Senate

Revised Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Miscellaneous amendments

Outline of chapter

9.1 Schedule 11 to this Bill makes a number of miscellaneous amendments to the taxation and superannuation laws. These amendments are part of the Government's commitment to the care and maintenance of the taxation and superannuation systems.

9.2 These amendments include: clarifying the tax treatment of native title benefits distributed through charities (Part 2); ensuring the fringe benefits tax rebate operates as intended (Part 3); and updating a number of significant taxation and superannuation thresholds to reflect reporting changes made by the Australian Bureau of Statistics (Part 4).

Context of amendments

9.3 Amendments to the taxation and superannuation laws, such as these, are periodically made to remove anomalies and correct unintended outcomes. Progressing such amendments gives priority to the care and maintenance of the tax system, a process supported by a 2008 recommendation from the Tax Design Review Panel.

Summary of new law

9.4 These miscellaneous amendments address technical deficiencies and legislative uncertainties within several taxation and superannuation provisions.

9.5 The table below lists the various parts of this Schedule.

Detailed explanation of new law

Part 1 - Technical amendments to the tax law to ensure that it operates properly following the changes made by the Australian Charities and Not-for-profits Commission (Consequential and Transitional) Act 2012

9.6 The amendments made to the Income Tax Assessment Act 1997 (ITAA 1997) ensure that entities which fall within the scope of the Australian Charities and Not-for-profits Commission (ACNC) are not exempt from income tax unless the entity is registered under the Australian Charities and Not-for-profits Commission Act 2012 (ACNC Act). These amendments maintain the integrity of the tax concessions by mirroring the previous law which required entities that fell within the scope of the Commissioner's endorsement requirements to be endorsed in order to be eligible for an exemption from income tax. [Schedule 11, items 1, 2 and 3 ]

9.7 This Part also amends the Income Tax (Transitional Provisions) Act 1997 to correct an incorrect reference in that Act. [Schedule 11, item 4 ]

Application and commencement provisions

9.8 The amendments in Part 1 commence on 3 December 2012, which was the day the ACNC Act commenced. These amendments are required to ensure that the ACNC Act operates in accordance with its policy intent. The amendments do not impact on any criminal offences. The retrospective operation of these amendments is not intended to alter any decisions that have already been made by the Commissioner of the ACNC or the Commissioner of Taxation. In effect, this amendment merely ratifies the operation of the current regime.

Part 2 - Amendments relating to Indigenous holding entities and native title

9.9 The amendments correct an issue with the application to charitable trusts of recent native title amendments to the income tax law.

9.10 Schedule 1 to the Tax Laws Amendment (2012 Measures No. 6) Bill 2012 clarifies the circumstances in which a native title benefit is not subject to income tax. In broad terms, such benefits are not taxable if they are paid, directly or indirectly, to an Indigenous person or to an Indigenous holding entity (see section 59-50 in item 3 of that bill).

9.11 Indigenous holding entities are defined to be either distributing bodies, ^[1] or trusts whose beneficiaries can only be Indigenous persons or distributing bodies.

9.12 It has been drawn to the Government's attention that some trusts in receipt of native title payments do not have beneficiaries at all because they are trusts with charitable objects rather than beneficiaries.

9.13 A charitable trust would not generally be taxable on the receipt of a native title payment anyway because all its income would be exempt from income tax. However, if it was not an Indigenous holding entity, the chain of payments would be broken, and subsequent payments it makes out of the native title payment could become taxable in the hands of those who receive it, even if they were Indigenous persons or Indigenous holding entities. For example, certain scholarships are not exempt income and so would be assessable to an Indigenous person even if paid by a charitable trust out of a native title payment.

9.14 That is not the intended result of the provisions in the Tax Laws Amendment (2012 Measures No. 6) Bill 2012. Accordingly, this Bill amends those provisions to include 'registered charities' in the definition of Indigenous holding entities. The result is that native title payments made by such entities are still exempt from income tax in the hands of an Indigenous person. [Schedule 11, item 6, paragraph 59-50(6)(c) of the ITAA 1997 ]

9.15 A 'registered charity' is an entity registered as a charity under the Australian Charities and Not-for profits Commission Act 2012 . Such entities are exempt from income tax (see section 50-5 of the ITAA 1997).

9.16 A registered charity can be an Indigenous holding entity even if it does not confine its charitable activities to Indigenous persons. However, the native title payments it makes are only made non-assessable non-exempt income if made to an Indigenous person or to another Indigenous holding entity.

