are to the ITAA 1997 unless the contrary is specified.

Context of amendments

Small business CGT concessions

2.3                  Division 152 provides four concessions that can permit small businesses or, in some cases, their owners to reduce, defer or disregard certain capital gains.

2.4                  These four CGT concessions are:

       the small business 15-year exemption (Subdivision 152-B);

       the small business 50 per cent reduction (Subdivision 152-C);

       the small business retirement exemption (Subdivision 152‑D); and

       the small business rollover (Subdivision 152-E).

2.5                  Section 152-10 sets out the basic conditions that all taxpayers must satisfy in relation to a CGT event before they can be entitled to these concessions for any resulting capital gain.

2.6                  Additional basic conditions apply if the asset is a share in a company or an interest in a trust (the object entity).

Interests in the income or capital of a partnership

2.7                  Generally, partners in a partnership are entitled to a share of the income of the partnership. Under Division 5 of Part III of the ITAA 1936, each partner is generally taxed on the partner’s share of the net income of the partnership.

2.8                  However, a partner can make an assignment of some or all of their interest in the partnership. Such an assignment cannot make the assignee a partner, and usually does not entitle the assignee to influence the exercise of the partner’s rights or entitlements. Instead, the effect of such an assignment means that the partner holds the partnership interest on trust for the assignee, and must deal with the interest consistent with the agreed terms. This may require the partner to transfer to the assignee the relevant share of any distributions of income or capital (or both) arising from the asset held on trust (ie. the partnership interest).

2.9                  In its decision in Federal Commissioner of Taxation v Everett [1980] HCA 6, the High Court found that such an assignment meant that the income received on trust did not form part of the income of the partner. Instead, the income was received on trust for the assignee and taxed in the hands of the assignee as a result of Division 6 of Part III of the ITAA 1936.

2.10              The use of such assignments and similar arrangements has subsequently become common for partners seeking to reduce their income tax liability. Over time, many arrangements have moved away from the facts in Federal Commissioner of Taxation v Everett [1980] HCA 6.

CGT interactions

2.11              Such arrangements result in a CGT event occurring and would usually result in a substantial capital gain for the partner.

2.12              This is because the entitlement to the future profits of the partnership is likely to be substantial and the costs of setting up the arrangement (which form the cost base) are likely to be minimal. Further, while in many cases the assignment or similar arrangement would be established on a non-arm’s length basis (such as with family members) and the partner would receive minimal, if any, consideration, the market value substitution rule (see section 116-30) would apply. This rule broadly treats the capital proceeds of a non-arm’s length transaction as being equal to the market value of the right or interest.

2.13              Prior to these amendments, individuals were able to substantially reduce or eliminate tax when undertaking such an assignment or similar arrangement by applying the small business CGT concessions in Division 152 to reduce or disregard any resulting capital gain.

Budget announcement

2.14              On 8 May 2018 in the 2018-19 Budget, the Government announced that partners that alienate their income by creating, assigning or otherwise dealing in rights to the income or capital of a partnership will no longer be able to access the small business CGT concessions in relation to these rights unless the right is a membership interest in the partnership.

Summary of new law

2.15              Schedule 2 to the Bill creates an additional basic condition that must be satisfied in relation to a capital gain in order to access the small business CGT concessions under Division 152 for that gain.

2.16              As a result of the new condition, the small business CGT concessions are only available in relation to a CGT event that relates to a right or interest that entitles an entity to the income or capital of a partnership (or amounts calculated by reference to a partner’s entitlement to distributions from a partnership) if the right or interest is a membership interest of the entity that has the entitlement.

Comparison of key features of new law and current law

New law

Current law

The small business CGT concessions are only available for a capital gain arising from a CGT event that involves the creation, transfer, variation or cessation of an interest or right that entitles an entity to the income or capital of a partnership (or to an amount calculated by reference to a partner’s entitlements) if the right or interest is a membership interest held by the entity with the entitlement.

The small business CGT concessions are available for a capital gain arising from a CGT event that involves an interest in or right to the income or capital of a partnership (or to an amount calculated by reference to distributions received by a partner) where the basic conditions are satisfied.

Detailed explanation of new law

2.17              Schedule 2 to the Bill amends Division 152 to introduce a new additional basic condition for the small business CGT concessions.

When the condition applies

2.18              The new condition applies to capital gains that arise from a CGT event that involves the creation, transfer, variation or cessation of a right or interest that entitles an entity to either:

       an amount of the income or capital of a partnership; or

       an amount calculated by reference to the partner’s entitlement to an amount of income or capital of a partnership.

 [Schedule 2, item 2, subsection 152-10(2C)]

2.19              Broadly, the first type of right or interest includes equitable assignments of a partnership interest of the sort considered in
Federal Commissioner of Taxation v Everett [1980] HCA 6, as well as other assignments of rights and interests that entitle an entity to all or part of the income or capital of a partnership.

2.20              In this context, ‘income or capital of a partnership’ includes but is not limited to the profits of the partnership, the proceeds of the realisation of assets of the partnership and any surplus of partnership assets over liabilities on dissolution.

2.21              The second type of right or interest includes rights and interests that do not provide any entitlement to income or capital of the partnership, but entitle an entity to receive amounts if the amounts are ascertained by reference to amounts a partner receives or is entitled to receive from the partnership.

2.22              For example, this would include a right to receive payments from an entity calculated by reference to amounts that entity received as a partner in a partnership. The inclusion of this second type of interest ensures that arrangements that in substance achieve the same outcome as an assignment of partnership income are treated in the same way for the purposes of the small business CGT concessions.

2.23              An entitlement to a payment or asset is not an entitlement to income or capital of the partnership merely because the entity that is obliged to make the payment or provide the asset is a partner or a partnership. Thus, the new additional basic condition does not apply to such an entitlement.

2.24              For example, if an individual sells their business to a partnership and becomes entitled to a payment or series of payments, the right to this payment or series of payments is not a right to or interest in the income or capital of the partnership, merely a right to a payment or payments from the partners.

2.25              The words ‘creation, transfer, variation or cessation’ encompass any dealing that may affect a right or interest. Any arrangement affecting the entitlement of a partner or giving another entity a related entitlement will result in a CGT event that involves the creation, transfer, variation or cessation of a right to or interest of the sort described in paragraph 2.18.

2.26              A CGT event can involve the creation, transfer, variation or cessation of more than one right or interest. If a CGT event affects more than one right or interest, all of the rights and interests involved must satisfy the requirements of the new additional basic condition. That is, each of the rights and interests must be a membership interest in the partnership of the entity that is entitled to an amount of the income or capital of the partnership as a result of that right or interest (or was entitled to an amount if the right or interest has ceased to exist).

Example 2.1: CGT events involving multiple rights or interests

Laura, a partner in a partnership, makes an equitable assignment of half her partnership interest to Dominic, her spouse. This entitles Dominic to half of any amounts Laura receives as a partner, but does not make Dominic a partner.

The assignment results in Laura having a CGT event. The CGT event involves both the variation of Laura’s partnership interest and the creation of a right in the hands of Dominic.

Both interests entitle the entity holding the interest – Laura for the partnership interest, and Dominic for the right to income – to an amount of the income and capital of the partnership. As a result, both interests must satisfy the additional basic condition for the small business CGT concessions to be available for the CGT event.

What the condition requires

2.27              A capital gain resulting from a CGT event satisfies the new additional basic condition if all rights or interests related to the CGT event are membership interests (see section 960-135) of the entity or entities that hold that right or interest immediately after the CGT event occurs. [Schedule 2, item 2, subsection 152-10(2C)]

2.28              If the right or interest ceases to exist as a result of the CGT event, the right or interest must have been a membership interest of the entity that held the right or interest immediately before it ceased to exist.

2.29              This means that the small business CGT concessions are only available for CGT events involving a right or interest in a partnership if the right or interest would be sufficient to make the entity holding the right or interest a partner (including for example, the transfer of all or part of a partner’s share in a partnership to another entity, making that other entity a partner or increasing their existing share in the partnership). Other rights and interests are not membership interests within the meaning of the income tax law and cannot satisfy the new condition. This is the case even if the entity that holds the right or interest is a partner due to another right or interest.

2.30              The small business CGT concessions remain available for genuine disposals and transactions that affect the substance of the operation of the partnership. However, they are not available for assignments and other rights or interests that merely result in the transfer of income or capital that a partner receives from the partnership to other entities without making the other entity a partner.

2.31              The effect of the amendments is that the small business CGT concessions would not be available for any capital gain arising from the assignment of such a right or interest by a partner. The amendments are only relevant for the purpose of determining if an entity is eligible for the small business CGT concessions – they do not affect other provisions of the tax law.

Example 2.2: Application of the new condition to a CGT event involving multiple interests

Continuing from Example 2.1, the partnership interest held by Laura and the equitable interest held by Dominic must be membership interests for the new additional basic condition to be satisfied in relation to the CGT event.

The partnership interest held by Laura is a membership interest of Laura’s in the partnership and satisfies the condition. The equitable interest held by Dominic is not a membership interest of Dominic’s and cannot satisfy the condition.

As Dominic’s interest does not satisfy the new additional basic condition, the small business CGT concessions are not available to Laura in relation to the CGT event.

2.32              Schedule 2 to the Bill also makes minor amendments to the guide to Subdivision 152-A to take into account the additional basic condition that must be satisfied for a capital gain to access the small business CGT concessions in Division 152. [Schedule 2, item 1, section 152-5]

Application and transitional provisions

2.33              The amendments commence from the start of the first quarter after Royal Assent. [Clause 2]

2.34              These amendments apply to CGT events that occur after 7.30pm legal time in the Australian Capital Territory on 8 May 2018. [Schedule 2, item 3]

2.35              The retrospective application of the amendments is in accordance with the Budget announcement by the Government on
8 May 2018. Exposure Draft legislation was released for public consultation from 12 October 2018 to 31 October 2018.

2.36              Retrospective application is necessary as the amendments are an important integrity measures to prevent inappropriate access to the CGT small business concessions for arrangements undertaken to reduce partner’s tax liabilities. If the amendments did not apply from announcement, partners would be able to enter into such arrangements during the period between announcement and the passage of legislation and avoid the operation of the measure.


Chapter 3         
Limiting deductions for vacant land

Outline of chapter

3.1                  Schedule 3 to the Bill amends the ITAA 1997 to deny deductions for losses or outgoings incurred that relate to holding vacant land. However, the amendments do not apply to any losses or outgoings relating to holding vacant land to the extent to which the land is:

       used or held available for use by the entity in the course of carrying on a business in order to earn assessable income; or

       used or held available for use in carrying on a business by;

      an affiliate, spouse or child of the taxpayer; or

      an entity that is connected with the taxpayer or of which the taxpayer is an affiliate.

3.2                  The amendments also do not apply to taxpayers that are:

       corporate tax entities, superannuation plans (other than self managed superannuation funds), managed investment trusts or public unit trusts; or

       unit trusts or partnerships of which all the members are entities of the above types.

3.3                  All legislative references in this Chapter are to the ITAA 1997 unless otherwise stated.

Context of amendments

3.4                  The income tax law allows taxpayers to claim the costs of holding vacant land if it is held for the purpose of gaining or producing assessable income or carrying on a business for the purpose of gaining such income. However, some taxpayers have been claiming deductions for costs associated with holding vacant land when it is not genuinely held for the purpose of gaining or producing assessable income.

3.5                   As the land is vacant, there is often limited evidence about the taxpayer’s intent other than statements by the taxpayer. The reliance on a taxpayer’s assertion about their current intention leads to compliance and administrative difficulties.

Summary of new law

3.6                  Schedule 3 to the Bill amends the ITAA 1997 to deny deductions for losses or outgoings incurred to the extent they relate to a taxpayer holding vacant land.

3.7                  However, the amendments do not apply to any losses or outgoings relating to holding vacant land to the extent the land was:

       used or held available for use by the taxpayer in the course of a business the taxpayer holding the land carries on for the purpose of gaining or producing assessable income; or

       used or held available for use in carrying on a business by:

      an affiliate, spouse or child of the taxpayer holding the land; or

      an entity that is connected with the taxpayer or of which the taxpayer is an affiliate in carrying on a business.

3.8                  The amendments also do not apply to:

       corporate tax entities, superannuation plans (other than self managed superannuation funds), managed investment trusts or public unit trusts; or

       unit trusts or partnerships of which all the members are entities of the above types.

Comparison of key features of new law and current law

New law

Current law

A taxpayer cannot claim deductions for losses or outgoings incurred that relate to holding vacant land.

However, the amendments do not apply to any losses or outgoings relating to holding vacant land to the extent the land was:

       used or held available for use by the taxpayer in the course of a business the taxpayer carries on; or

       used or held available for use by an affiliate, spouse or child of the taxpayer, or an entity that is connected with the taxpayer or of which the taxpayer is an affiliate, in carrying on a business.

