How this page works
The Commissioner of Taxation has limited powers to modify the operation of tax law in circumstances where entities will benefit, or at least be no worse off, as a result of the modification. This power is known as the Commissioner's remedial power (CRP).
To help taxpayers and practitioners, this page describes situations where the Commissioner has used the CRP to modify the operation of the law applying to individuals. Each section has:
- links to legislative instruments
- links to explanatory materials
- information about when it applies to and from.
We will add to this page as the CRP is applied to new situations.
Early stage investors (Angel investor) – 3-year expense test
Issue description
Investors in early stage innovation companies must satisfy a number of requirements to access a non-refundable tax offset.
One requirement is satisfying an expense test, which requires the entity to have both:
- incorporated in the last 6 income years
- incurred $1 million or less in expenses across all of the last 3 income years.
The provision includes the current income year in the expense test period. The test is difficult to apply because entities need to track current year expenses through an incomplete income tax year to show they meet the test.
It was suggested that the Commissioner exercise his remedial power to change the expense test period to the 3 prior income years.
The Commissioner did not need to consider whether to exercise his power because this issue was addressed by a minor technical amendment.
CRP suitability
The issue was resolved via legislative amendment in Item 12 of Part 2 of Schedule 2 to the Treasury Laws Amendment (2018 Measures No. 2) Act 2020.
Fringe benefits tax outdated census data
Issue description
A fringe benefits tax (FBT) exemption for remote area housing is based on road distances from major population centres, measured as at 24 June 1986 and 1981 using census data.
It was suggested that the road distances from major population centres could be updated using the CRP. However, modifying the law in these circumstances would not be favourable to all taxpayers.
CRP suitability
This is unsuitable as it is not beneficial to all taxpayers.
ESVCLPs and pre-owned investments
Issue description
Generally, an early stage venture capital limited partnership (ESVCLP) can only invest in new shares or units. However, an ESVCLP can invest in ‘pre-owned’ shares or units if it satisfies certain additional requirements.
An ESVCLP can only meet the additional requirements if the total value of the pre-owned investments in question and the value of all of its other investments doesn't exceed 20% of the ESVCLP’s committed capital.
The policy intent was to apply the 20% cap to the total value of the pre-owned investments in question and all of its other pre-owned investments.
The Commissioner did not need to consider whether to exercise his power because this issue was addressed by a minor technical amendment.
CRP suitability
The issue was resolved via legislative amendment in Item 2 of Part 1 of Schedule 2 to the Treasury Laws Amendment (2018 Measures No. 2) Act 2020.
TOFA and foreign exchange election
Issue description
The exercise of the CRP was sought to allow taxpayers to make the taxation of financial arrangements (TOFA) foreign exchange election with retrospective effect to fix errors made by incorrectly classifying:
- foreign exchange gains as unrealised foreign exchange gains
- unrealised foreign exchange gains as realised foreign exchange gains.
This was over a number of years where taxpayers were out of time to lodge a request for amendment of their returns.
Paragraphs 5.70 and 5.71 of the Explanatory Memorandum to the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008, which introduced the TOFA regime, notes that elections don't apply to financial arrangements that are held before the income year in which the election is made. Therefore, using the CRP to modify the law in these circumstances would be inconsistent with the intended purpose or object of the provisions.
Further, the Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2016 Measures No.2) Bill 2016 (the law establishing the CRP) notes that the CRP ‘cannot be used to modify the operation of a taxation law for a particular entity … [including] exercising the power in relation to a class that is so narrowly defined that it could practically only consist of a particular entity’. As this modification would have only impacted the one applicant taxpayer, it would not have been permissible in any event.
CRP suitability
- it is inconsistent with the intended purpose or object of the relevant provision
- the power can't be used to modify the law for one particular entity.
ADIs and Tier 2 regulatory capital
Issue description
For the purpose of the debt/equity rules in Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997), an interest would be classed as ‘debt’ if the issuer has an ‘effectively non-contingent obligation’ to repay the investment. Regulations may provide what constitutes ‘debt’ or ‘equity’ for Division 974 purposes.
Section 974-135F of the Income Tax Assessment Regulations 1997 provides that non-viability clauses on certain subordinate notes issued by prudentially regulated entities don't in themselves prevent the note’s obligation to pay principal or interest from being a non-contingent obligation. This may allow the notes to be classed as a ‘debt interest’ under the debt/equity rules of Division 974 of the ITAA 1997.
To apply section 974-135F, ‘the note must be written off or converted into ordinary shares of the issuer….if a non-viability trigger event occurs’.