9.17 As a consequence of adding registered charities to the definition of 'Indigenous holding entity', the list of permitted beneficiaries of trusts that come within that definition is expanded to include registered charities. [Schedule 11, item 5, paragraph 59-50(6)(b) of the ITAA 1997 ]

Transitional provision

9.18 The amendment to the provisions clarifying the treatment of native title payments extends the definition of 'Indigenous holding entity' to include registered charities. However, registered charities only came into existence on 3 December 2012 with the commencement of the Australian Charities and Not-for profits Commission Act 2012 . To cover earlier periods, the amendments apply to an entity before that time if it was endorsed as a tax exempt charitable entity under section 50-5 of the ITAA 1997 at that time. [Schedule 11, items 7 and 8, heading to Part 2-15 and section 59-50 of the Income Tax (Transitional Provisions) Act 1997 ]

Application and commencement provision

9.19 The amendments apply to income years starting on or after 1 July 2008. That aligns the application of the amendments with the application of the provisions they amend, so that those provisions will always apply as altered by the amendments. [Schedule 11, item 9 ]

9.20 The amendments, which can only benefit affected taxpayers, commence immediately after the commencement of Schedule 1 to the Tax Laws Amendment (2012 Measures No. 6) Bill 2012. This ensures that those amendments are only made if the provisions they amend are enacted. [Clause 2, table item 16 ]

Part 3 - Fringe benefits tax minor amendments

9.21 This Part contains minor amendments to ensure that certain provisions in the Fringe Benefits Tax Assessment Act 1986 (FBTAA) operate effectively and as intended by Parliament.

9.22 Section 65J of the FBTAA sets out the categories of employers that are able to access a fringe benefits tax rebate. These employers include registered charities, scientific institutions and public educational institutions.

9.23 The amendments in Part 3 of this Schedule introduce minor changes to correct anomalies that resulted from consequential amendments contained in the Australian Charities and Not-for-profits Commission (Consequential and Transitional) Act 2012 that did not entirely achieve Parliament's intention.

9.24 This Part reinserts the substantive special conditions previously contained in section 65J of the FBTAA which were unintentionally removed by the Australian Charities and Not-for-profits Commission (Consequential and Transitional) Act 2012 .

9.25 Section 65J has also been rewritten to improve readability. This is achieved by inserting the substantive provisions in a table and explicitly cross referencing the income tax exempt entity provisions. These amendments will ensure consistency and will simplify the tax laws. [Schedule 11, items 13 and 14 ]

9.26 Consequential amendments are made in the FBTAA and the Taxation Administration Act 1953 to ensure that the text in the relevant sections reflects the updated text in section 65J. [Schedule 11, items 10 to 12 and 15 to 26 ]

Application provision

9.27 The amendments in Part 3 apply for the 2013-14 fringe benefit tax (FBT) year and later FBT years. [Schedule 11, subitem 27(1)]

9.28 The 2013-14 FBT year has already commenced, however, as discussed above, these amendments essentially confirm existing practice and ensure the law operates in accordance with the policy intent behind the provisions.

9.29 These amendments provide greater certainty for taxpayers by ensuring that the effect of section 65J is largely unchanged from that which existed prior to the commencement of the ACNC Act, with updates to the terminology and structure of the section.

9.30 The amendments apply prospectively in that they do not affect any existing entitlements prior to the commencement of this legislation. This is because Part 3 applies to endorsements for the FBT rebate by the Commissioner of Taxation after the commencement of this legislation, and the amendments do not adversely affect any entity which has already been endorsed by the Commissioner of Taxation.

9.31 Where an entity has been endorsed under subsection 123E(1) of the FBTAA immediately before the commencement of Part 3, the amendments apply to an entity for the 2014-15 FBT year and later FBT years. This reflects that the entity will have already been endorsed for the 2013-14 FBT year, so it would be inappropriate to change the requirements for these entities part way through an FBT year. [Schedule 11, subitem 27(2)]

9.32 A transitional provision is inserted so that an endorsement in place at the end of the 2013-14 FBT year will continue to have effect as if it were an endorsement under subsection 123E(1) of the FBTAA as amended by this Schedule. This means that an entity endorsed under the old regime of section 65J need not seek re-endorsement following these amendments. [Schedule 11, subitem 27(3)]

Part 4 - Updating indexation provisions

Why do the thresholds require updating?