The amendments do not apply to:

       corporate tax entities, superannuation plans (other than self managed superannuation funds), managed investment trusts or public unit trusts; and

       unit trusts or partnerships of which all the members are entities of the above types.

A taxpayer can claim deductions for losses or outgoings incurred that relate to holding vacant land if:

       the losses or outgoings were incurred in gaining or producing their assessable income; or

       the losses or outgoings relate to the taxpayer carrying on a business in order to derive assessable income.

 

Detailed explanation of new law

3.9                  Schedule 3 to the Bill amends the ITAA 1997 to deny deductions for losses or outgoings incurred that relate to holding vacant land.

3.10              However, the amendments do not apply to any losses or outgoings relating to holding vacant land to the extent that the land was:

       used or held available for use in the course of a business the taxpayer carries on for the purpose of gaining or producing assessable income; or

       used or held available for use in carrying on a business by an affiliate, spouse or child of the taxpayer, or an entity that is connected with the taxpayer or of which the taxpayer is an affiliate.

3.11              The amendments also do not apply to the extent that the losses or outgoings relate to a period after land ceases to be vacant land.

3.12              The amendments do not prevent certain types of entities from claiming such deductions (refer to paragraphs 3.42 to 3.52).

Vacant land

3.13              Land is vacant, for the purpose of these amendments, if there is no substantial and permanent building or other structure that is in use or available for use on the land, with an independent purpose that is not incidental to the purpose of another structure or proposed structure on the land. A structure includes a building or other thing that is built or constructed on the land. [Schedule 3, item 3, subsection 26-102(1)]

Land

3.14              In this context, the relevant area of land is the land to which the loss or outgoing relates. [Schedule 3, item 3, subsection 26‑102(1) and the notes to subsection 26-102(1)]

3.15              For most losses and outgoings relating to holding land, this will be the land covered by a single property title as the loss or outgoing relates to that title.

3.16              For example, if an entity becomes liable to rates in respect of a property, the relevant land is the property that is the subject of the rates notice. If this land contains a substantial and permanent structure that has an independent purpose and it is not incidental to the purpose of another structure or proposed structure then the land is not vacant and the loss or outgoing may be deductible.

3.17              In other cases a loss or outgoing may relate to only part of the land covered by a title or to land covered by multiple titles.

Substantial and permanent

Meaning of substantial

3.18              To be substantial, a building or other structure needs to be significant in size, value or some other criteria of importance in the context of the relevant property. [Schedule 3, item 3, subsection 26-102(1)]

3.19              Whatever makes the structure substantial must be a feature of that particular structure – a structure is not substantial if it only has value as an adjunct to another structure. For example, a letterbox would not be substantial and a residential garage would be unlikely to be substantial.

Meaning of permanent

3.20              To be permanent, a structure needs to be fixed and enduring. A fixed structure that is not built for a temporary purpose is a permanent structure even if it would not be expected to remain standing forever. Likewise the fact a structure may require some repairs either at the present time or at some future point does not affect its permanency. [Schedule 3, item 3, subsection 26-102(1)]

Independent rather than incidental purpose

3.21              Whether a particular structure has an independent purpose that is not incidental to the purpose of another structure or proposed structure on the land is a question of fact. It needs to be considered in the context of the structure, the land on which it is located and the other structures (if any) that have been, are in the process of being or may be expected to be constructed on that land. [Schedule 3, item 3, subsection 26-102(1)]

3.22              Structures that exist to support the use or functioning of another structure, such as pipes or powerlines, will not satisfy this requirement. Similarly, structures that have the purpose of increasing the utility of another structure will not satisfy this requirement.

3.23              For example, structures such as a residential garage or shed are constructed for the purpose of adding utility for individuals using the residence on the land. Such structures do not have an independent purpose and are incidental to the related residential premises.

3.24              On the other hand, a commercial parking garage complex, a woolshed for shearing and baling wool and a grain silo would all usually have an independent purpose, rather than being incidental to some other structure as they operate separately from and independent of any other structure on the land. In general, the separate primary use of a structure to generate income will be an indication the structure satisfies this requirement.

Example 3.1: Vacant land

Chelsy owns a block of land. She intends to eventually build a rental property on the land. However, while the block of land is fenced and has a retaining wall, it currently does not contain any substantial and permanent building or other structure with an independent purpose that is not incidental to the purpose of another building or structure. As the block of land does not have a substantial and permanent structure on it, it is vacant land and Chelsy cannot deduct any holding costs she may incur in relation to the land.

Time at which land must contain a structure

3.25              For a loss or outgoing to be deductible, the relevant land must generally contain a structure at the time the loss or outgoing is incurred. [Schedule 3, item 3, subsection 26-102(1)]

3.26              However, in some cases a taxpayer may incur a loss or outgoing after ceasing to hold the land to which it relates (for example, they may pay interest on a loan after the land has been sold). In this case, the loss or outgoing will be deductible if the land was not vacant immediately before the taxpayer ceased to hold an interest in the land. [Schedule 3, item 3, paragraph 26-102(1)(b)]

Holding costs

3.27              The amendments apply to the costs of holding land. The amendments clarify that any ongoing borrowing costs, including interest payments on money borrowed for the acquisition of land, are considered to be costs of holding land for this purpose. Other examples of such holding costs include land taxes, council rates and maintenance costs. [Schedule 3, item 3, paragraph 26-102(1)(a)]

3.28              Holding costs can be costs incurred in the capacity of the owner of the freehold interest in the land or of a long term leasehold interest in the land. Alternatively, where the owner leases the land to another party, the amendments also apply separately to any costs incurred by the lessee in relation to their interest in the land as the lessee is also considered to hold the land under the terms of the lease.

Holding costs of vacant land incurred in carrying on a business

3.29              Even where land is vacant (i.e. does not contain any structures) these amendments do not deny deductions to the holder of the land for the costs of holding that land to the extent that they are incurred in:

       carrying on a business by the taxpayer (for example a property development or primary production business); or

       holding land that is used or made available for use in carrying on such a business by certain entities related to the taxpayer.

[Schedule 3, item 3, subsections 26-102(1) and 26-102(2)]

3.30              Whether a business is being carried on depends on the facts of the particular case. Some indicators that the courts have considered relevant are whether the activity has a significant commercial purpose or character, whether there is repetition and regularity of the activity and whether the activity is better characterised as a hobby or recreational pastime.

3.31              The exclusion applies to both land used in a business and land held available for use in a business. This would include land held by a property developer for future development of a housing estate for sale. This ensures that the exception is not limited to land that is in active use by a business but also applies to land or parts of land that are available for business purposes.

3.32              Accordingly, it is sufficient that land is held in the course of carrying on a business for future use or made available to a related entity that is carrying on a business for future use.

3.33              The reference to ‘to the extent that’ ensures that the amendment does not exclude the whole area of vacant land from the principle that holding costs of vacant land should not be deducted if a small part of the land is being used for carrying on a business but the rest of the land is being used for another purpose. For example, where a business is operated on one part of a property that is vacant land by an entity but the remainder of the vacant land is set aside for the construction of residential premises for rent and not held available for business use then apportionment is required. In such circumstances, the entity can only claim a deduction for the costs of holding the land that is used to carry on the business and not for that part of the land that is vacant land.

3.34              The extent to which a property is used or held available for use in carrying on a business must be determined on an apportionment basis that is fair and reasonable in the context of the particular property.

Example 3.2: Expenditure for mixed use land

Howard owns one hectare of land in Queensland. He uses one third of the land for carrying on his firewood sales business. He stores all his firewood in the open and there are no structures on the land. Howard has set aside the remainder of the land to construct a rental property. The remaining part of the land is separately fenced off and has been subject to site work including earthworks to clear the land ready for construction.

Howard is eligible to claim losses and outgoings relating to holding the part of the land that he uses for carrying on his firewood business, to the extent that the loss or outgoing is necessarily incurred for the purpose of gaining or producing the assessable income.

The remainder of his land is not used or held available for use in carrying on his firewood business. Further, as there are no structures on Howard’s land, it cannot contain a building or other structure that meets the requirements of these amendments. As a result, Howard is not entitled to claim any deductions relating to the costs of holding this part of the land even though he intended to derive income from it in the future as a rental property.

Related parties

3.35              The related entities that enable the holder of land to satisfy the test that a business is being carried on are:

       an affiliate of the holder of the land (broadly an entity controlled by the entity that holds the land - see section 328‑130);

       an entity of which the holder of the land is an affiliate (see also section 328-130);

       a spouse, or a child aged under 18 years of age, of the holder of the land (see section 152-47); or

       an entity that is connected with the holder of the land (see section 328-125).

[Schedule 3, item 3, subsection 26-102(2)]

3.36              The leasing of land to related parties is common in the agricultural sector for family enterprises and the special rule for related parties ensures that the amendments do not adversely affect primary producers using such arrangements.

Past business use

3.37              In some cases a taxpayer may incur holding costs relating to a time when land was previously used or made available for use in the course of carrying on a business. These costs can be deducted based on the use of the land at that prior time as they relate to the time at which the prior business use occurred despite being incurred after this use had ceased. [Schedule 3, item 3, subsection 26-102(3)]

3.38              For example, a taxpayer may have borrowed money to acquire land for use in carrying on a business. On ceasing to carry on that business, the taxpayer disposes of the property and repays the loan including outstanding interest. Even though this interest cost is incurred after the business ceases to be carried on, these amendments do not prevent it from being deductible. This is because it relates to (ie. is deductible because of) the prior use or availability for use of land in the period in which the land was used in carrying on the business.

Example 3.3: Expenditure incurred in carrying on a business deductible

Albert carries on business as a property developer and owns a significant property portfolio of vacant land in Melbourne. He incurs outgoings relating to holding the vacant land including interest payments and council rates. Some of this vacant land is currently in use. Other areas are being held available for use in future developments.

As Albert incurs the expenditure to hold the land in carrying on his business for the purpose of producing assessable income it is deductible. It does not matter whether the land is currently being developed or if it is held for future use.

Example 3.4: Expenditure incurred in carrying on a business by a related party of the holder of land

Gina owns vacant land in New South Wales which she rents to her spouse Robin for use in a farming business he carries on. Robin, as Gina’s spouse, forms part of the class of related parties (spouses, children under 18 years old, affiliates and connected entities) that allow Gina to deduct her costs of holding the land. This is because Robin is carrying on a business on it to produce assessable income.

Land will be treated as vacant land until residential premises exist on the land

3.39              A special rule applies when determining if land that contains residential premises within the meaning of the GST Act is vacant. The land is treated as remaining vacant for the purposes of these amendments until the residential premises are:

       able to be occupied under the law; and

       leased, hired or licensed or available for lease, hire or licence.

[Schedule 3, item 3, subsection 26-102(4)]

3.40              This rule means a taxpayer cannot deduct the costs of holding land containing residential premises until the premises can be legally rented and the taxpayer is actively seeking to derive income from the use of the property as residential premises. It ensures that in the context of a rental property, statements about intention are not sufficient. Instead, deductions are only available for the costs of holding land containing residential premises if the premises are available for rent and are placed on the rental market.

3.41              The special rule is only relevant once an amount would otherwise be deductible. This means that:

       the land must contain a substantial and permanent building on it with an independent purpose that is not incidental to another building or structure on the land or to be built on the land; and

       the building must be in use or ready for use to generate income;

in order to satisfy both the general requirements for deductibility under this measure and the separate deductibility requirements in section 8-1. [Schedule 3, item 3, subsections 26‑102(1) and (4)]

Example 3.5: New residential premises available for rent

Anna purchased a block of vacant land and built new residential premises on it. Occupancy permits are issued for the residential premises once the building is considered suitable for occupation and the building is actively made available for rent.

Anna can deduct the costs of holding this block of land to the extent expenses are incurred once the property is legally available for occupation and is leased, hired or licensed or otherwise available for lease, hire or licence.

Excluded classes of entity

3.42              These amendments do not prevent an entity from deducting a loss or outgoing that relates to holding vacant land, if at any time during the income year in which the loss or outgoing is incurred, the entity is:

       a ‘corporate tax entity’ within the meaning of the ITAA 1997;

       a ‘superannuation plan’ that is not a ‘self managed superannuation fund’ within the meaning of the ITAA 1997;

       a public unit trust within the meaning of section 102P of the ITAA 1936;

       a managed investment trust within the meaning of section 275-10; or

       a partnership or unit trust if all of the members of the partnership or trust are entities included on this list (including this item).