Mutual and NFP authorised deposit institutions (ADI) however would issue these notes with the non-viability clauses resulting in a conversion into mutual equity interests (MEIs) instead of shares due to their corporate structuring and capitalisation. This conversion into MEIs is permitted under the prudential standards.
It was unclear as to whether MEIs fit the definition of ‘ordinary share’ for the purposes of section 974-135F. This could result in a difference in tax outcome for those notes that would convert into 'ordinary shares’ and those that would convert into MEIs, despite both notes conforming with the prudential regulations.
Use of the CRP was sought to extend subsection 974-135F(4) to include MEIs.
CRP suitability
The issue was resolved via legislative amendment in the Treasury Laws Amendment (Mutual Equity Interests) Regulations 2019.
Simplified reporting to access tax relief at trustee level
Issue description
A taxpayer anticipated new managed investment trust (MIT) rules that would have allowed the Australian trusts in the particular taxpayer’s structure to be considered MITs and access the 15% MIT withholding rate. However, the taxpayer’s trusts did not satisfy the tests for being classified as MITs.
The application of Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936) results in the amounts being taxed at 45% as trustee tax under subsection 98(4) of the Income Tax Assessment Act 1936 (ITAA 1936). The ultimate beneficiaries under this trust structure are companies, and Division 6 recognises that the tax paid by the trustee can benefit those companies in respect of their own tax liabilities. However, to obtain a credit for the tax paid by the trustee, it would be necessary for the taxpayer to lodge tax returns for the trust and a number of companies upstream.
Use of the CRP was sought to allow simplified reporting for the chain of entities so that just one tax return needed to be filed and for tax to be paid at the 30% rate rather than at the trustee level.
Paragraphs 10.31 to 10.32 and 10.42 to 10.45 of the Explanatory Memorandum to the Tax Laws Amendment (2007 Measures No. 3) Bill 2007 states that the applicable tax rate in these circumstances is 45% and shows that the intended method to obtain the credit was for each ultimate beneficiary to lodge a tax return so that their tax liability was individually assessed and the appropriate credit to be refunded. Therefore, using the CRP to modify the law to allow for simplified reporting and a lower tax rate would be inconsistent with the intended purpose or object of the provisions.
Further, the Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2016 Measures No.2) Bill 2016 (the law establishing the CRP) notes that the CRP ‘cannot be used to modify the operation of a taxation law for a particular entity … [including] exercising the power in relation to a class that is so narrowly defined that it could practically only consist of a particular entity’. As this modification would have only impacted the one applicant taxpayer, it would not have been permissible in any event.
CRP suitability
This is unsuitable as:
- it is inconsistent with the intended purpose or object of the relevant provision
- the power can't be used to modify the law for one particular entity.
Returns on foreign investment from dual resident companies
Issue description
In 2014, the tax law provisions dealing with returns on foreign investment were modernised and updated. Section 23AJ of the Income Tax Assessment Act 1936 (ITAA 1936) was replaced by Subdivision 768-A of the Income Tax Assessment Act 1997 as part of this process. Subdivision 768-A treats certain income received by an Australian corporate tax entity from a foreign resident company as non-assessable non-exempt income.
There was a change made to the wording of one of the key conditions for entitlement to the exemption. The condition that the paying company be ‘not a Part X Australian resident’ was changed to a requirement that the paying company be a ‘foreign resident’. This change inadvertently resulted in some dual resident companies’ dividends paid to Australian residents being treated as assessable income for the Australian resident. This was not the policy intent. The distribution received by the Australian resident should not be assessable income.
Use of the CRP was sought to modify the law to enable the condition for entitlement to the exemption recognise that the paying company be ‘not a Part X Australian resident’.
The CRP was considered unsuitable in this circumstance as the budget impact of the proposed modification was not negligible.
CRP suitability
This is unsuitable as the impact of the modification on the Commonwealth Budget would not be negligible.
The issue was nonetheless resolved via legislative amendment in Item 113 of Part 2 of Schedule 3 to the Treasury Laws Amendment (2019 Measures No. 3) Act 2020.
Continuity of ownership test and new head company
Issue description
Division 166 of the Income Tax Assessment Act 1997 (ITAA 1997) modifies the continuity of ownership test (COT) for widely held and eligible Division 166 companies to make it easier for these companies to apply the continuity of ownership (COO) rules.
