Senate

Revised Explanatory Memorandum

Circulated By the Authority of the Treasurer, the Hon Wayne Swan MP

Chapter 3 - Transactions involving security and intelligence agencies

Outline of chapter

3.1 Schedule 3 to this Bill amends the tax law to provide the heads of the Australian Security Intelligence Organisation and the Australian Secret Intelligence Service with the power to declare that Commonwealth tax laws do not apply to a specified entity in relation to a specified transaction. This ensures that the tax authorities will not need to obtain information that should remain secret in the interests of national security.

Context of amendments

3.2 Under current tax law, the administrative obligations on tax authorities can require them to seek information that, for reasons of Australia's national security, is very sensitive and should remain confidential. In practice, the tax authorities have usually respected requests from the security and intelligence agencies not to seek such information but there are doubts whether complying with such requests would always be legally justified.

Summary of new law

3.3 These amendments grant a power to the Director-General of Security and the Director-General of the Australian Secret Intelligence Service to declare that a specified entity is not subject to Commonwealth tax laws in relation to a specified transaction. Making a declaration about a transaction will mean that the tax authorities will not need to seek information about that transaction and so will not have to choose between observing their obligations under the tax laws and preserving Australia's national security interests.

Comparison of key features of new law and current law

Detailed explanation of new law

3.4 Situations can arise where transactions entered into in connection with the operational activities of Australia's security and intelligence agencies could attract taxation consequences. In working out how the tax laws apply to those transactions, the tax authorities may need information that should be kept secret in the interests of Australia's national security. This can result in a conflict between the interests of national security and the tax law.

3.5 While these conflicts have been managed till now by the tax authorities taking a reasonable approach when asked to by the security and intelligence agencies, it would be preferable to provide legislative guidance to deal with these cases.

3.6 These amendments address the conflicts by giving the heads of the relevant security and intelligence agencies the power to declare that specified entities are not subject to Commonwealth tax laws in relation to specified transactions. The result will be that the tax authorities will not need to seek information about entities in relation to transactions subject to a declaration . [Schedule 3, item 1, subsection 850-100(1)]

3.7 Unless otherwise specified, legislative references in this chapter are to provisions in Schedule 1 to the Taxation Administration Act 1953.

Making a declaration

3.8 A declaration can be made by the Director-General of Security or by the Director-General of the Australian Secret Intelligence Service [Schedule 3, item 1, subsections 850-100(2) and (3)]. To make a declaration, they must be satisfied that it is necessary for the proper performance of the functions (respectively) of the Australian Security Intelligence Organisation or the Australian Secret Intelligence Service [Schedule 3, item 1, subsection 850-100(4)].

3.9 A declaration must be made in writing and must be signed by the relevant Director-General [Schedule 3, item 1, subsection 850-100(5)]. It must also specify one or more entities and one or more transactions. It is not enough to specify an entity without also specifying a transaction, or vice versa [Schedule 3, item 1, subsections 850-100(2) and (3)].

Entities

3.10 'Entity' is a widely defined term (see subsection 960-100(1) of the Income Tax Assessment Act 1997 ( ITAA 1997)). It includes individuals, corporations, trusts, partnerships, superannuation funds and bodies politic. It is not necessary for a declaration to name a particular entity; it can specify a class of entities (see subsection 46(3) of the Acts Interpretation Act 1901). For instance, a declaration would sufficiently specify an entity if it said that it applied to the parties to a specified transaction.

3.11 These amendments make it clear that a declaration can specify the Australian Security Intelligence Organisation or the Australian Secret Intelligence Service as entities . [Schedule 3, item 1, subsections 850-100(2) and (3)]

3.12 The specified entity need not still exist when the declaration is made. For instance, a declaration could specify a deceased individual or a liquidated company . [Schedule 3, item 1, paragraph 850-100(6)(b)]

Transactions

3.13 A declaration must specify a transaction. As with entities, it can do that by specifying a class of transactions instead of naming a particular transaction (see subsection 46(3) of the Acts Interpretation Act 1901).

3.14 A declaration can specify a transaction that has already happened before the declaration is made [Schedule 3, item 1, paragraph 850-100(6)(a)]. It does not matter that the specified transaction happened before these amendments commence [Schedule 3, item 1, subsection 850-100(4)].

Revoking a declaration

3.15 The Directors-General also have the power to revoke or vary any declaration they have made (see subsection 33(3) of the Acts Interpretation Act 1901).