[Schedule 3, item 3, subsection 26-102(5)]

3.43              Effectively this means that the amendments do not apply to deductions for institutional investors holding vacant land. Institutional investors usually operate under a corporate structure, are public unit trusts or managed investment trusts, meet the description of being a ‘superannuation plan’ that is not a ‘self managed superannuation fund’ or are unit trusts or partnerships that are ultimately held by these entities. Generally, such investors are considered to have a low risk of incorrectly claiming deductions in relation to vacant land, as these entities are either not controlled by an individual, do not receive tax concessions which flow through to individuals or both.

3.44              Corporate tax entity is defined in section 960-115. It includes entities that are companies, corporate limited partnerships, corporate unit trusts and public trading trusts at the relevant time. It does not include a trust merely because the trustee of the trust is a corporate tax entity.

3.45              ‘Superannuation plan’ and ‘self managed superannuation fund’ are defined in subsection 995-1(1).

3.46              Public unit trust is defined in section 102P of the ITAA 1936. Broadly, a unit trust will be a public unit trust if the units in the trust are listed for quotation in the official list of a stock exchange, offered to the public in a public offer and held by more than 50 people or where a tax‑exempt investment vehicle (such as a foreign superannuation fund) is a substantial unitholder (see subsections 102P(1) and (2) of the ITAA 1936). However, a trust will not be a public unit trust if 20 or fewer people hold the beneficial interest in 75 per cent or more of the income or property of the trust, or if other integrity rules are not satisfied (see section 102P of the ITAA 1936).

3.47              Trusts are also excluded if they are managed investment trusts within the meaning of section 275-10.

3.48              In all cases these requirements ensure that trusts must be widely held and genuinely free from the control of any one member to benefit from this exclusion.

3.49              The final exclusion for unit trusts or partnerships applies if all of the members of the entity (i.e. the unit holders or partners) are listed as excluded entities. It includes unit trusts or partnerships that have a member or members that are an excluded entity because of this amendment (ie. they are themselves a trust or partnership where all of the members are excluded entities).

3.50              This exclusion ensures that where all the benefit of deductions goes to excluded entities, the deductions continue to be available. This includes situations where the excluded entities receive the benefit of deductions through a chain of unit trusts or partnerships.

3.51              The entities to which the measure does not apply are consistent with the excluded entities for the purposes of section 26-31 concerning travel related to use of residential premises as residential accommodation and section 40-27 that relates to reduction of deductions for second-hand assets in residential property.

3.52              References to entities holding vacant land in this Chapter exclude the above entities for which this measure does not apply.

Denied deductions for cost base expenses included in the cost base

3.53              Losses and outgoings that are not deductible in an income year as a result of these amendments are not able to be deducted in later years. However, under the existing law they may be included in the cost base of the asset for CGT purposes, resulting in a corresponding reduction in any capital gain when a CGT event happens if they meet the cost base criteria.

3.54              The relevant CGT event would typically be the sale of land (CGT event A1) but could include other CGT events such as granting, renewing or extending an option to purchase land (CGT event D2) or entering into a conservation covenant over land (CGT event D4).

3.55              This CGT treatment is consistent with the tax treatment that applies for holding vacant land for private use. For instance, an individual who buys land to later build a holiday home solely for private use can include expenses, such as rates and borrowing expenses, in their CGT cost base upon sale if they have never been entitled to claim the expenses as deductions and they are ordinarily a cost base element.

Consequential amendments

3.56              Schedule 3 includes a consequential amendment to add a reference to the new rules to the guidance material in section 12-5 (which contains a list of provisions about deductions). [Schedule 3, items 1 and 2, section 12-5]

Application and transitional provisions

3.57              The amendments commence from the start of the first quarterly period commencing after the day of Royal Assent of the Bill. [Clause 2]

3.58              The measure applies to losses and outgoing incurred on or after 1 July 2019 regardless of whether the land was first held prior to this date. [Schedule 3, item 4]

3.59              This measure was announced by the Government in the 2018-19 Budget on 8 May 2018. Exposure draft legislation was released for public consultation from 15 October 2018 to 31 October 2018.

3.60              Retrospective application is necessary as the amendments are an important integrity measure to prevent deductions being claimed in relation to vacant land that may not be genuinely held for the purpose of gaining or producing assessable income. However, given taxpayers have received advance notice of over a year of the changes and the period of retrospectivity is expected to be resolved well before the end of the 2019‑20 income year, in practice any disadvantage is likely to be minimal.

 

 


Outline of chapter

4.1                  Schedule 4 to the Bill amends the ITAA 1936 to extend to family trusts the anti-avoidance rule that applies to other closely held trusts that undertake circular trust distributions. This allows income tax to be imposed on circular trust distributions at a rate of tax equal to the top marginal tax rate plus the rate of Medicare levy.

4.2                  All references in this Chapter to legislation are to the ITAA 1936 unless otherwise stated.

Context of amendments

4.3                  The income tax law imposes trustee beneficiary non‑disclosure tax on circular trust arrangements. Circular trust distributions occur when the trustee of a closely held trust becomes entitled to an amount that is attributable to trust income that the trustee had distributed to a beneficiary that was a trustee of another trust (a trustee beneficiary).

4.4                  Trustee beneficiary non-disclosure tax can apply to closely held trusts. Closely held trusts are:

       trusts in which up to 20 individuals have a fixed entitlement to 75 per cent or more of the income or capital of the trust; or

       discretionary trusts.

4.5                  However, an ‘excluded trust’ is not treated as a closely held trust.

4.6                  Tax imposed under the Taxation (Trustee Beneficiary Non‑Disclosure Tax) Act (No. 1) 2007 applies to the untaxed amount of a share of the net income of a closely held trust that is included in the assessable income of a trustee beneficiary, if the trustee does not give the Commissioner a correct trustee beneficiary statement.  Alternatively, if the trustee beneficiary gives a correct statement then the trustee is subject to tax imposed under the Taxation (Trustee Beneficiary Non-Disclosure Tax) Act (No. 2) 2007 on the untaxed amount of any circular trust distribution.

4.7                  Prior to the amendments an ‘excluded trust’ included a family trust and as a result trustee beneficiary non-disclosure tax did not apply to circular trust arrangements involving family trusts.

4.8                  Accordingly, as trustee beneficiary non-disclosure tax did not apply to family trusts prior to the amendments, it created the potential for circular trust distributions to occur involving family trusts that could result in the original trustee avoiding liability for tax on such distributions.

4.9                  On 8 May 2018 in the 2018-19 Budget, the Government announced that it would extend to family trusts a specific anti-avoidance rule that applies to other closely held trusts that engage in circular trust distributions. This will better enable the ATO to take action against family trusts that engage in these arrangements by extending the specific
anti-avoidance rule that imposes tax on such distributions at a rate equal to the top personal tax rate plus the Medicare levy.

Summary of new law

4.10              The amendments ensure that trustee beneficiary non‑disclosure tax applies at the top marginal tax rate plus the rate of Medicare levy to the untaxed part of a circular trust distribution to which a trustee of a family trust becomes presently entitled.

Comparison of key features of new law and current law

New law

Current law

Trustee beneficiary non‑disclosure tax applies to the untaxed part of a circular trust distribution to which the trustee of the closely held trust, including a family trust, becomes presently entitled.

Trustee beneficiary non‑disclosure tax applies to the untaxed part of a circular trust distribution to which the trustee of the closely held trust (other than a family trust) becomes presently entitled.

Detailed explanation of new law

Trustee beneficiary non-disclosure tax to apply to circular distributions involving family trusts

4.11              The definition of an excluded trust is amended to remove:

       family trusts;

       a trust in relation to which an interposed entity election has been made and is in force in accordance with section 272-85 in Schedule 2F; and

       a trust that is covered by subsection 272-90(5) in Schedule 2F.

[Schedule 4, items 1 and 2 paragraphs 102UC(4)(b) to (e) of the definition of excluded trust]

4.12              References to family trusts in this Chapter are to the trusts referred to in paragraph 4.11 above.

4.13              The effect of removing these trusts from the definition of excluded trust is that trustee beneficiary non-disclosure tax applies to any circular distributions that are made by these trusts.

No trustee beneficiary statements for family trusts

4.14              Ordinarily, the trustee would be required to lodge a correct trustee beneficiary statement with the Commissioner within a certain period after the end of a year of income. If a trustee beneficiary does not make such a statement, then they are liable to pay trustee beneficiary non‑disclosure tax on the untaxed amount of any trustee beneficiary’s share of the net income of the trust.

4.15              The amendments, however, do not require a trustee of a family trust to lodge a trustee beneficiary statement because it is considered that such reporting would impose unnecessary compliance costs on family trusts. [Schedule 4, item 4, paragraph 102UT(1)(c)]

4.16              As a trustee of a family trust is not required to lodge a trustee beneficiary statement, a corresponding amendment is also made to ensure that a trustee beneficiary of a family trust is not liable to pay tax imposed under the Taxation (Trustee Beneficiary Non-Disclosure Tax) Act (No. 1) 2007 merely because they have not submitted a statement. However, they are liable to tax imposed under the Taxation (Trustee Beneficiary Non‑Disclosure Tax) Act (No. 2) 2007 on the untaxed amount of a share of the net income of a trustee beneficiary associated with a circular trust distribution. [Schedule 4, item 3, paragraph 102UK(1)(ca)]

4.17              These amendments also ensure that a trustee of a family trust is not guilty of an offence under section 8C of the TAA 1953 because it fails to submit a correct trustee beneficiary statement. [Schedule 4, item 4, paragraph 102UT(1)(c)]

Example 4.1: Discretionary family trust

Mr Johnson is the trustee of the Johnson Family Trust, which is a discretionary trust. Mr Johnson makes an election that the trust is a ‘family trust’ for the 2019-20 income year. Under the amended trustee beneficiary rules the Johnson Family Trust is a closely held trust.

The trust has income of $1,000 for the 2019-20 income year. Its net income is equal to the income of the trust. Mr Johnson resolves to distribute 50 per cent of its net income for the 2019-20 income year to his daughter, Ms Johnson, in her capacity as trustee of the
Johnson Jr Family Trust.

Ms Johnson resolves to distribute all $500 she receives to her father, Mr Johnson, in his capacity as trustee. He is now presently entitled to a share of the income of the Johnson Family Trust. Mr Johnson is liable to pay tax as imposed by the Taxation (Trustee Beneficiary Non‑Disclosure Tax) (No. 2) Act 2007 on $500 of income.

Consequential amendments

4.18              As a result of removing family trusts from the definition of an ‘excluded trust’ a consequential amendment has been made to clarify that trustees of family trusts continue to face a withholding obligation where the beneficiary does not quote a tax file number to the trustee before the time of the distribution. [Schedule 4, item 5, subparagraph 12-175(1)(c)(ii) of Schedule 1 to the TAA 1953]

Application and transitional provisions

4.19              The amendments made by Schedule 4 to the Bill commence from the first day of the first quarterly period that occurs after the day the Bill receives the Royal Assent. [Clause 2]

4.20              Schedule 4 to the Bill applies to income years starting on or after 1 July 2019. [Schedule 4, item 6]

4.21              This measure was announced by the Government in the 2018-19 Budget on 8 May 2018. Exposure draft legislation was released for public consultation from 12 October 2018 to 31 October 2018.

4.22              Retrospective application is necessary. The amendments are an important integrity measure that will better enable the ATO to pursue family trusts that engage in circular trust distributions by extending an anti-avoidance rule that applies to other closely held trusts. As taxpayers have had significant notice about the change and trust distributions are normally determined at the end of the income year, in practice any effects are expected to be minimal. 


Chapter 5         
Disclosure of business tax debts

Outline of chapter

5.1                  Schedule 5 to the Bill amends the TAA 1953 to allow taxation officers to disclose the business tax debt information of a taxpayer to credit reporting bureaus when certain conditions and safeguards are satisfied.

5.2                  This will allow tax debts to be placed on a similar footing as other debts, strengthening the incentives for businesses to pay their debts in a timely manner and effectively engage with the ATO to avoid having their tax debt information disclosed.

5.3                  The amendments will reduce unfair financial advantage obtained by businesses that do not pay their tax on time and contributes to more informed decision making within the business community by enabling credit providers and businesses to make a more complete assessment of the credit worthiness of a business.

5.4                  All legislative references in this Chapter are to Schedule 1 to the TAA 1953 unless otherwise stated.

Context of amendments

5.5                  In the 2016-17 Mid-Year Economic and Fiscal Outlook, the Government announced a measure to allow taxation officers to disclose to credit reporting bureaus the tax debt information of businesses that do not effectively engage with the ATO to manage their tax debts.  This Schedule implements this measure by providing an exception to the general prohibition on taxation officers disclosing protected information contained in Division 355 for disclosures of this kind.

