CRP not suitable for individuals
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).
The following information describes situations where the Commissioner was unable to use the CRP to modify the operation of the law to assist individuals.
Exempting individuals from 5-year record-keeping requirement
Issue description
In 2005, when the period of review was shortened to 2 years, record-keeping requirements were changed for:
- payment summaries (or income statements)
- Medicare levy family payments
- returns lodged by agents.
The CRP was sought to exempt some taxpayers from the 5-year record-keeping requirement who would otherwise not already be exempt. However, the Commissioner can't exercise the CRP in these circumstances because it is clear from paragraphs 2.71 to 2.72 of the Explanatory Memorandum to the Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 2) 2005 that it was not intended to exempt individuals outside of the circumstances listed in the statute.
CRP suitability
This is unsuitable as it is inconsistent with the intended purpose or object of the relevant provision.
Use of discretion to classify properties as pre-capital gains tax assets
Issue description
The exercise of the CRP was sought to disregard a capital gain from a capital gains tax (CGT) event for an asset that was acquired under a contract that was originally to be entered into before the CGT law was enacted but the contract was ultimately deferred pending advice from relevant authorities until after the CGT law commenced to apply.
Paragraph 8 of the 'Main Features' section of the Explanatory Memorandum to the Income Tax Assessment Amendment (Capital Gains) Bill 1986, which introduced the CGT regime notes that where assets were acquired on or after 20 September 1985, they are in scope for CGT. It says, 'for example, where assets are acquired under a contract, the time of acquisition will be the time of the making of the contract'. Therefore, using the CRP to modify the law in these circumstances would be 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.
Inheritance taxing point and capital gains tax event E7
Issue description
Where an asset passes from a deceased individual (first deceased) to a second individual who dies (second deceased) without the affairs of the first deceased having been concluded before the death of the second deceased, the beneficiaries of the second deceased incur a capital gains tax (CGT) liability.
While the asset passes from the first deceased’s estate to the second deceased’s beneficiaries under their wills, the rollovers available in these situations are available to those who ‘own’ the asset at the time of death. As no probate or letters of administration are granted for the first deceased before the second deceased dies, the asset is not ‘owned’ by the second deceased at the time of their death and the rollovers don't apply.
It was proposed to apply the CRP to allow a rollover in these circumstances. However, subparagraph 1 of paragraph B of Chapter 2.18 of the Explanatory Memorandum to the Tax Laws Improvement Bill (No. 1) 1998 states that the rollover doesn't apply to assets that were acquired by the legal personal representative during administration of the first deceased estate. Therefore, the CRP can't be exercised to modify the law in these circumstances.
CRP suitability
This is unsuitable as it is inconsistent with the intended purpose or object of the relevant provision.
Capital gains tax replacement asset rollover relief
Issue description
The ACT Government offered a voluntary scheme to buy back asbestos insulated properties at market value.
Subdivision 124-B of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer can choose to obtain capital gains tax (CGT) replacement asset rollover relief where an asset is compulsorily acquired, lost, or destroyed. Where this rollover relief is chosen, the taxpayer must incur expenditure in acquiring another CGT asset.
Use of the CRP was sought to include an asset that is damaged because of asbestos insulation under the voluntary scheme within the CGT definition of a compulsorily acquired, lost or destroyed asset.
Chapter 2.16 of the Explanatory Memorandum to the Tax Law Improvement Bill (No. 1) 1998 expressly states that rollover relief is only available when one of the required circumstances occurs. Damage to an asset is not a specified circumstance and it is not the intended policy outcome to include such a circumstance. Therefore, expanding the circumstances for which replacement asset rollover relief is available is inconsistent with the intended purpose or object of the provision.
CRP suitability
This is unsuitable as it is inconsistent with the intended purpose or object of the relevant provision.
Taxation of a compensation payout
Issue description
A taxpayer suffered a compensable injury. As a result, income was received from Centrelink and WorkCover, which was included in the taxpayer’s tax return. The taxpayer then received a lump sum compensation settlement in a later financial year. In certain circumstances, under Part 3.14 of the Social Security Act 1991 and Chapter 3 of the Queensland Workers’ Compensation and Rehabilitation Act 2003, when a person receives a compensation settlement it is required that any Centrelink and WorkCover income received be repaid. The taxpayer repaid the Centrelink and WorkCover monies and sought to amend their tax return.
Subsection 59-30(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that section 59-30 doesn't apply (which makes a payment non-assessable non-exempt income) to an amount that a taxpayer must repay because the taxpayer received a lump sum as compensation or damages for a wrong or injury they suffered in their occupation. As a result, the amounts the taxpayer received from Centrelink and WorkCover were assessable income and the tax return amendment was denied.
Use of the CRP was sought by the taxpayer to allow the requested amendment.