Effect of a declaration

3.16 For an entity specified in a declaration, the specified transactions are disregarded in determining the entity's tax-related liabilities under any Commonwealth law [Schedule 3, item 1, paragraph 850-100(8)(a)]. The transactions are also disregarded in determining the entity's entitlement to any tax-related benefit under any Commonwealth law [Schedule 3, item 1, paragraph 850-100(8)(b)].

Example 3.1 : Entity not liable to taxation or entitled to refund

A declaration is stated as applying the exempting provisions to a service that James pays Jack to provide. The result is that Jack and James are not liable for taxation or entitled to any tax credit or refund in relation to their transaction. Jack will not treat the payment as assessable income for income tax purposes and will not pay goods and services tax (GST) for providing the service. James will not be able to deduct the payment for income tax purposes, will not be liable for any superannuation guarantee charge in relation to the payment, and will not be entitled to any input tax credit for GST purposes.

3.17 These effects of a declaration apply even to tax consequences that a provision of a law says can only be exempted by another provision if it expressly says that it is providing an exemption from that consequence . [Schedule 3, item 1, paragraph 850-100(8)(a)]

3.18 These amendments are drafted that way (as opposed to expressly mentioning particular consequences) to ensure that all provisions of that sort are covered. Current examples of 'exemption limitation' provisions covered by the amendments are:

Table 3.1 : Exemption limitation provisions covered

3.19 An amount of ordinary income (such as wages) that is excluded from being assessable income will usually be exempt income for income tax purposes (see subsection 6-20(2) of the ITAA 1997). Exempt income can reduce the recipient's income tax losses of previous years (see Division 36 of the ITAA 1997). Amounts arising under a transaction specified in a declaration do not have that effect because the transaction is disregarded in working out tax-related liabilities and benefits, including the effect of a tax loss . [Schedule 3, item 1, subsection 850-100(6)]

3.20 For an entity specified in a declaration, the specified transactions are also disregarded in determining whether the entity has any rights or obligations in relation to tax-related liabilities or benefits. If it does, the transactions are ignored in determining the extent of those rights and obligations . [Schedule 3, item 1, paragraph 850-100(8)(c)]

Example 3.2 : Entity not liable to taxation or entitled to refund

Continuing the previous example, Jack's and James' transaction is ignored in working out whether James has to withhold any part of his payment to Jack or whether either of them has to keep records about the transaction.

Miscellaneous aspects of declarations

Legislative instruments

3.21 A declaration would probably be a legislative instrument within the meaning of the Legislative Instruments Act 2003. That Act requires that legislative instruments, unless exempt, be registered on the Federal Register of Legislative Instruments (see section 24 of that Act) and to be tabled in Parliament (see section 38 of that Act), and would usually result in the instrument ceasing to apply after 10 years (see section 50 of that Act). Those outcomes would not be appropriate for reasons of national security and personal privacy. Declarations will necessarily contain sensitive operational information and personal information, which should not be publicly disclosed. For that reason, these amendments provide that the declarations are not legislative instruments and are therefore exempt from the requirements of the Legislative Instruments Act 2003. [Schedule 3, item 1, subsection 850-100(9)]

Evidence

3.22 Something that purports to be a signed declaration is to be taken to be a properly made declaration in the absence of evidence to the contrary. That avoids the possibility that the tax authorities would need to seek information to satisfy themselves that a declaration was validly made before giving effect to it . [Schedule 3, item 1, subsection 850-100(7)]

3.23 The Inspector-General of Intelligence and Security provides independent assurance for ministers and Parliament as to whether Australia's security and intelligence agencies are acting legally and with propriety by inspecting, inquiring into and reporting on their activities. It would be inconsistent with the proper performance of that function for the Inspector-General to be required to presume that the declarations were properly made. Therefore, the presumption does not apply to the activities of the Inspector-General . [Schedule 3, item 1, subsection 850-100(7)]

Oversight

3.24 As well as being reviewed by the Inspector-General of Intelligence and Security, who is appointed under the Inspector-General of Intelligence and Security Act 1986, the making of declarations will be generally overseen by the Parliamentary Joint Committee on Intelligence and Security. That committee is established under section 28 of the Intelligence Services Act 2001 and has among its functions, reviewing the administration and expenditure of the security and intelligence agencies (see paragraph 29(1)(a) of that Act).

Application and transitional provisions

3.25 These amendments apply from commencement on Royal Assent [Clause 2, item 3 in the table]. However, a declaration can be made in relation to a transaction that occurred before commencement [Schedule 3, item 1, subsection 850-100(6)].