5.6                  The legislative framework will ensure that a taxpayer’s tax debt information may only be disclosed to credit reporting bureaus where certain conditions and safeguards are satisfied. This will include conditions and safeguards to be set out in a legislative instrument to be made by the Treasurer which establish whether a taxpayer can be subject to the new disclosure arrangements.

5.7                  The criteria in the legislative instrument are expected to be broadly in line with the criteria set out in the exposure draft of the instrument released, alongside the exposure draft Bill and accompanying explanatory materials, for public consultation on the Treasury website from 11 January 2018 to 9 February 2018. This generally reflects the criteria to be applied for the purposes of the measure (as announced by the Government in the 2016-17 Mid‑Year Economic and Fiscal Outlook) together with some additional safeguards. In the 2016-17 Mid-Year Economic and Fiscal Outlook, the Government announced the measure would initially only apply to business taxpayers with an ABN that have a tax debt, of which at least $10,000 is overdue for more than 90 days. Following consultation, the Government has decided to increase the tax debt threshold from $10,000 to $100,000 to target higher risk tax debts.

5.8                  The legislative framework will also include procedural conditions and safeguards that the Commissioner must satisfy before disclosing a taxpayer’s tax debt information. This ensures the taxpayer is made aware that the Commissioner is considering disclosing their information and affords taxpayers with an opportunity to engage with the ATO to prevent their tax debt information from being reported. This will be supported by rigorous administrative arrangements that will provide taxpayers with the opportunity to initiate a review process prior to any disclosure or to correct the information proposed to be reported.

5.9                  Allowing taxation officers to report tax debt information to credit reporting bureaus in the specified circumstances will:

       support more informed decision making within the business community by making overdue tax debts more visible;

       encourage taxpayers to engage with the ATO to manage their tax debts; and

       reduce the unfair advantage obtained by businesses that do not pay their tax on time.

5.10              Disclosing tax debt information to credit reporting bureaus will allow businesses and credit providers to make a more complete assessment of the credit worthiness of a business. A credit reporting bureau collects, holds and discloses an entity’s debt information to other interested parties for a fee, typically in the form of a credit worthiness report. The impact of the rules providing for the confidentiality of taxpayer information is that businesses that regularly assess the creditworthiness of potential commercial partners would usually be unaware of the existence of any overdue tax debt.

5.11              Currently, the first time creditors may learn that a business has an overdue tax debt is after the ATO commences legal action to recover the tax debt. Tax debt information from the ATO may provide a new and significant piece of information which will improve a business’s ability to make informed decisions about the risk of providing credit or terms of trade to a business with unpaid debts.

5.12              The tax debt information disclosed by the ATO will not necessarily present a complete picture of a business’s outstanding tax debts. Some limitations on the information that may be disclosed will be inbuilt into the legislative framework. Such limitations strike a balance between improving the transparency of tax debt information in the business community and providing fairness for businesses with overdue tax debts. For example, it is expected that tax debt amounts that are being disputed in various forums, and tax debt amounts that are being paid under a payment arrangement, will not be disclosed.

5.13              Another limitation is that only information about tax debts known to the Commissioner can be disclosed. An entity that has outstanding lodgment obligations may have tax debts owed to the Commissioner, which are not known to the Commissioner. Although there will still be limitations on the visibility of tax debt information, the amendments take a significant step towards improving the transparency of overdue tax debts in the business community.

5.14              The amendments reduce the incentive for a taxpayer to prioritise the payment of their non-tax debts over their tax debts given both types of debt may affect the taxpayer’s credit worthiness. This increases the incentive for taxpayers to pay their tax debts in a timely manner and will reduce the unfair competitive advantage obtained by taxpayers who do not pay their tax debts on time over taxpayers who comply with their tax obligations. The amendments will also add a further mechanism by which the Government is acting to limit or prevent illegal phoenixing.

5.15              The amendments provide the ATO with additional options to deal with taxpayers that are choosing not to effectively engage with them to manage their tax debts, complementing the ATO’s existing debt collection activities and strategies. The ATO already has a comprehensive engagement strategy, which is adapted to different taxpayers based on their previous engagement history and circumstances, to increase the likelihood of the taxpayer engaging with the ATO.

5.16              The ATO’s existing debt collection activities may include phone calls, letters, text messages, referral to a debt collection agency or other pre-litigation action. In some cases, more significant action is warranted, including garnishee orders (which involves redirecting money owed to a taxpayer by third parties to the Commissioner to reduce the taxpayer’s tax debt) or recovery through the courts.

5.17              The consequences for a taxpayer of having their tax debt information disclosed to credit reporting bureaus can potentially be serious. For example, such information could lead to difficulty accessing finance, which could have broader ramifications for the business. This is similar to the consequences that could arise as a result of other potential debt collection options available to the ATO. For example, where the ATO issues a garnishee order to the taxpayer’s bank it can provide a signal to the bank that the taxpayer has a tax debt or where the ATO institutes debt recovery proceedings through the courts, the tax debt information of the taxpayer will become public.

5.18              Given the potential consequences of disclosure for a particular taxpayer, the amendments should motivate some taxpayers to promptly pay their tax debt and voluntarily comply with their tax obligations or encourage taxpayers to engage with the ATO preventing their debts from being reported.

5.19              The procedural conditions and safeguards that the Commissioner must satisfy before disclosing a taxpayer’s tax debt information are important features of the legislative framework. In addition, the framework is being designed to ensure the ATO will not disclose the taxpayer’s tax debt information if there is an active complaint relating to the Commissioner’s intention to disclose a taxpayer’s tax debt information or an active dispute involving the underlying tax liability to which the tax debt relates.

5.20              It is expected that the Commissioner will adopt an administrative approach that ensures taxpayers have access to an inexpensive and simple review process prior to their tax debt information being disclosed by the Commissioner. A taxpayer should be able to access an internal ATO review process, as well as a complaints process conducted by the Inspector-General of Taxation. Where possible, existing and well-understood processes for review and complaints will be utilised.

5.21              As the ATO is not compelled to disclose the tax debt information of taxpayers, the ATO is able to temporarily exclude a taxpayer from disclosure while the taxpayer is experiencing exceptional circumstances preventing them from managing their debts. For example, where a taxpayer’s ability to pay their tax debts has been affected by a natural disaster.

Summary of new law

5.22              Schedule 5 to the Bill amends the TAA 1953 to allow taxation officers to disclose the tax debt information of a particular entity operating a business to credit reporting bureaus when certain conditions and safeguards are satisfied.

5.23              This will allow tax debts to be placed on a similar footing as other debts, strengthening the incentives for businesses to pay their debts in a timely manner and effectively engage with the ATO to avoid having their tax debt information disclosed.

5.24              The amendments will contribute to reducing unfair financial advantage obtained by businesses that do not pay their tax on time and contribute to more informed decision making within the business community by enabling credit providers and businesses to make a more comprehensive assessment of the credit worthiness of a business.

Comparison of key features of new law and current law

New law

Current law

Ability of taxation officers to disclose protected information to credit reporting bureaus

The exceptions to the confidentiality of taxpayer information offences are expanded, such that if certain conditions and safeguards are met, taxation officers can disclose protected information relating to a particular taxpayer’s tax debts to credit reporting bureaus.

 

The disclosure must be for the purpose of enabling the credit reporting bureau to prepare, update or issue a credit worthiness report in relation to a particular taxpayer.

 

Generally, the taxpayer whose information is to be disclosed must be within the class of entity declared in a legislative instrument made by the Treasurer. However, this does not apply if the taxpayer is no longer in the declared class of entity, but the disclosure relates to the reasons why the entity is no longer included in the declared class and is for the purpose of enabling the credit reporting bureau to update or correct credit worthiness reports in relation to that taxpayer.

 

In addition, a disclosure will only be permitted if all of the following procedural conditions are met:

               the Commissioner has notified the taxpayer at least 21 days before disclosure; and

               the Commissioner has consulted with the Inspector‑General of Taxation.

However, these procedural conditions do not apply for disclosures to update, correct or confirm information previously disclosed.

 

It is an offence (punishable by two years imprisonment) for a taxation officer to disclose protected information, such as information relating to a particular taxpayer’s tax debt unless an exception to the offence applies.

 

There are no exceptions relating to disclosing protected information relating to a particular taxpayer’s tax debts to credit reporting bureaus.

 

Ability of third parties to on-disclose protected information in the form of a credit worthiness report

It is an exception to the offence for an entity other than a taxation officer to on‑disclose protected information (such as an entity’s tax debt information) if:

       the information was originally disclosed by a taxation officer under the new exception to the confidentiality of taxpayer information offences (see above); and

       the entity making the record or disclosure is not the credit reporting bureau to which the information was originally disclosed or an entity appointed or employed by, or otherwise performing services for, a credit reporting bureau.

It is an offence (punishable by two years imprisonment) for an entity (other than a taxation officer) to on‑disclose or record protected information acquired from a taxation officer.

 

However, the offence does not apply in certain specified circumstances. For example, the offence does not apply if the information was already available to the public.

Detailed explanation of new law

Allowing taxation officers to disclose tax debt information to credit reporting bureaus

Overview

5.25              Under subsection 355-25(1), it is an offence (punishable by two years imprisonment) for a taxation officer to disclose or record protected information acquired in their capacity as a taxation officer. This offence protects the confidentiality of taxpayer information, including information relating to a taxpayer’s tax debts.

5.26              These amendments ensure that taxation officers will not be liable for an offence for disclosing to a credit reporting bureau the tax debt information of a particular taxpayer, provided that:

       the disclosure is to a credit reporting bureau; and

       the record or disclosure is of information that relates to the tax debts of a taxpayer who is within the class of entity whose tax debt may be disclosed, as set out in a legislative instrument to be made by the Treasurer; and

       the disclosure is for the purpose of enabling the credit reporting bureau to prepare, issue, update, correct or confirm a credit worthiness report in relation to a particular taxpayer; and

       the procedural conditions and safeguards for disclosure of the taxpayer’s information have been met.

[Schedule 5, item 2, subsection 355‑72(1)]

5.27              Allowing taxation officers to report protected information relating to a particular taxpayer’s tax debts to credit reporting bureaus in the specified circumstances will:

       support more informed decision making within the business community by making overdue tax debts more visible;

       encourage taxpayers to engage with the ATO to manage their tax debts; and

       reduce the unfair advantage obtained by businesses that do not pay their tax on time. For further information see paragraphs 5.9 to 5.18.

5.28              Before initially disclosing a taxpayer’s tax debt information, taxation officers must ensure compliance with certain procedural safeguards. The procedural safeguards are to notify the taxpayer whose information is to be reported at least 21 days before disclosure and to consult with the Inspector-General of Taxation prior to disclosure. A taxation officer failing to comply with such conditions or disclosing a taxpayer’s tax debt information where the taxpayer did not satisfy the criteria for disclosure commits an offence under subsection 355‑25(1). [Schedule 5, item 2, paragraph 355-72(1)(e)]

5.29              After the initial disclosure of a taxpayer’s tax debt information, and while that entity remains within the class of entity whose tax debt information may be disclosed, taxation officers may make further disclosures of the taxpayer’s tax debt information without the need to satisfy all the procedural conditions. For example, it would be expected that after the initial disclosure, the Commissioner would routinely disclose the balance of a taxpayer’s overdue tax debt to allow credit reporting bureaus to maintain accurate and up-to-date information. The balance of a taxpayer’s overdue tax debt would be calculated incorporating any new tax debts that become overdue following the initial disclosure or amounts paid.

5.30              The Commissioner may also disclose the tax debt information of an entity which no longer meets the criteria for disclosure set out by the Treasurer in a legislative instrument, where the disclosure relates solely to the reasons why an entity no longer meets the criteria and is for the purpose of enabling a credit reporting bureau to update or correct the information in a credit worthiness report in relation to that entity. Taxation officers need not satisfy all the procedural conditions in relation to updates or corrections. [Schedule 5, item 2, subsection 355-72(4)]

5.31              This allows the Commissioner to promptly notify a credit reporting bureau that a particular taxpayer no longer falls within the class of entities whose tax debt information can be disclosed. In such a situation, it is expected that the Commissioner will, in accordance with the agreements entered into between the Commissioner and credit reporting bureaus, instruct credit reporting bureaus to remove the tax debt information of the taxpayer in a timely manner.

5.32              If such a taxpayer once again falls within the class of entities whose tax debt information can be disclosed, taxation officers must treat the potential disclosure of the taxpayer’s tax debt information as an initial disclosure. That is, taxation officers must ensure that all the procedural safeguards have been satisfied prior to any disclosure of the taxpayer’s tax debt information.