9.33 In 2012, the Australian Bureau of Statistics (ABS) announced that, instead of reporting the average weekly ordinary time earnings (AWOTE) survey for each quarter of the year (March, June, September and December), it will only do so for two quarters of the year (June and December).

9.34 This change in frequency took effect during 2012 with the June period publication being the last quarterly issue and the December period publication the first produced on a biannual basis, although still determined in respect of the December quarter.

9.35 A number of thresholds in laws administered by the Commissioner of Taxation reference the December and March quarters. No provisions reference the September or June quarters.

9.36 Therefore, as data is no longer produced for the March quarter, a number of significant thresholds become inoperative from the 2013-14 income or financial year (depending on the relevant threshold) if these provisions are not amended. The diagram below reports the timeline of ABS publications.

Diagram 9.1 : Timeline of ABS AWOTE publications

What thresholds reference the March quarter?

9.37 The following thresholds reference the March quarter.

Superannuation Guarantee (Administration) Act 1992

9.38 Employers must pay into an applicable superannuation account on a quarterly basis a minimum of 9.25 per cent of their eligible employees' earnings from 1 July 2013 (increasing progressively to 12 per cent from 1 July 2019 onwards).

9.39 Section 15 limits the maximum amount of superannuation that an employer has to provide for an employee. The amount (called the 'maximum contributions base') is indexed each financial year in accordance with the AWOTE for the March quarter (see section 9).

Superannuation (Government Co-contribution for Low Income Earners) Act 2003

9.40 The Government Superannuation Co-contribution is a payment made by the Government to the superannuation accounts of eligible members. It is designed to boost any personal (after-tax) contributions made during the income year.

9.41 The maximum co-contribution is payable to individuals with incomes up to the 'lower income threshold'. The maximum amount progressively reduces when income exceeds the 'lower income threshold' until it is phased out completely at the 'higher income threshold'. These thresholds are indexed each income year in accordance with the AWOTE for the March quarter (see subsection 10A(5)).

Income Tax Assessment Act 1997

9.42 Subsection 960-275(1A) applies an indexation formula to various provisions, outlined below.

Genuine redundancy payments and early retirement scheme payments

9.43 Section 83-170 allows a taxpayer to calculate the tax-free limit of a genuine redundancy payment and an early retirement scheme payment. These payments are tax-free up to a limit worked out under that section.

9.44 Subsections 960-275(1A) and 960-280(4) index the tax-free limit for an income year in accordance with the AWOTE for the March quarter.

Pre-1 July 1988 funding credits

9.45 Since 1 July 1988, most contributions to superannuation schemes have been subject to a 15 per cent earnings tax in the hands of the fund (see Subdivision 295-C). An exception applies where there are pre-1 July 1988 funding credits (see subsection 295-265(2)).

9.46 Funding credits were granted to unfunded superannuation schemes so that contributions made after 1 July 1988 to provide for benefits that accrued prior to 1 July 1988 are not taxed. This ensures consistency with funded superannuation schemes that only pay tax on contributions from 1 July 1988.

9.47 Subsections 960-275(1A) and 960-280(4) index the amount of unused pre-1 July 1988 funding credits for an income year in accordance with the AWOTE for the March quarter.

How do these amendments resolve this issue?

9.48 These amendments ensure that income and superannuation thresholds that reference the March AWOTE quarter instead reference the preceding December AWOTE quarter. [Schedule 11, items 28 to 31, subsection 960-275(1A ) ( formula) of the ITAA 1997, subsection 10A(5 ) ( definition of current year) of the Superannuation (Government Co-contribution for Low Income Earners) Act 2003, and paragraph 9(1)(b) and subsection 9(1 ) ( note) of the Superannuation Guarantee (Administration) Act 1992 ]

Example 9.71 : Superannuation guarantee maximum contribution base for the 2013-14 financial year

The superannuation guarantee maximum contribution base for the 2012-13 financial year is $45,750 per quarter.

To determine this amount for the 2013-14 year using the December AWOTE quarter rather than the March AWOTE quarter, the following formula in section 15 of the Superannuation Guarantee (Administration) Act 1992 is used:

These amendments provide that the indexation factor for the year is determined by dividing the December 2012 AWOTE quarter (1396.00) by the December 2011 AWOTE quarter (1330.10). This results in an indexation factor for the year of 1.050 (rounded to three decimal places - see section 9).