Where a new holding company is interposed between the relevant COO- tested company and a less than 10% direct stakeholder, the COO-tested company is disqualified from relying on the concessional tracing rule in section 166-225 of the ITAA 1997. Section 166-230 of the ITAA 1997 would then apply (attributing the indirect stakes to an entirely different top interposed entity). This generally has the effect of causing the company to fail the COT. The company would then have to satisfy the same business test in order to deduct its tax losses or apply its net capital losses.
The proposed CRP modification to section 166-225 of the ITAA 1997 was to ensure that the interposition of a holding company between the tested company and a less than 10% direct stakeholder will not cause a failure of the COT.
The CRP was considered unsuitable in this circumstance as the budget impact of the proposed modification was not negligible.
CRP suitability
This is unsuitable as the impact of the modification on the Commonwealth Budget would not be negligible.
The issue was nonetheless resolved via legislative amendment in Item 80-83 of Part 2 of Schedule 3 to the Treasury Laws Amendment (2019 Measures No. 3) Act 2020.
Early stage venture capital limited partnership tax offset
Issue description
Subdivision 61-P of the Income Tax Assessment Act 1997 (ITAA 1997) provides limited partners in an early stage venture capital limited partnership (ESVCLP) with a non-refundable carry-forward tax offset to encourage investment in new ESVCLPs. The amount of the tax offset is calculated from the formula under subsection 61-765(1) of the ITAA 1997 and is equal to 10% of the lessor of the partner’s contributions to the ESVCLP for the income year; and the partner’s investment related amount (the proportionate share of the investments made by the ESVCLP). The investment related amount is worked out using the formula in subsection 61-765(3) of the ITAA 1997 where the partner’s share is multiplied by the sum of eligible venture capital investments.
The application of the definition of partner’s share in the investment related amount means that if a partner joins a ESVCLP in a subsequent year, they receive a reduced tax offset because the partner’s share of the investment related amount is based on the entire capital of the ESVCLP rather than the funds committed in the relevant tax year.
A request was made to use the CRP to amend the partner’s share part of the investment related amount formula to make this part based on the funds contributed during the financial year instead of the partner’s interest at the end of the income year in relation to the ESVCLP’s entire capital.
Paragraph 2.27 of the Explanatory Memorandum (EM) to the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 makes clear that the definition of partner’s share was intended to be an end of income year test. This was how the offset was intended to be calculated to encourage long-term commitment from partners to ESVCLPs.
It is clear from the EM that the law is operating as intended. Therefore, using the CRP to modify the law in these circumstances is inconsistent with the intended purpose or object of the provisions.
CRP suitability
This is unsuitable as it is inconsistent with the intended purpose or object of the relevant provision.
Scrip for scrip rollover carveout for trust schemes
Issue description
The capital gains tax (CGT) scrip for scrip rollover allows taxpayers exchanging shares or trust interests involving companies and trusts as part of a merger or takeover arrangement to defer CGT from the realisation of any capital gains from such transactions. The rollover prevents the triggering of a CGT tax event.
In 2010, amendments were made to the scrip for scrip rollover expanding it to include takeovers that don't contravene key provisions in Chapter 6 of the Corporations Act 2001 (Corporations Act), and mergers undertaken via a scheme of arrangement (if the entity is a company) that don't meet the participation requirements of the scrip for scrip rollover. As trusts can't undertake schemes of arrangement, the carve out for trusts only applies to takeover bids.
The proposed modification was to include trust schemes as an additional carve out from the participation requirements. It was considered unsuitable for CRP because the law was operating as intended and the modification is clearly inconsistent with policy intent. Paragraph 5.1 of the Explanatory Memorandum to the Tax Laws Amendment (2010 Measures No. 4) Bill 2010 confirms the carve out is only intended to apply to takeovers and mergers actually regulated by the Corporations Act, whereas there is no actual framework underpinned by the Corporations Act that regulates trust schemes, only an optional opt-in one.
CRP suitability
This is unsuitable as it is inconsistent with intended purpose or object of the relevant provisions.
Hybrid mismatch and AT1 Regulatory capital
Issue description
Australia’s hybrid mismatch rules are designed to prevent multinational corporations from exploiting differences in the tax treatment of an entity or instrument under the laws of 2 or more tax jurisdictions.
An issue arose that impacted on an investor’s ability to claim franking benefits attached to franked distributions paid on issuers of additional tier 1 (AT1) capital instruments. The main concern with the provision was whether franked distributions on AT1 capital instruments gave rise to an entitlement to a deduction under foreign tax laws. Use of the CRP was sought to ensure relevant franking benefits would be allowed on the distribution.