5.33              Consistent with most of the other exceptions to the confidentiality of taxpayer information provisions in Division 355, the Commissioner is not obliged to disclose the relevant information. In other words, the Commissioner is permitted, but not required, to disclose the tax debt information of a particular taxpayer, once the conditions relating to an exception are satisfied.

Credit reporting bureaus

5.34              The amendments allow taxation officers to disclose information to an entity the Commissioner recognises as an entity that prepares and issues credit worthiness reports in relation to other entities. The amendments define these entities as credit reporting bureaus. [Schedule 5, item 2, subsection 355-72(7)]

5.35              In contrast to the definition of a ‘credit reporting body’ in the Privacy Act 1988, the definition of a credit reporting bureau is framed in terms of disclosures of information about the credit worthiness of an entity (rather than about an individual). There may be some entities that are recognised by the Commissioner as credit reporting bureaus that do not prepare credit worthiness reports in relation to individuals (and therefore do not meet the strict definition of a ‘credit reporting body’ within the meaning of the Privacy Act 1988).

5.36              An entity that is a credit reporting body within the meaning of the Privacy Act 1988 may also be recognised by the Commissioner as a credit reporting bureau for the purposes of these amendments. However, the Commissioner is not obliged to recognise an entity as a credit reporting bureau, despite the entity meeting the definition of a credit reporting body within the meaning of the Privacy Act 1988.

5.37              The Commissioner must publish a list of entities recognised as credit reporting bureaus on the ATO website.
[Schedule 5, item 2, subsection 355-72(8)]

5.38              For the avoidance of doubt, the list of credit reporting bureaus is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003 as the action is administrative in character.
 
[Schedule 5, item 2, subsection 355-72(9)]

5.39              As the Commissioner has discretion regarding whether or not to make a disclosure (once the conditions have been satisfied), the Commissioner has flexibility to establish appropriate administrative arrangements to ensure an entity which the Commissioner intends to disclose information to complies with any terms and conditions the Commissioner considers appropriate. For example, the Commissioner may choose to only disclose to a credit reporting bureau that has agreed to maintain particular processes, safeguards and mechanisms to ensure taxpayer information is appropriately managed.

5.40              The Commissioner also has flexibility to decide that a particular credit reporting bureau should no longer receive tax debt information from the Commissioner. The Commissioner may choose to no longer recognise the entity as a credit reporting bureau for the purpose of these amendments.

Disclosure must be for specified purpose and be of tax debt information

5.41              In order to rely on the exception to the offence protecting the confidentiality of taxpayer information, the disclosure must be of information that relates to the tax debts of an entity and be for the purpose of enabling the credit reporting bureau to prepare, issue, update, correct or confirm a credit worthiness report in relation to a particular entity. [Schedule 5, item 2, paragraphs 355-72(1)(c) and (d)]

5.42              This allows credit reporting bureaus to provide their customers with more complete information to improve their ability to make informed decisions about the risk of providing credit or terms of trade to a business with unpaid debts. This may involve the dissemination of a credit worthiness report or a product other than a credit worthiness report, which provides information about an entity’s credit worthiness. For further information, see paragraph 5.78.

5.43              It is expected that disclosures of information that relate to the tax debts of a taxpayer and are made for the requisite purpose will include unique identifiers for a business, such as the taxpayer’s ABN and legal name, and their disclosable tax debt amount. The disclosable tax debt amount is the balance of the entity’s overdue tax debt.

5.44              The information that may be disclosed must relate to a taxpayer’s tax debt within the meaning of section 8AAZA of the TAA 1953. This includes primary tax debts such as income tax debts, activity statement debts, superannuation debts and penalties and interest charge debts, and secondary tax debts such as amounts due under a court order.

5.45              Information that corrects an error in the information previously disclosed or updates this information, or provides a reason for the correction or update, may also be disclosed.

5.46              The type of information that may be disclosed as a result of these amendments is referred to in this Chapter as ‘tax debt information’.

5.47              These amendments do not authorise the disclosure of an entity’s tax file number, as this information is protected under the TAA 1953, the ITAA 1936 and the Privacy (Tax File Number) Rule 2015.

Class of entity whose tax debt information may be disclosed

5.48              The amendments provide that the Treasurer may by (disallowable) legislative instrument determine the class of entity whose tax debt information may be disclosed by the Commissioner. Specifying the class of entity in a legislative instrument provides the Government with flexibility to update the criteria promptly to ensure it delivers the right policy outcome. It also provides an appropriate level of Parliamentary scrutiny around the criteria as the instrument will be disallowable. [Schedule 5, item 2, subsection 355-72(5)]

5.49              Before making the legislative instrument, the Treasurer must consult the Australian Information Commissioner in relation to matters that relate to the privacy functions (within the meaning of the Australian Information Commissioner Act 2010) and that would be affected by the proposed instrument. The Treasurer must consider any submissions made by the Australian Information Commissioner during the consultation. This ensures that privacy considerations are taken into account during the process of making, remaking or amending the legislative instrument. [Schedule 5, item 2, subsection 355-72(6)]

5.50              In order to rely on the exception to the offence protecting the confidentiality of taxpayer information introduced by these amendments, a legislative instrument must be in place. That is, such a legislative instrument must be registered on the Federal Register of Legislation and have commenced before any disclosures of tax debt information can occur. [Schedule 5, item 2, paragraph 355-72(1)(c)]

5.51              A taxation officer must disclose in accordance with the legislative instrument. It remains an offence for the taxation officer to disclose information where they have failed to comply with the requirements in the instrument. However, a taxation officer may disclose the tax debt information of an entity that no longer falls within the class declared in the instrument in only very limited circumstances as specified in the law. For further information see paragraphs 5.30 to 5.31. 

5.52              The legislative instrument is expected to specify that an entity is within the class of entity whose tax debt information may be reported if the entity is carrying on a business with an ABN and has a tax debt, of which at least $100,000 is overdue for more than 90 days. This reflects the criteria that will initially be applied for the purposes of the measure, which was announced by the Government in the 2016-17 Mid-Year Economic and Fiscal Outlook and refined following consultation by raising the minimum tax debt threshold. The refinements were announced by the Government in the 2018-19 Mid-Year Economic and Fiscal Outlook.

5.53              In addition, it is expected that the legislative instrument will specify other criteria which ensure that taxation officers cannot disclose the tax debt information of a taxpayer except in certain circumstances. Some further examples of cases of non-disclosure are:

       where the Inspector‑General of Taxation has advised the Commissioner that the Inspector‑General of Taxation has an active complaint relating to the taxpayer’s tax debt or the disclosure of the taxpayer’s tax debt information; or

       where a taxpayer is effectively engaging with the ATO to manage their tax debt by undertaking specific actions; or

       where a taxpayer is disputing the calculation of a tax debt through the Administrative Appeals Tribunal or the courts.

5.54              As the Commissioner has discretion regarding whether or not to disclose the tax debt information of a particular taxpayer, the Commissioner may choose to exclude a taxpayer from disclosure for other reasons that are not determined in the legislative instrument. For public transparency, the Commissioner may set out such additional circumstances in ATO guidance.

Procedural safeguards for initial disclosure

5.55              In order to rely on the exception to the offence protecting the confidentiality of taxpayer information, in addition to being for the specified purpose, the initial disclosure of an entity’s tax debt information to a credit reporting bureau must meet certain conditions. That is, a disclosure that is not information that simply updates, corrects or confirms information previously disclosed will only be permitted if, at the time of the disclosure, all of the following procedural conditions are met:

       the Commissioner has notified the taxpayer at least 21 days before disclosure; and

       the Commissioner has consulted with the Inspector-General of Taxation.

Notification of intention to disclose

5.56              Before a taxation officer can disclose the tax debt information of a taxpayer meeting the class criteria set out in the legislative instrument, the Commissioner must notify the taxpayer in writing at least 21 days before the information is disclosed that the Commissioner intends to disclose their tax debt information. The notice must set out particular information and must be served on the taxpayer. [Schedule 5, item 2, subsections 355-72(2) and (3)]

5.57              This notification requirement does not apply where the information is disclosed to update, correct or confirm the information previously disclosed. This allows corrections to the information to be made quickly and for the ATO to regularly update information previously disclosed. [Schedule 5, item 2, paragraph 355‑72(2)(b)]

5.58              It will remain an offence under subsection 355-25(1) for a taxation officer to disclose tax debt information if the taxation officer does not comply with this notification requirement.

5.59              The notice must be served on the taxpayer. The Commissioner may serve a document on an entity in accordance with the rules set out in Division 4 of the Taxation Administration Regulations 2017. These rules allow the Commissioner to serve a document to an entity’s preferred address for service, which may include a physical address, a postal address or an electronic address.  Section 28A of the Acts Interpretation Act 1901 also provides rules about how documents may be served on individuals and bodies corporate. [Schedule 5, item 2, paragraph 355‑72(3)(e)]

5.60              The notice must:

       set out the type of information to be disclosed, including the balance of the overdue tax debts payable by the taxpayer at the time the notice is given; and

       explain how a taxpayer may make a complaint in relation to the proposed disclosure of their information.

[Schedule 5, item 2, paragraphs 355-72(3)(b), (c) and (d)]

5.61              The notice will allow a taxpayer to determine whether they need to correct the information that may be reported or otherwise make a complaint in relation to the disclosure.

5.62              It is expected that the notice will set out how the taxpayer can effectively engage with the ATO to manage their tax debt or otherwise take steps to ensure they are excluded from disclosure. As such, the notice will provide the taxpayer with a genuine opportunity to prevent the disclosure of their tax debt information.

5.63              At the end of the 21 day period, if the taxpayer still meets the criteria for disclosure as set out in the Treasurer’s legislative instrument, and the other safeguards are met, the Commissioner may disclose the taxpayer’s tax debt information to recognised credit reporting bureaus.

Consultation with Inspector-General of Taxation

5.64              Before a taxation officer can initially disclose the tax debt information of a taxpayer, the Commissioner must firstly consult with the Inspector‑General of Taxation in relation to the disclosure of the information. This requirement does not apply where the information is disclosed to update, correct or confirm the information previously disclosed. This exception simply allows updates and corrections to information previously disclosed to be made promptly.
[Schedule 5, item 2, subparagraph 355-72(1)(e)(i)]

5.65              The Inspector-General of Taxation is a body that is empowered to conduct investigations, including investigations into action affecting a particular entity that:

       is taken by a tax official; and

       relates to tax administration matters; and

       is the subject of a complaint by that entity to the Inspector‑General of Taxation.

5.66              The requirement for taxation officers to consult with the Inspector-General of Taxation prior to making a disclosure of an entity’s tax debt information is designed as a safeguard to ensure that the Commissioner does not disclose the tax debt information of an entity inappropriately.

5.67              The Inspector-General of Taxation is already empowered to conduct investigations into complaints made by particular taxpayers about the disclosure of their tax debt information as part of the Inspector‑General of Taxation’s existing functions set out in the Inspector‑General of Taxation Act 2003.

5.68              It is anticipated that a taxpayer who has been given a notification of the Commissioner’s intention to disclose their tax debt information and is not satisfied with the resolution of the complaint through the mechanisms provided by the ATO may wish to lodge a complaint with the Inspector-General of Taxation.

5.69              Genuine consultation requires taxation officers to notify the Inspector-General of Taxation of the Commissioner’s intention to disclose a particular taxpayer’s tax debt information. It involves providing the Inspector‑General of Taxation with a reasonable timeframe to verify whether any active debt related complaints from the affected taxpayer have been lodged with the Inspector-General and respond to the Commissioner.

5.70              As the Commissioner is required to notify affected taxpayers of the Commissioner’s intention to disclose their tax debt information at least 21 days before disclosing the information, it is possible a taxpayer may lodge a complaint with the Inspector-General of Taxation during this
21 day period. Therefore, providing the Inspector-General of Taxation with a reasonable timeframe to verify whether any relevant complaints have been lodged involves waiting until the end of this 21 day period before requesting a response from the Inspector-General of Taxation. Providing a reasonable timeframe also involves the Commissioner taking into account any requests from the Inspector-General for further time to consider the disclosure of a particular taxpayer’s information.

5.71              Where the Inspector-General of Taxation responds by making a recommendation about the disclosure of the taxpayer’s tax debt information, the Commissioner must have regard to any recommendation when making a final decision about the disclosure.

5.72              It is expected that the legislative instrument declaring the class of entity whose tax debt information may be disclosed by the Commissioner will facilitate the further involvement of the Inspector‑General of Taxation in the process. For example, the legislative instrument may only permit a disclosure where the Inspector-General of Taxation has not advised that it is conducting such an investigation relating to the taxpayer’s tax debt or the Commissioner’s intention to disclose the taxpayer’s tax debt information. In order to rely on the exception to the offence protecting the confidentiality of tax information, taxation officers will be required to take reasonable steps to confirm that such an investigation is not underway before making the disclosure.