Paragraph 3.11 of the Explanatory Memorandum to the Tax Laws Amendment Bill (No. 2) 2003 confirms that an intended exclusion to the provision is where a taxpayer receives income as a benefit or regularly paid compensation, and then has to repay that income because a lump sum compensation payment or a lump sum payment for damages for a wrong or injury suffered in the taxpayer’s occupation is later received. Therefore, use of the CRP in this case is inconsistent with the intended purpose or object of the provision.
Further, the Explanatory Memorandum to 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's inconsistent with the intended purpose or object of the relevant provision
- the power cannot be used to modify the law for one particular entity.
Capital gains tax on the sale of a rental property
Issue description
A taxpayer sought to have their capital gains tax (CGT) liability waived on the sale of a rental property they owned as joint tenants on the basis they had received none of the rental income.
As a joint tenant of the property the taxpayer held a CGT asset according to the tax law. The disposal of the property triggered the CGT event that gave rise to a capital gain and in turn a CGT liability for the taxpayer. This is the intended operation of the CGT regime in these circumstances as reflected in Chapters 2.6 and 2.12 of the Explanatory Memorandum to the Tax Law Improvement Bill (No. 1) 1998.
The CRP was not used in this circumstance as the law is operating as intended.
Further, the Explanatory Memorandum to 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's inconsistent with the intended purpose or object of the relevant provision
- the power cannot be used to modify the law for one particular entity.
Extension of the capital gains tax main residence exemption
Issue description
Section 118-160 of the Income Tax Assessment Act 1997 (ITAA 1997) allows for the main residence exemption to continue to be claimed when a main residence is accidentally destroyed, and a capital gains tax (CGT) event happens in relation to the land on which it was built without another dwelling being built on the land.
A request was made to extend this section, for an individual taxpayer, to cover when a property is intentionally destroyed (for instance, as part of a renovation process) and the construction of a new residence is interrupted or otherwise prevented.
Chapter 2.12 of the Explanatory Memorandum to the Tax Law Improvement Bill (No. 1) 1998 confirms that the rule in section 118-160 was only intended to apply when ‘a dwelling is accidentally destroyed (for example, by a bushfire)’. The intentional destruction of a main residence would not be within the intended policy outcome for this rule.
The CRP was not used in this circumstance as the law was operating as intended.
Further, the Explanatory Memorandum to 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's inconsistent with the intended purpose or object of the relevant provision
- the power cannot be used to modify the law for one particular entity.
High pay as you go (PAYG) instalment rates
Issue description
Taxpayers with business or investment income pay instalments towards their income tax liability during the income year. Generally, there are 2 methods for working out the pay as you go (PAYG) instalment amount payable, namely the ‘rate’ method and ‘amount’ method. If the ‘rate’ method is chosen by the taxpayer, the amount that they are required to pay is determined according to a rate notified to them by the Commissioner. In some instances, the calculation of this rate (which is prescribed in the law) can work out to be significantly higher than the taxpayer’s top marginal income tax rate. Therefore, for these selected taxpayers, this instalment rate method doesn't accurately reflect their true tax liability.
The anomaly with the calculation occurs where a taxpayer receives a high proportion of one type of income (for example, statutory income such as employee share scheme income) as compared to another type of income (for example, ordinary income such as interest or dividends). To overcome this problem, taxpayers are informed by the ATO to vary the rate downwards. However, some taxpayers don't manually vary the rate downwards and use the rate that was notified. The result is the taxpayer ends up overpaying their tax instalments. Any overpayments are reconciled at the time of assessment.
Use of the CRP was sought to modify the instalment rate so it would not exceed the top marginal tax rate (plus Medicare levy) and ensure the rate more accurately reflected the taxpayer’s actual tax liability.
The intended purpose or object of the law is to ensure efficient collection of income tax through the payment of instalments over a year that is as close as possible to the taxpayer’s tax liability for that year. The overpayment or incorrect reporting of tax instalments that is reconciled only when the taxpayer lodges their tax return is clearly not in line with the policy intent. However, 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 wouldn't be negligible.
Division 83 unused leave entitlements
Issue description
Unused annual leave and unused long service leave payments are included in a taxpayer’s assessable income under Division 83 of the Income Tax Assessment Act 1997 (ITAA 1997). Where an unused annual leave or unused long service payment is made in connection with a ‘genuine redundancy payment’, an ‘early retirement scheme payment’ or an ‘invalidity segment of an employment termination payment or superannuation benefit’, a tax offset is available to ensure the rate of tax on such payments doesn't exceed 30%.
Under relevant provisions in the ITAA 1997, a tax offset is only available in relation to specific types of payments. As a result, a concern was raised that the ITAA 1997 provisions operated more restrictively than relevant provisions that were previously contained in the Income Tax Assessment Act 1936 (ITAA 1936).
Use of the CRP was sought to remove references to specific eligible payments in relevant provisions in the ITAA 1997, to ensure the provisions aligned with the original provisions in the ITAA 1936.
The Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 makes clear that the changes in terminology were not designed to alter the operation of the ITAA 1997 provisions, compared with the ITAA 1936 provisions. The former provisions required unused leave to be paid in respect of a ‘bona fide redundancy amount’, an ‘early retirement scheme amount’ or an ‘invalidity amount'. These amounts under the former provisions were equivalent to the new prescribed payment categories in the ITAA 1997, which means that there are no relevant differences between the previous provisions and the current provisions.
The modification was deemed unsuitable for the CRP as the law was operating as intended.
CRP suitability
This is unsuitable as it is inconsistent with the intended purpose or object of the relevant provision.
Division 293 tax for higher level office holders
Issue description
State higher level office holders (SHLOHs) are generally exempted from paying tax under Division 293 of the Income Tax Assessment Act 1997 (ITAA 1997) if they hold a position listed in section 293-145.01 of the Income Tax Assessment (1997 Act) Regulations 2021.
Since this Regulation was enacted in 2013, there have been other positions determined by the courts or the ATO to be SHLOHs. However, the Regulation hasn't been updated to include these positions.
Use of the CRP was proposed to modify the Regulation to include additional positions as SHLOHs. However, the ATO determined that this wasn't necessary as it considered that it could administer the existing law in a way that ensured that SHLOHs wouldn't be subject to Division 293 tax. As such, this issue was deemed unsuitable for the CRP as it was neither necessary nor reasonable to pursue a modification to the law.
CRP suitability
This is unsuitable as the Commissioner doesn't consider the modification to be reasonable, given the issue can be managed appropriately without pursuing the modification.
Veteran payment issues
Issue description
Where a taxpayer is required to repay an amount on which they previously paid tax, section 59-30 of the Income Tax Assessment Act 1997 (ITAA 1997) allows the taxpayer to treat that amount as non-assessable, non-exempt (NANE) income. Provisions in the ITAA 1936 allow the taxpayer to have an amended assessment issued for the applicable income year excluding that NANE income. Generally, the taxpayer will receive a refund of the tax paid. However, for section 59-30 to apply, the taxpayer must have repaid the applicable amount before it is treated as NANE income.
Use of the CRP was sought to modify the operation of the law to treat the term 'repay' in section 59-30 as including 'entering arrangements to repay'. This would have assisted veterans who are obliged to pay back a Department of Veterans’ Affairs pension (where tax has been withheld) and who then later receive a Commonwealth Superannuation Corporation military superannuation pension backdated to their date of discharge (resulting in a lump sum payment).
The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 2) 2003 clearly states that amendments to earlier year income tax assessments to exclude previously assessable income are only possible when the applicable amount has been repaid. As such, the proposed modification was deemed unsuitable for the CRP as the law was operating as intended. However, the ATO has since developed an administrative solution to address this issue.
CRP suitability
This is unsuitable as it is inconsistent with the intended purpose or object of the relevant provision.
Medicare levy exemption for Jobseeker payments
Issue description
Section 251U of the Income Tax Assessment Act 1936 (ITAA 1936) contains a list of prescribed persons who are exempt from paying the Medicare levy. That list had previously included recipients of the now-repealed Sickness Allowance. That exemption was repealed when the Sickness Allowance was replaced with the Jobseeker Payment on 20 September 2020.
When the applicant applied for Sickness Allowance in early 2021, they were instead placed on the Jobseeker Payment. In light of the similar obligations imposed on the recipients of these types of payments, the applicant proposed that they also be entitled to an exemption from the Medicare levy, and that this should be remedied through the CRP.
When parliament repealed the Medicare levy exemption for Sickness Allowance recipients, it did not enact an equivalent exemption for Jobseeker payment recipients. The policy intent appears to have been that Jobseeker Payment recipients would not receive a Medicare Levy exemption.
The proposed modification was deemed unsuitable for the CRP as the law was operating as intended.
CRP suitability
This is unsuitable as it is inconsistent with the intended purpose or object of the relevant provision.
Legal personal representative definition
Issue description
It is an offence for taxation officers to disclose taxpayer information unless the disclosure is permitted under Division 355 of Schedule 1 to the Taxation Administration Act 1953 (TAA).
Taxation officers are able to disclose taxpayer information to a taxpayer’s ‘legal personal representative’, which includes ‘an executor or administrator of an estate of an individual who has died.’ The ATO requires evidence of a grant of probate or letters of administration before disclosing information to an executor or administrator on this basis.
Use of the CRP was proposed to expand the definition of legal personal representative to include persons entitled to be a taxpayer’s legal personal representative when it would otherwise be uneconomical to obtain a grant of probate or letters of administration.
The Explanatory Memorandum to the Tax Laws Amendment (Confidentiality of Taxpayer Information) Bill 2009 highlights that Division 355 is underpinned by an exhaustive list of entities that can access information on behalf of a taxpayer. As the proposed modification would require the Commissioner to presuppose and determine who is entitled to be a legal personal representative (in a way that would depart from the list determined by the parliament), this would be involve departure from the current policy. Accordingly, the CRP couldn't be utilised.
CRP suitability
This is unsuitable as it is inconsistent with the intended purpose or object of the relevant provision.