During consideration of its suitability for the CRP, it was determined that this issue could be addressed alongside other planned legislative amendments to the hybrid mismatch rules. Accordingly, consideration of this candidate for the CRP ceased.
CRP suitability
A legislative solution was prioritised prior to determining CRP suitability.
The issue was resolved via legislative amendment in items 61 to 64 of Part 4 of Schedule 1 to the Treasury Laws Amendment (2020 Measures No. 2) Act 2020.
Sovereign immunity
Issue description
The Income Tax Assessment Act 1997 provides an income tax exemption for certain sovereign entities by making ordinary income or statutory income of these entities non-assessable non-exempt income if certain conditions are satisfied. The exemption doesn't apply where the amount is attributable to either:
- non-concessional managed investment trust (MIT) income (NCMI)
- amounts that would be NCMI but for certain transitional provisions under the Tax Administration Act 1953 (TAA) (known as Excluded NCMI).
The purpose of this carve-out is to ensure the policy intent of the NCMI provisions in the TAA are not defeated by the fact an investor is a sovereign entity. The NCMI provisions provide that these amounts are subject to withholding tax of 30%, or 15% under the approved economic infrastructure facility exception and transitional rules. If the carve-out did not exist, these amounts would not be subject to any withholding tax.
Consequential amendments were made to the notification requirements in Schedule 1 to the TAA to ensure that where a withholding MIT makes a payment to another entity, to notify that other entity about the extent a payment is attributable to NCMI. The same was not done for Excluded NCMI. This lack of information means parts of payments attributable to Excluded NCMI are not traceable, meaning withholding amounts may be incorrect or no withholding occurs.
The proposed modification was to expand the notification requirements to include Excluded NCMI. However, the text of the relevant paragraph is clear in that it is only the extent of those fund payments that are attributable to NCMI amounts that should be reported on the notice, and the Commonwealth Parliament has been specific in what should be contained in the notice to assist the payee to discharge its withholding obligations. This is illustrated by paragraphs 1.83 and 1.84 of the Explanatory Memorandum to the Tax Laws Amendment (Election Commitments No. 1) Bill 2008.
As the intended purpose or object of the relevant provision is for the notice requirements to be prescribed by the Commonwealth Parliament, the modification is inconsistent with that policy intent.
CRP suitability
This is unsuitable as it is inconsistent with the intended purpose or object of the relevant provision.
Base rate entity passive income and dividends
Issue description
The Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Act 2018 changed the requirements for corporate tax entities to qualify for the lower corporate tax rate of 27.5%. This Act changes the test so that an entity will only qualify for the lower rate for an income year if no more than 80% of its assessable income is base rate entity passive income (BREPI) and their aggregated turnover is less than the aggregated turnover threshold for that income year.
The meaning of BREPI is provided under the Income Tax Rates Act 1986. An amount of assessable income that is BREPI is defined exclusively under that Act, including an amount that can be ‘traced’ through a trust or partnership that is directly or indirectly referable to another amount that is defined as BREPI (the tracing rule).
A taxpayer brought forward an issue regarding whether the non-portfolio dividend exclusion and the tracing rule means that non-portfolio dividends can flow through a trust and therefore not be BREPI. It was proposed to modify the operation of the tracing rule so it applies to non-portfolio dividends.
It was considered unsuitable for CRP because the modification would be inconsistent with the policy intent. Paragraph 1.11 of the Explanatory Memorandum to the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 states that ‘a dividend that is a non-portfolio dividend (within the meaning of section 317 of the ITAA 1936) is not base rate entity passive income.’ Furthermore, the Income Tax Rates Act 1986 states that the tracing rule applies to BREPI and expressly excludes a non-portfolio dividend from being a distribution that is classed as BREPI. As such, it was determined the law is operating as intended.
CRP suitability
This is unsuitable as it is inconsistent with the intended purpose or object of the relevant provision.
Sole trader eligibility for the JobKeeper Payment
Issue description
The JobKeeper Payment is a temporary wage subsidy that was introduced by the Australian Government as part of its economic response to COVID-19. The eligibility criteria for the JobKeeper Payment are contained in the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (the Rules). Businesses are eligible on the basis of having eligible employees under Division 2 of the Rules with business owners, including sole traders, eligible under Division 3 on the basis of business participation.
For sole traders to be considered eligible business participants under the Rules, certain requirements must be satisfied. One is that the individual must not be an employee (other than a casual employee) of another entity.
A taxpayer proposed a modification to allow sole traders with separate permanent employment to access the JobKeeper Payment.