5.73              The requirement to consult with the Inspector‑General of Taxation introduced by these amendments only applies for an initial disclosure of a taxpayer’s tax debt information. Any requirements included in the legislative instrument will apply for initial disclosures, as well as disclosures for the purpose of updating, correcting or confirming information previously disclosed.

Allowing third parties to on-disclose tax debt information

5.74              The policy intent of this measure is to allow credit reporting bureaus to use the tax debt information of particular taxpayers to prepare credit worthiness reports, which will be made available to various third parties, such as banks and other businesses seeking to make a more complete assessment of the entity’s credit worthiness. For example, a credit reporting bureau may prepare a credit worthiness report which includes a credit score, where that score has been compiled using information from a range of sources including the tax debt information disclosed by the ATO. Other credit reporting bureaus may transform or present tax debt information in other ways on a credit worthiness report or similar product.

5.75              It is intended that customers of credit reporting bureaus (third parties) be permitted to record or otherwise deal with this information in the course of their businesses. This allows them to use the information to make more informed decisions about who they provide credit to.

5.76              It is an offence (punishable by two years imprisonment) under section 355-155 for an entity (other than a taxation officer) to on-disclose or record protected information acquired from a taxation officer.

5.77              A credit reporting bureau will not be liable for an offence under section 355-155 (on-disclosure of protected information by other people) if they record or disclose the protected information for the original purpose, or in connection with the original purpose of the disclosure (see section 355-175). That is, the credit reporting bureau may use tax debt information concerning a particular entity for preparing, updating and issuing a credit worthiness report in relation to that entity. An entity appointed or employed by or otherwise performing services for a credit reporting bureau receiving the information for the credit reporting bureau will also be able to rely on the exception in section 355-175.

5.78              It is expected that credit reporting bureaus will provide a credit worthiness report to their customers for a fee. A credit reporting bureau may also use an entity’s tax debt information to prepare and disseminate to interested parties other products which provide information about an entity’s credit worthiness. For example, a risk alert is a product that provides updates to entities that have previously subscribed to receive updates about the credit worthiness of a particular entity. This may be a purpose in connection with the original purpose of the disclosure. However, a disclosure for any other purpose by a credit reporting bureau remains an offence.

5.79              Generally, these type of activities are likely to constitute making the information ‘publicly available’ for the purposes of section 355-170 (which provides an exception to the offence in section 355-155 (on‑disclosure of protected information by other people) if the information was already available to the public). However, section
355-170 may not apply to protect third parties where the information is only available to select customers.

5.80              For the avoidance of doubt, these amendments ensure that the customers of a credit reporting bureau and any other third parties subsequently dealing with tax debt information are not exposed to criminal sanctions for recording or on-disclosing the information.
 
[Schedule 5, item 3, section 355-215]

Interactions with privacy law

5.81              The amendments in this Schedule strike an appropriate balance between improving the transparency of tax debt information in the business community and providing fairness for businesses with overdue tax debts. In order to achieve this balance, the legislative framework includes a number of safeguards and procedural conditions which must be satisfied before a taxpayer’s tax debt information may be disclosed. Further, the criteria for the lawful disclosure of a taxpayer’s tax debt information (to be specified by legislative instrument) will be designed to allow disclosure only when it would be a proportionate response, given the particular entity and the risk their tax debt represents to other businesses.

5.82              In these circumstances, the disclosure of a taxpayer’s tax debt information, whilst having impacts on privacy, is considered to be an effective and proportionate means of achieving important policy objectives. Information about the Schedule’s engagement with privacy is in the statement of compatibility with human rights.

5.83              The amendments are consistent with the requirements of the Privacy Act 1988.

Consistency with the Australian Privacy Principles

5.84              Schedule 1 to the Privacy Act 1988 sets out the Australian Privacy Principles, which deal with the handling of personal information. Australian Privacy Principle 6 provides that if an APP entity (an agency or organisation) holds personal information about an individual that was collected for a particular purpose (the primary purpose), the entity must not use or disclose the information for another purpose (the secondary purpose). However, this does not apply if the use or disclosure of the information is authorised under an Australian law (refer paragraph 6.2(b) of Schedule 1 to the Privacy Act 1988).

5.85              The Privacy Act 1988 defines ‘personal information’ as meaning information or an opinion about an identified individual, or an individual who is reasonably identifiable, whether the information or opinion is true or not and whether the information or opinion is recorded in a material form or not.

5.86              To the extent that tax debt information is ‘personal information’ within the meaning of the Privacy Act 1988, its use or disclosure is, relevantly, authorised under an Australian law if the use or disclosure is in accordance with the amendments or section 355-175. The amendments allow taxation officers to disclose tax debt information and third parties to on-disclose the tax debt information. Section 355-175 has the effect of allowing credit reporting bureaus to on-disclose tax debt information in connection with the original purpose of the disclosure. [Schedule 5, items 2 and 3, sections 355-72 and 355-215]

Consistency with Part IIIA of the Privacy Act 1988

5.87              Part IIIA of the Privacy Act 1988 deals with the privacy of information relating to credit reporting. This includes rules governing a credit reporting body’s collection, use and disclosure of information about individuals. A ‘credit reporting body’ is defined in the Privacy Act 1988 as an organisation or prescribed agency that carries on a credit reporting business. A credit reporting body may be a recipient of tax debt information disclosed by the Commissioner, where the entity is also considered a credit reporting bureau for the purposes of the amendments.

5.88              Section 20C of the Privacy Act 1988 prohibits a credit reporting body from collecting credit information about an individual unless, relevantly, the collection of credit information is required or authorised by or under an Australian law.

5.89              Credit information is defined in section 6N of the Privacy Act 1988. To the extent that tax debt information is ‘credit information’ within the meaning of the Privacy Act 1988, its collection by a credit reporting body is authorised under an Australian law, where that collection is a direct consequence of a disclosure in accordance with the amendments. [Schedule 5, items 2 and 3, sections 355-72 and 355-215]

5.90              Section 20E of the Privacy Act 1988 prohibits a credit reporting body from using or disclosing credit reporting information (it holds) about an individual unless, relevantly, the use or disclosure of credit reporting information is required or authorised by or under an Australian law.

5.91              Credit reporting information is defined in section 6 of the Privacy Act 1988. To the extent that tax debt information is ‘credit reporting information’ within the meaning of the Privacy Act 1988, its use or disclosure is, relevantly, authorised under an Australian law where that use or disclosure is in accordance with section 355-175. Section 355-175 has the effect of allowing credit reporting bureaus to on-disclose tax debt information in connection with the original purpose of the disclosure.

Consequential amendments

5.92              This Schedule includes consequential amendments to define ‘credit reporting bureau’ in section 995-1 of the ITAA 1997 and insert notes to assist users of the legislation. [Schedule 5, items 1 to 3, subsection 995‑1(1) of the ITAA 1997 and notes to subsections 355-72(1) and (4) and section 355‑215]

Application and transitional provisions

5.93              The amendments apply in relation to records and disclosures of information on or after the day after the Bill receives Royal Assent (regardless of whether the information was acquired before, on or after that day). [Schedule 5, item 4]

5.94              Additionally, the amendments do not authorise records or disclosures of information until a legislative instrument determining the class of entity whose tax debt information may be disclosed by the Commissioner is in force. [Schedule 5, item 2, paragraph 355-72(1)(c)]


Chapter 6         
Electronic invoicing implementation

Outline of chapter

6.1                  Schedule 6 to the Bill amends the TAA to confer on the Commissioner functions and powers to develop and/or administer a framework or system for electronic invoicing.

Context of amendments

6.2                  Electronic invoicing is the electronic exchange of invoices and other procurement related information and documentation between suppliers and buyers. Establishing an electronic invoicing regime provides an opportunity to streamline invoice transactions. In the electronic invoicing context, ‘invoice’ includes what are traditionally regarded as invoices and other procurement related information and documentation. Electronic invoicing removes the need for businesses to create invoices that then have to be scanned, posted or emailed, and manually entered into the receiver’s accounting system. An electronic invoice can be sent directly to a customer’s system, even if the two businesses are using different accounting software. Deloitte Access Economics estimates that electronic invoicing could result in economy‑wide benefits of up to $28 billion over ten years. Electronic invoicing reduces processing times and errors leading to faster payment. Electronic invoicing will reduce the costs of doing business for both government and industry and also support the Government’s policy of improving payment times to small business.

6.3                  The Australian and New Zealand governments are working together to pursue common approaches to electronic invoicing as part of the Single Economic Market agenda. In March 2018, the Australian and New Zealand Prime Ministers agreed to a trans-Tasman approach to electronic invoicing. On 22 February 2019, the Prime Minister jointly announced with the New Zealand Prime Minister the two countries’ intention to adopt the Pan-European Public Procurement Online interoperability framework for trans‑Tasman electronic invoicing.

6.4                  The Pan‑European Public Procurement Online interoperability framework is a secure network that enables government organisations and private enterprises to exchange business documents, such as invoices, electronically. The Pan‑European Public Procurement Online interoperability framework connects different electronic procurement and invoicing systems by establishing a set of common business processes and technical standards. This provides a seamless exchange of information between trading partners who use different software applications. The Pan-European Public Procurement Online interoperability framework is currently used in over 30 countries across Europe, Asia and North America. It is proposed that the Commissioner become the Australian local Pan-European Public Procurement Online Authority due to the skills and experience the Commissioner has with similar projects. However, the Commissioner does not currently have specific functions and powers related to electronic invoicing.

Summary of new law

6.5                  Schedule 6 to the Bill amends the TAA to confer on the Commissioner:

       functions to develop and/or administer a framework or system for electronic invoicing; and

       powers to do all things necessary or convenient to be done for or in connection with the performance of those functions.

Comparison of key features of new law and current law

New law

Current law

The Commissioner’s functions include the functions of developing and/or administering a framework or system for electronic invoicing. The Commissioner’s powers include the power to do all things necessary or convenient to be done for or in connection with the performance of those functions.

The Commissioner does not have specific functions and powers related to electronic invoicing.

Detailed explanation of new law

6.6                  Schedule 6 to the Bill amends the TAA to confer on the Commissioner functions and powers related to electronic invoicing.

6.7                  Schedule 6 to the Bill provides that the Commissioner’s functions include the function of developing and/or administering a framework or system for electronic invoicing. These are broad functions that give the Commissioner the flexibility to determine how to most efficiently and effectively implement an electronic invoicing regime. [Schedule 6, item 2, subsection 3G(1) of the TAA 1953]

6.8                  These functions are not limited to developing or implementing electronic invoicing for use solely within Australia. The Commissioner can develop and/or administer a framework or system for electronic invoicing that may connect to, or be accessed by, users in other countries.

6.9                  Schedule 6 to the Bill also provides that, without limiting the functions conferred on the Commissioner by the Bill, the Commissioner may develop the framework or system by adopting, with appropriate modification, a system for electronic invoicing operating outside Australia. This could allow the Commissioner to, for example, adopt the Pan-European Public Procurement Online interoperability framework for electronic invoicing, for use both in Australia and for trans-Tasman and other international transactions. [Schedule 6, item 2, subsection 3G(2) of the TAA 1953] 

6.10              Schedule 6 to the Bill gives the Commissioner the power to do all things that are necessary or convenient to be done for or in connection with the performance of the functions conferred by Schedule 6 to the Bill. This is intended to ensure a comprehensive conferral of power to allow the Commissioner to carry out the functions described above. [Schedule 6, item 2, subsection 3G(3) of the TAA 1953] 

6.11              Schedule 6 to the Bill also provides that three specific powers are included in the power to do all things that are necessary or convenient to be done for or in connection with the performance of the functions:

       the power to enter into agreements for integrating the framework or system for electronic invoicing that the Commissioner operates with frameworks or systems for electronic invoicing that operate outside Australia;

       the power to enter into agreements for accessing the framework or system that the Commissioner operates; and

       the power to liaise with foreign countries and agencies, and other entities, of foreign countries to develop common approaches to electronic invoicing between countries. [Schedule 6, item 2, subsection 3G(4) of the TAA 1953]

6.12              These specified powers do not limit the broader power to do all things that are necessary or convenient to be done for or in connection with the performance of the Commissioner’s functions. Rather, the powers are specified to remove any doubt that the Commissioner can engage in the described activities.

6.13              Schedule 6 to the Bill also provides that the conferral of powers and functions on the Commissioner does not limit any other functions or powers that the Commissioner has. [Schedule 6, item 2, subsection 3G(5) of the TAA 1953]  

Application and transitional provisions

6.14              The amendments made by Schedule 6 to the Bill commence and apply from the day after Royal Assent.


Chapter 7      
Salary sacrifice integrity

Outline of chapter

7.1                  Schedule 7 to this Bill amends the SGAA to improve the integrity of the superannuation system by ensuring that an individual’s salary sacrifice contributions cannot be used to reduce an employer’s minimum SG contributions.