Therefore, under these amendments, the maximum contribution base that an employer must use for the 2013-14 financial year is $48,040 per quarter (rounded up to the nearest $10 dollars as required under section 15). This amount is calculated below:

9.49 The data for determining the thresholds need to be available before the start of the relevant income year to fulfil legislative obligations (see subsection 10A(8) of the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 ) and administrative requirements, for example, to employers. Using the preceding December quarter allows this requirement to be satisfied.

Application and commencement provision

9.50 To ensure the thresholds that rely on the AWOTE data continue to operate, these amendments apply in relation to the 2013-14 income year and later years in respect to the changes to the ITAA 1997 and the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 . As the threshold test in the Superannuation Guarantee (Administration) Act 1992 is based on a financial year, these amendments apply in relation to that Act from the 2013-14 financial year and later years. [Schedule 11, item 32 ]

9.51 Schedule 7 to the Tax and Superannuation Laws Amendment (2013 Measures No. 1) Bill 2013 contains technical corrections relating to the indexation formula in subsection 960-275(1A) of the ITAA 1997 (see above in paragraphs 9.42 to 9.47 for a description of the provisions that rely on this formula). As the technical corrections do not incorporate the indexation changes described in this Part, these amendments commence at either the later of the start of the day after these amendments receive Royal Assent or immediately after the technical corrections in Schedule 7 commence. This ensures the technical corrections do not override these amendments. [Clause 2, table items 18 and 20)]

Part 5 -

Other minor amendments

Minor amendments to Division 50

9.52 Part 5 amends the ITAA 1997 to maintain the operation of minor tax integrity requirements as well as simplifying the expression of these rules.

9.53 The ITAA 1997 is also amended to reduce the reporting burden on certain environmental institutions where those institutions are registered charities.

9.54 The current law requires certain specifically listed environmental entities to report statistical information to the Environment Secretary. However, following the commencement of the ACNC, many of these entities (those which are charities registered with the ACNC) will be required to report to the ACNC.

9.55 To reduce duplicative reporting, section 30-60 of the ITAA 1997 is repealed and replaced with a new section 30-60 which requires additional information to be given to the Environment Secretary only where the entity is not a registered charity. This reflects the fact that registered charities already provide information to the ACNC. [Schedule 11, item 35 ]

9.56 Sections 50-15, 50-50, 50-55, 50-65, 50-70 and 50-72 of the ITAA 1997 are amended to standardise requirements that an entity falling within those sections must comply with all the substantive requirements in their governing rules and apply its income and assets solely for the purpose for which the entity is established. [Schedule 11, items 36, 37, 40, 41, 44, 45, 48, 49 and 52 to 54 ]

9.57 Endorsement of entities as exempt from income tax under a general category is decided by reference to the entity's stated purposes and objectives.

9.58 For established entities, some reference can be had to the entity's actual activities to determine whether those activities demonstrate the pursuit of alternative or inconsistent purposes and objectives. The operations of the entity are important and can be used to determine the purposes for which an entity is established.

9.59 However, this can create some difficulty for the Australian Taxation Office because 'inappropriate conduct' may not always manifest pursuit of an alternate purpose but nonetheless should result in an entity no longer being entitled to endorsement.

9.60 For this reason, a special condition generally imposed on exempt entities is that they operate only in a manner consistent with their substantive governing rules and purpose. Therefore, while an entity's governing rules and purposes may initially determine their eligibility for endorsement/eligibility for an income tax exemption, they are expected to operate in a manner consistent with those rules and purposes to remain eligible.

9.61 Requiring an exempt entity to comply only with their substantive governing rules and purposes allows an entity to keep its income tax exempt status for minor procedural irregularities, such as an absence of quorum at a meeting or missing a required lodgement date. Breaches of procedural irregularities will not, of themselves, affect an entity's continued entitlement to income tax exempt status.

9.62 Substantive governing rules are those rules of core importance to the operation of the entity and would include those related to an entity's object and purpose and those relating an entity's not-for-profit status.

9.63 This requirement applies equally to the income tax exempt categories that are not the subject of the endorsement rules. However, because the entity is not endorsed, the Commissioner will consider the same issues if he decides to issue an assessment for income tax payable because the entity is not considered to be income tax exempt.

9.64 The new law confirms the Court's interpretation in Commissioner of Taxation v Bargwanna [2012] HCA 11, relating to whether a charitable trust is applied for the purposes for which it was established.