This modification was determined to be unsuitable for CRP as the modification was considered to be inconsistent with policy intent. The Rules states that ‘the individual is not an employee (other than a casual employee) of another entity’ at the time of nomination. It is clear that the policy intent is to prevent JobKeeper payments being claimed by sole traders who have other permanent employment.
CRP suitability
This is unsuitable as it is inconsistent with the intended purpose or object of the relevant provision.
GST on property subject to pre-existing long-term lease
Issue description
Following the Full Federal Court's decision in Commissioner of Taxation v Gloxinia Investments (Trustee) [2010] FCAFC 46 (Gloxinia), the Commonwealth Parliament made amendments to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to ensure ‘that sales or long-term leases of new residential premises by a registered entity are taxable supplies, and that sales or long-term leases of existing residential premises are input taxed supplies.’ The amendments did not apply to wholesale supplies before 27 January 2011, as long as other requirements for the exception were met.
A taxpayer bought an apartment off the plan just after the Gloxinia decision, and failed to satisfy the other criterion in the exception, meaning the sale of the apartment was considered a taxable supply. The taxpayer asked the Commissioner to exercise the CRP in a way that would mean their purchase would be an input taxed supply.
The policy intent of the GST Act amendments is clear from the Explanatory Memorandum to the Tax Laws Amendment (2011 Measures No. 9) Bill 2011. ‘The intention … is to ensure that certain sales of newly constructed residential premises by a developer to home buyers and investors will be taxable supplies of new residential premises even though there may have been an earlier “wholesale supply” of the premises.’
The proposed modification was deemed unsuitable for the CRP as the law was operating as intended.
Further, the Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2016 Measures No.2) Bill 2016 (the law establishing the CRP) notes that the CRP ‘cannot be used to modify the operation of a taxation law for a particular entity … [including] exercising the power in relation to a class that is so narrowly defined that it could practically only consist of a particular entity’. As this modification would have only impacted the one applicant taxpayer, it would not have been permissible in any event.
CRP suitability
- it is inconsistent with the intended purpose or object of the relevant provision
- the power can't be used to modify the law for one particular entity.
Significant global entities reporting
Issue description
Amendments to subparagraph 815-355(3)(a)(ii) of the Income Tax Assessment Act 1997were introduced into Parliament in 2020 that sought to require country-by-country (CBC) reporting entities to lodge a master file and CBC report that reflected the CBC reporting group of which they are a member, in line with international practice and OECD model legislation.
Before these amendments being legislated, it was suggested that the CRP could be used to modify subparagraph 815-355(3)(a)(ii) to clarify that the provision refers to the CBC reporting group for the current income year, rather than the previous income year.
However, as this issue was ultimately resolved via a legislative amendment in 2021, modification via the CRP became unnecessary.
CRP suitability
This issue was resolved via legislative amendment in Items 3-5 of Part 1 of Schedule 3 to the Treasury Laws Amendment (2021 Measures No. 5) Act 2021.
Loss carry back tax offset
Issue description
The temporary loss carry back tax offset allowed certain corporate tax entities to carry back a tax loss for the 2019–20, 2020–21, 2021–22 or 2022–23 income year, and apply it against tax paid in a previous income year (as far back as the 2018–19 income year), to generate a refundable tax offset. This was designed to assist with the economic impacts of COVID-19.
A corporate tax entity needed to make an irrevocable choice to claim the refundable tax offset when it lodged its income tax return for the 2020–21 and 2021–22 income years, under section 160-15 of the Income Tax Assessment Act 1997. However, paragraph 2.30 and Example 2.1 of the Explanatory Memorandum to the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020 suggested that a loss carry back choice could be changed in certain circumstances.
Use of the CRP was sought to modify the operation of section 160-15 to allow a taxpayer to revoke and change their loss carry back choice.
While the proposed modification itself appears to be consistent with the Explanatory Memorandum, new machinery provisions would be required to provide a process for an entity to amend its choice and enable the recalculation of the refundable tax offset entitlement. Incorporating new machinery provisions of this type would broaden the policy intent of the original law, which means that this candidate is not suitable for an exercise of the CRP.
CRP suitability
This is unsuitable as it is inconsistent with the intended purpose or object of the relevant provision.
The issue was nonetheless resolved via legislative amendment in Items 32–33 of Part 1 of Schedule 3 to the Treasury Laws Amendment (2021 Measures No. 5) Act 2021.
Situations where the CRP was considered but not applied to modify the operation of tax law that affects business.