7.2                  All legislative references in this Chapter are to the SGAA.

Context of amendments

7.3                  In December 2016, the Government established the Superannuation Guarantee Cross-Agency Working Group to investigate practical ways to improve employer compliance with their SG obligations.

7.4                  On 14 July 2017, the Minister for Revenue and Financial Services announced that the Government would amend the SGAA to implement recommendations made by the Cross-Agency Working Group to close loopholes that could be used by employers to short change employees who choose to make salary sacrifice contributions into their superannuation accounts and released the Cross‑Agency Working Group’s Report, Superannuation Guarantee Non-compliance.

7.5                  In particular, these amendments will implement the Cross‑Agency Working Group’s recommendations to amend the law to:

       prevent contributions made as part of a salary sacrifice arrangement from satisfying an employer’s SG obligations (Recommendation 8); and

       specifically include salary or wages sacrificed to superannuation in the base for calculating an employer’s SG obligations (Recommendation 9).

7.6                  Under a salary sacrifice arrangement an employee agrees to forego part of their future salary or wages in return for their employer providing benefits of a similar value for example, in exchange for a company provided car or childcare benefits.

7.7                  Employees are also able to salary sacrifice amounts of their future salary and wages to be paid by their employer to a superannuation fund as superannuation contributions. These contributions are deductible for the employer and are not included in the assessable income of the employee (subject to concessional contributions caps). Instead, these contributions are included in the assessable income of the superannuation fund and generally taxed concessionally at a rate of 15 per cent.

7.8                  Currently, salary sacrificed amounts count towards employer contributions that reduce an employer’s mandated SG contributions. In addition, employers can calculate SG obligations on a (lower) post salary sacrifice earnings base. While employees salary sacrificing may obtain other taxation benefits, employees who salary sacrifice to boost their superannuation savings may end up with lower superannuation contributions than they expect.

Summary of new law

7.9                  Schedule 7 to this Bill amends the SGAA to prevent employers from using their employees’ salary sacrifice superannuation contributions to reduce their own SG contributions and ensure that SG is paid on the pre-salary sacrifice base.

7.10              The amendments improve the integrity of the superannuation system by ensuring that an individual’s salary sacrifice contributions cannot be used to reduce an employer’s minimum SG contributions.

7.11              The Government announced the changes on 14 July 2017 as part of its response to the Cross-Agency Working Group’s Report, Superannuation Guarantee Non-Compliance.

Comparison of key features of new law and current law

New law

Current law

Amounts that an employee salary sacrifices to superannuation cannot reduce an employer’s SG charge. Salary sacrificed amounts also do not form part of any late contributions an employer makes that are eligible to be offset against the SG charge.

Amounts that an employee salary sacrifices to superannuation may reduce an employer’s SG charge. Salary sacrificed amounts, if paid late, may also be offset against the SG charge.

To avoid a shortfall an employer must contribute at least 9.5 per cent of an employee’s ordinary time earnings (OTE) base to a complying superannuation fund or retirement savings account (RSA). An employee’s OTE base is comprised of their OTE and any amounts sacrificed into superannuation that would have been OTE, but for the salary sacrifice arrangement.

To avoid a shortfall an employer must contribute at least 9.5 per cent of an employee’s OTE to a complying superannuation fund or RSA. The employer may choose whether or not to include salary sacrificed amounts in the OTE.  

If an employer has a shortfall, the amount of the shortfall is calculated by reference to their employee’s total salary or wages base. An employee’s salary or wages base is comprised of their salary and wages, and any amounts sacrificed into superannuation that would have been salary or wages, but for the salary sacrifice arrangement.

If an employer has a shortfall, the amount of the shortfall is calculated by reference to their employee’s total salary and wages. The employer may choose whether or not to include salary sacrificed amounts in the employee’s salary or wages.  

 

Detailed explanation of new law

7.12               The amendments implement the Cross Agency Working Group’s recommendation to ensure SG is paid on the pre-salary sacrifice base (Recommendation 9) and that salary sacrificed amounts are not used to reduce the minimum amount of SG the employer must pay (Recommendation 8). Recommendation 9 is achieved by introducing the concepts of quarterly salary and wages base and OTE base which explicitly include sacrificed amounts. The amendments implement Recommendation 8 by providing amounts sacrificed under a salary sacrifice arrangement will not reduce an employer’s mandated SG contributions.

Working out the SG shortfall

7.13               Employers are liable for the SG charge for a quarter if they have a shortfall for the quarter (section 16). An employer’s shortfall is calculated by reference to the SG charge percentage, which is currently 9.5 per cent (subsection 19(2)).

7.14               An employer will not have a shortfall for a quarter if they contribute at least 9.5 per cent of an employee’s OTE base for the quarter. If insufficient contributions are made, the shortfall is calculated by multiplying the difference between 9.5 per cent and the actual percentage of contributions that were made, by the employee’s quarterly salary or wages base. [Schedule 7, items 3 and 7, subsection 19(1)(formula) and subsection 23(2)(formula)]

7.15               These amendments introduce the concept of the quarterly salary or wages base. This concept applies to an employer in respect of an employee and is the sum of:

       the total salary or wages paid by the employer to the employee for the quarter; and

       any salary or wages amounts of the employee for the quarter in respect of the employer that have been sacrificed into superannuation.

[Schedule 7, items 1 and 4, definition of ‘quarterly salary or wages base’ in subsection 6(1) and subsection 19(1)]

7.16               The inclusion of sacrificed salary or wages amounts ensures that the shortfall and charge is calculated on the pre-salary sacrifice base and that employers cannot calculate their superannuation guarantee obligations on reduced salary and wages.

7.17               A sacrificed salary or wages amount refers to the amount by which an employee agrees their salary and wages be reduced for a quarter under a salary sacrifice arrangement. A salary sacrifice arrangement is one under which:

       a contribution is made, or will be made to a complying superannuation fund or an RSA by the employer for the benefit of the employee; and

       the contribution was made because the employee agreed for it to be made in return for the employee’s salary or wages for the quarter being reduced.

 [Schedule 7, items 1 and 2, definition of ‘salary sacrifice arrangement’ in subsection 15A(1), definition of ‘sacrificed salary or wages amount’ in subsection 6(1) and paragraph 15A(2)(b)]

7.18               Sacrificed salary or wages amounts do not include amounts that, had they been paid to an employee, would have been excluded salary and wages. [Schedule 7, item 2, subsections 15A(3) and 15A(4)]

7.19               Salary and wages are excluded salary or wages if they are paid to, for example, a part-time employee under 18 years of age, an employee to whom an international social security agreement applies or an employee who earns less than $450 a month (sections 27 and 28).

7.20               Where sacrificed salary or wages amounts under a salary sacrifice arrangement are taken into account for the one quarter, but not actually contributed to the fund in that quarter – the amount will be counted in the quarter to which the salary sacrifice arrangement relates. Where sacrificed salary or wages amounts are never contributed and instead paid to the employee in a later quarter (for example, at the employee’s request) – they will be disregarded to avoid double counting.  [Schedule  7, item 5, subsection 19(3)]

7.21               The quarterly salary and wages base remains subject to limits set by the maximum contribution base.  [Schedule 7, item 5, subsection 19(4)]

Reduction of the SG charge percentage

7.22               These amendments ensure that the SG charge percentage of an employer in relation to an employee is reduced if, so far as is relevant, the employer makes a contribution (other than a sacrificed contribution) to a superannuation fund that is not a defined benefit fund or to an RSA for the employee’s benefit (section 23). The amount of the reduction is worked out using the formula:

[Schedule 7, item 7, subsection 23(2)(formula)]

A sacrificed contribution is one made to a complying super fund or RSA under a salary sacrifice arrangement. [Schedule 7, item 1, subsection 6(1)]

These amendments clarify that sacrificed contributions are not taken into account in applying the above formula. This ensures that sacrificed contributions are not treated as contributions that reduce an employer’s SG charge. [Schedule 7, item 6, subsection 23(2)]

7.23               The OTE base is the number of dollars in the sum of:

       the OTE of the employee for the quarter; and

       any sacrificed OTE amounts of the employee for the quarter in respect of the employer.

[Schedule 7, item 9, definition of ‘ordinary time earnings base’ in subsection 23(2)]

7.24               This ensures that mandatory employer contributions that reduce the SG charge are calculated on a pre-salary sacrifice base.

7.25               A sacrificed ordinary time earnings amount refers to the amount by which an employee agrees their OTE be reduced for a quarter under a salary sacrifice arrangement. A salary sacrifice arrangement is one under which :

       a contribution is made or will be made to a complying superannuation fund or an RSA by the employer for the benefit of the employee; and

       the contribution is made because the employee agreed for it to be made in return for the employee’s OTE for the quarter being reduced.

 [Schedule 7, items 1 and 2, definition of ‘sacrificed ordinary time earnings amount’ in subsection 6(1) and paragraph 15A(2)(a)]

7.26               Sacrificed OTE amounts do not include amounts that would have been excluded salary and wages if they had been paid to the employee and will therefore not be counted as part of the OTE base. [Schedule 7, items 2, 11, 12 and 13, subsections 15A(3), 15A(4) and 23(12)]

7.27               Where sacrificed OTE amounts under a salary sacrifice arrangement are taken into account for one quarter, but not actually contributed to the fund in that quarter – the amount will be counted in the quarter to which the salary sacrifice arrangement relates.  Where sacrificed OTE amounts are never contributed at all, for example, where they are paid as OTE instead of being contributed to superannuation – they will be disregarded to avoid double counting. [Schedule 7, item 10, subsection 23(7A)]

7.28               In addition, where the employer makes a late contribution for their employee and seeks to offset it against the SG charge they have incurred, sacrificed amounts cannot form part of that late contribution. [Schedule 7, item 14, subsection 23A(1)]

7.29               Section 23B allows small businesses to comply with employee choice of fund requirements while minimising compliance costs, by providing a free Small Business Superannuation Clearing House through which contributions can be paid to various funds. Section 23B ensures small businesses that make contributions through an approved clearing house are treated as having complied with their SG obligations by making the contribution to their employee’s fund or RSA. The provision currently applies to contributions made through an approved clearing house for the purposes of section 23 (reduction of the charge percentage) and section 23A (offsetting late payments). The amendments modify the section so that it also applies to contributions made through an approved clearing house for the purposes of section 15A (salary sacrifice arrangements). [Schedule 7, items 15 to 17, section 23B]

Example 7.1: Sacrificed contributions do not reduce SG charge and employers cannot use salary sacrificed amounts to satisfy their own SG obligations

Pablo has quarterly OTE of $15,000 which would ordinarily generate an entitlement to $1,425 in SG contributions ($15,000 x 9.5 per cent). He salary sacrifices $1,000 a quarter, expecting his superannuation contributions to rise to $2,425 for that quarter. 

However, his employer uses the sacrificed amount ($1,000) to satisfy part of the employer’s mandated SG obligation, and only makes a total contribution of $1,425, mostly consisting of the employee’s $1,000 salary sacrificed amount.

Under the new amendments, Pablo’s $1000 sacrificed contribution will no longer reduce the charge. Therefore, the charge percentage would only be reduced by 2.83 per cent ($425 / $15,000 x 100). As the employer is required to contribute 9.5 per cent of the OTE base, they must contribute an additional 6.67 per cent to meet their minimum SG obligations. The employer has a shortfall of approximately $1,000 (6.67 per cent x $15,000).

As sacrificed contributions no longer reduce the charge Pablo’s employer will need to contribute $1 425 (mandatory employer contributions) in addition to the $1,000 employee sacrificed amount, to avoid a shortfall and liability for the SG charge.

Example 7.2: SG liability to be calculated on the pre-salary sacrifice base and Employers cannot calculate SG contribution on post salary sacrifice OTE base

Consuela earns the same salary as Pablo ($15,000 per quarter) and salary sacrifices the same amount ($1,000 per quarter).

Consuela’s employer previously calculated SG liability on Consuela’s post salary sacrifice wage ($14,000 instead of $15,000 per quarter). The employer contributed $2,330 per quarter ($1,330 mandated employer contribution + $1,000 salary sacrifice amount) instead of $2,425 ($1,425 + $1,000).

When calculating the amount to be contributed, Consuela’s employer must (under the new law) include sacrificed OTE amounts in the OTE base. The OTE base is the sum of OTE and sacrificed OTE amounts.

Consuela’s employer’s charge percentage would be reduced by 8.86 per cent ($1,330 / $15,000 x 100).