9.65 Corrections are made to the references in the Income Tax Assessment Act 1936 and the ITAA 1997 to give effect to the changes above. [Schedule 11, items 33, 34, 38, 39, 42, 43, 46, 47, 50 and 51 ]

Application provision

9.66 The amendments in Part 5 to this Schedule (other than item 55) apply in relation to income tax years starting on or after the commencement of Part 5, which occurs on the day after this Act receives the Royal Assent. [Schedule 11, subitem 56(1)]

Clarification of R & D concession for exempt entities

9.67 The research and development (R & D) provisions provide that R & D entities that are controlled by exempt entities are entitled to an R & D tax offset equal to 40 per cent of their relevant deductible expenditure on R & D (rather than the 45 per cent offset that otherwise applies for taxable entities whose aggregated turnover is under $20 million for the year). Questions have been raised about whether the reference to an entity being controlled by exempt entities requires the entity to have been controlled for the whole year, only at the end of the year, or at any time during the year. The amendments clarify that the provisions apply to an entity that is controlled by an exempt entity at any time during the year. [Schedule 11, item 55, table item 2 in subsection 355-100(1) of the ITAA 1997 ]

Application provision

9.68 These amendments apply to assessments for income years starting on or after 1 July 2013. For earlier periods, the existing meaning of the provision continues. However, no inference is to be drawn from the clarification that the unamended provision must have had a different meaning. [Schedule 11, subitems 56(2) and (3)]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

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

Miscellaneous amendments

9.69 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

9.70 Schedule 11 to this Bill makes a number of miscellaneous amendments to the taxation and superannuation laws. These amendments are part of the Government's commitment to the care and maintenance of the taxation and superannuation systems.

9.71 These amendments include: clarifying the tax treatment of native title benefits distributed through charities (Part 2); ensuring the fringe benefits tax rebate operates as intended (Part 3); and updating a number of significant taxation and superannuation thresholds to reflect reporting changes made by the Australian Bureau of Statistics (Part 4).

Human rights implications

9.72 These amendments make a number of minor and machinery changes to the taxation and superannuation provisions to ensure the provisions are consistent with their original policy intent. As such, this Schedule does not engage any of the applicable rights or freedoms.

Amendments relating to Indigenous holding entities and native title

9.73 In relation to the amendments in Part 2 regarding charitable entities and native title, these amendments supplement the amendments contained in the Tax Laws Amendment (2012 Measures No. 6) Bill 2012.

9.74 These amendments promote the right to self-determination as recognised in Article 1 of the International Covenant on Civil and Political Rights (ICCPR) and Article 1 of the International Covenant on Economic, Social and Cultural Rights (ICESCR). This includes individuals being free to pursue their economic, social and cultural developments. This includes the rights to and interests in land held by Indigenous persons under their traditional law and customs recognised by native title.

9.75 The amendments in Part 2 promote this principle by making clear that distributions of native title benefits to Indigenous persons or Indigenous holding entities from registered charities retain both their status as native title benefits and the tax treatment that goes with that status.

9.76 Article 2 of the ICCPR and Article 2(2) of the ICESCR require State Parties to respect and ensure all individuals the rights recognised in the Covenants without discrimination of any kind as to race, colour, sex, language, religion, political or other opinion, national or social origin, property, birth or other status.

9.77 Differences in treatment will not amount to prohibited discrimination (that is, they will be legitimate) if the reasons for such differentiation are reasonable and objective, and if the aim is to achieve a purpose which is legitimate (see the Committee on the Elimination of Racial Discrimination, in its General Recommendation No. 32 (at paragraph 8)).

9.78 Therefore, the amendments in Part 2 engage the rights to equality and non-discrimination because they apply only to a certain group of individuals within the population and draw a distinction between individuals who have native title rights (namely, Indigenous people) and persons who do not (namely, non-Indigenous people). Although, prima facie, this Schedule provides differential treatment in favour of Indigenous people who obtain native title benefits, the purpose which the amendments aim to achieve is legitimate and the reasons for differentiation are reasonable and objective.

Conclusion

9.79 The amendments in Part 2 are compatible with human rights as it advances the protection of human rights and to the extent that it may also limit human rights, those limitations are reasonable, necessary and proportionate.

9.80 The other Parts are compatible with human rights as they do not encroach upon any applicable rights or freedoms.

Assistant Treasurer, the Hon David Bradbury