The $1,330 is the amount the employer contributed, and the $15,000 is the correct OTE base that the employer’s SG obligation should have been calculated on.

Since 8.86 per cent is less than the required 9.5 per cent, the employer will have a charge percentage of 0.64 per cent under section 19 and a shortfall of $95.

To avoid the shortfall, Consuela’s employer contributes $2,425 each quarter (consisting of $1,425 in mandated employer contribution and $1,000 in sacrificed amounts) which is the correct amount.

Example 7.3: Amounts that are salary and wages but not OTE

Lucille is paid $20,000 in salary and wages a quarter, which includes overtime of $5,000. She enters into a salary sacrifice arrangement of $2,500 of overtime pay per quarter. Her OTE is $15,000 a quarter (as overtime is not included in OTE).

Lucille’s total employer contribution should be $3,925 ($1,425 mandatory employer contribution + $2,500 sacrificed amount for the quarter).

Lucille’s employer contributes $3,925, with $1,425 being the amount relevant for reducing the charge. The sacrificed amount is not added into the base of OTE, to the extent it includes overtime. This is because it is not a sacrificed OTE amount, since the salary sacrifice arrangement results in no reduction in the employee’s OTE.

Lucille’s employer’s SG charge percentage is reduced by the following amount:

Therefore, the SG charge percentage is reduced to zero and there is no shortfall to pay, which is the correct outcome since overtime should be excluded from OTE.

Application and transitional provisions

The amendments made by this Schedule apply in relation to working out an employer’s superannuation guarantee shortfall for quarters beginning on or after 1 July 2020. [Schedule 7, item 18]


Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Schedule 1 - Tax treatment of concessional loans involving tax exempt entities

8.1                  Schedule 1 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

8.2                  This Schedule amends Schedule 2D to the ITAA 1936 (which applies to tax exempt entities that become taxable) to:

       specify the basis for working out the market value of TOFA assets and liabilities entered into on concessional terms held at the transition time for the purposes of applying the TOFA provisions; and

       modify the operation of the TOFA balancing adjustment that is made when the entity ceases to have such a TOFA asset or liability.

Human rights implications

8.3                  This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

8.4                  This Schedule is compatible with human rights as it does not raise any human rights issues.

Schedule 2 - Enhancing the integrity of the small business CGT concessions in relation to partnerships

8.5                  Schedule 2 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

8.6                  This Schedule amends the tax law to prevent the small business CGT concessions in Division 152 of the ITAA 1997 from being available for assignments of the income of a partner and other rights or interests in the income or capital of a partnership that are not a membership interest in the partnership.

Human rights implications

8.7                  This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

8.8                  This Schedule is compatible with human rights as it does not raise any human rights issues.

Schedule 3 - Limiting deductions for vacant land

8.9                  Schedule 3 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

8.10              This Schedule amends the ITAA 1997 to deny deductions for losses or outgoings incurred that relate to holding vacant land.

8.11              However, the amendments do not apply to any losses or outgoings relating to holding vacant land to the extent to which:

       the taxpayer carries on a business in order to earn assessable income on the vacant land; or

       an affiliate, spouse or child of the taxpayer, or an entity that is connected with the taxpayer or of which the taxpayer is an affiliate carries on a business on the vacant land.

Human rights implications

8.12              This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

8.13              This Schedule is compatible with human rights as it does not raise any human rights issues.

 

Schedule 4 - Extending anti-avoidance rules for circular trust distributions

8.14              Schedule 4 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

8.15              The amendments ensure that the trustee beneficiary non‑disclosure tax applies at the top marginal tax rate plus Medicare levy to the untaxed part of a circular trust distribution to which a trustee of a family trust becomes presently entitled.

Human rights implications

8.16              This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

8.17              This Schedule is compatible with human rights as it does not raise any human rights issues.

Schedule 5 - Disclosure of business tax debts

8.18              Schedule 5 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

8.19               This Schedule amends the TAA 1953 to allow taxation officers to disclose the business tax debt information of a taxpayer to credit reporting bureaus when certain conditions and safeguards are satisfied.

8.20              This will allow tax debts to be placed on a similar footing as other debts, strengthening the incentives for businesses to pay their debts in a timely manner and effectively engage with the ATO to avoid having their tax debt information disclosed.

8.21              The amendments will reduce unfair financial advantage obtained by businesses that do not pay their tax on time and contribute to more informed decision making within the business community by enabling credit providers to make a more complete assessment of the credit worthiness of a business.

Human rights implications

8.22              The amendments made by this Schedule engage the prohibition on arbitrary or unlawful interference with privacy contained in Article 17 of the International Covenant on Civil and Political Rights (ICCPR).

8.23              The amendments allow taxation officers to disclose the tax debt information of a taxpayer to credit reporting bureaus when certain conditions and safeguards are satisfied. The amendments also ensure that entities other than taxation officers and credit reporting bureaus are able to record and on-disclose the tax debt information originally disclosed by the ATO without becoming liable to a criminal offence. In addition, the amendments ensure the existing exception in section 355‑175 operates appropriately in relation to credit reporting bureaus, allowing them to on‑disclose tax debt information, provided the on‑disclosure is for or in connection with the original purpose of the disclosure.

8.24              Taxation officers may only disclose the tax debt information of an entity if a legislative instrument made by the Treasurer declaring the class of entity whose tax debt information may be disclosed is in effect.  This provides an appropriate level of Parliamentary scrutiny around the class criteria as the instrument will be disallowable. In addition, the legislative instrument must be made subject to consultation with the Australian Information Commissioner, whose role includes investigating privacy complaints covered by the Privacy Act 1988. This ensures that privacy considerations are taken into account during the process of making, remaking or amending the legislative instrument.

8.25              The amendments engage the prohibition on arbitrary or unlawful interference with privacy to the extent that the amendments authorise the disclosure of personal information relating to an individual. It is expected that the legislative instrument will specify that a taxpayer is within the class of entity whose tax debt information may be disclosed if, amongst meeting other criteria, the taxpayer holds an ABN. This may mean the disclosure of personal information relating to an identified individual is authorised, where the individual holds an ABN. For example, the tax debt information of a business operating as a sole trader structure will involve information relating to an individual.

8.26              The legislative framework may also authorise the disclosure of personal information, where the tax debt information of an entity is considered to be information about an individual who is reasonably identifiable (refer subsection 6(1) of the Privacy Act 1988).

8.27              This Schedule is compatible with Article 17 of the ICCPR, as its engagement with the prohibition on interference with privacy will neither be unlawful (including by virtue of the amendments to Australia’s taxation legislation set out in the Schedule) nor arbitrary. The amendments are not arbitrary as the amendments are aimed at a legitimate objective and constitute an effective and proportionate means of achieving that objective.

8.28              The United Nations Human Rights Committee has stated, in their General Comment Number 16, that:

       ‘unlawful means that no interference can take place except in cases envisaged by the law. Interference authorized by States can only take place on the basis of law, which must itself comply with the provisions, aims and objectives of the Covenant [the ICCPR]’; and

       ‘the concept of arbitrariness is intended to guarantee that even interference provided for by law should be in accordance with the provisions, aims and objectives of the Covenant and should be, in any event, reasonable in the particular circumstances’.

8.29              The Schedule’s engagement with the prohibition on interference with privacy is lawful as the amendments authorise the disclosure of a taxpayer’s tax debt information where certain conditions and safeguards are satisfied. This is achieved by providing exceptions to the offences protecting the confidentiality of taxpayer information contained in Division 355 in Schedule 1 to the TAA 1953.

8.30              The objectives of these amendments are to:

       support more informed decision making within the business community by making overdue tax debts more visible;

       encourage taxpayers to engage with the ATO to manage their outstanding tax debts; and

       reduce the unfair advantage obtained by businesses that do not pay their taxes on time.

8.31              The amendments authorise the disclosure of a taxpayer’s tax debt information to a credit reporting bureau for the purpose of enabling a credit reporting bureau to prepare, issue, update, correct or confirm a credit worthiness report in relation to the taxpayer.  This allows credit reporting bureaus to provide their customers with more complete information to improve their ability to make informed decisions about the risk of providing credit or terms of trade to a business with unpaid debts.

8.32              As the disclosure of a taxpayer’s tax debt information may impact the taxpayer’s credit worthiness and have flow on impacts for their business, the amendments should encourage taxpayers to engage with the ATO to manage their tax debts.

8.33              The amendments constitute an effective and proportionate means of achieving these objectives, as taxation officers will not be authorised to directly make a taxpayer’s tax debt information publicly available. Instead, taxation officers will be authorised to disclose the taxpayer’s tax debt information to credit reporting bureaus that may use the information to prepare a credit worthiness report in relation to the taxpayer and disseminate this to interested customers.  This is considered a more effective means of supporting more informed decision making within the business community as credit reporting bureaus are well-placed to provide a more comprehensive picture of a taxpayer’s credit worthiness. This is because they are able to present an entity’s tax debt information in the context of a taxpayer’s other debt information.

8.34              The amendments which ensure that people (other than taxation officers and credit reporting bureaus) are able to record and on-disclose the tax debt information originally disclosed by the ATO are also an effective and proportionate means of achieving these objectives. These amendments will ensure that the customers of a credit reporting bureau, such as banks and other businesses seeking to make a more complete assessment of the taxpayer’s credit worthiness may record or otherwise deal with this information in the course of their businesses without being exposed to criminal sanctions. This ensures the amendments are effective in supporting more informed decision making within the business community.

8.35              The amendments ensure that the existing exception in section 355‑175 applies appropriately in relation to credit reporting bureaus and entities appointed or employed by or otherwise performing services for a credit reporting bureaus.  That is, the amendments ensure credit reporting bureaus are allowed to on‑disclose tax debt information, provided the on-disclosure is for or in connection with the purpose of preparing, issuing, updating, correcting or confirming credit worthiness reports in relation to the relevant entity.

8.36              The amendments are a proportionate means of achieving the policy objectives because the legislative framework will include procedural conditions and safeguards that the Commissioner must satisfy before disclosing a taxpayer’s tax debt information.

8.37              The legislative safeguards will include a requirement for the Commissioner to serve the taxpayer with a notice at least 21 days before the initial disclosure of the taxpayer’s tax debt information, which must set out particular information. The notice will allow the taxpayer to assess whether they need to correct the information that may be disclosed or otherwise make a complaint in relation to the disclosure. It will also provide the taxpayer with the opportunity to prevent the disclosure of their tax debt information by effectively engaging with the ATO.

8.38              Before a taxation officer can disclose the tax debt information of a taxpayer (other than to confirm, correct or update information), the Commissioner must consult with the Inspector General of Taxation in relation to the disclosure of the information. This provides an independent safeguard to ensure the Commissioner does not disclose the tax debt information of a taxpayer inappropriately.

8.39              In addition, the amendments are a proportionate and effective means of achieving the policy objective because the amendments will only authorise disclosures of a taxpayer’s tax debt information if the taxpayer is within the class of entity whose tax debt information may be disclosed, as declared in a legislative instrument made by the Treasurer.

8.40              The criteria for determining whether an entity falls within the class of entities will be designed to ensure that only the tax debt information of business entities carrying a significant overdue tax debt may have their tax debt information disclosed to credit reporting bureaus. The criteria will also ensure that a taxpayer who is considered to be effectively engaging in relation to their tax debt will not have their tax debt information disclosed. For example, it is expected that an entity will be considered to be effectively engaging if the entity has entered into a payment arrangement with the Commissioner to pay the relevant tax debt by instalments, and the entity is complying with that arrangement.

Conclusion

8.41              This Schedule is consistent with Article 17 of the ICCPR on the basis that its engagement of the prohibition on interference with privacy will neither be unlawful (including by virtue of the amendments to Australia’s taxation legislation set out in the Bill) nor arbitrary. To this extent, the Schedule complies with the provisions, aims and objectives of the ICCPR.

Schedule 6 – Electronic invoicing implementation

8.42              This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

8.43              Schedule 6 to the Bill amends the TAA to confer on the Commissioner:

       functions to develop and/or administer a framework or system for electronic invoicing; and

       powers to do all things necessary or convenient to be done for or in connection with the performance of those functions.

8.44              This is a Government machinery change that does not affect the rights of individuals.

Human rights implications

8.45              This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

8.46              This Schedule is compatible with human rights as it does not raise any human rights issues.

Schedule 7 - Salary sacrifice integrity

8.47              This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

8.48              Schedule 7 to this Bill amends the SGAA to improve the integrity of the superannuation system by ensuring that an individual’s salary sacrifice contributions cannot be used to reduce an employer’s minimum SG contributions.

Human rights implications

8.49              This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

8.50              This Schedule is compatible with human rights as it does not raise any human rights issues.