House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)

Chapter 2 - Consolidation and repeal of tax provisions

Outline of chapter

2.1 Schedule 2 to this Bill simplifies the taxation laws by:

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consolidating duplicated taxation administration provisions contained in various taxation Acts into a single set of provisions in Schedule 1 to the Taxation Administration Act 1953 (TAA 1953);

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repealing spent or redundant taxation laws; and

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moving longstanding regulations into the primary law.

Context of amendments

Background

2.2 Sunsetting provisions in legislation provide that the Act or legislative instruments generally cease to have effect after a specific date unless further legislative action is taken to extend the operation of that legislative instrument or Act. The legislative action taken is usually to remake the instrument or Act.

2.3 Most jurisdictions in Australia have automatic sunsetting regimes for legislative instruments. The Commonwealth legislative instrument sunsetting regime is set out in Part 6 of the Legislative Instruments Act 2003. This provides for instruments to sunset 10 years after their registration on the Federal Register of Legislative Instruments.

2.4 Generally Australian Government agencies must plan for sunsetting well in advance of an instrument's sunset date, as the process to review and implement any review recommendations for each instrument can be lengthy.

2.5 Sunsetting is an important mechanism for the Australian Government to implement policies to reduce red tape, deliver clearer laws, and align existing legislation with current government policy by requiring ongoing review of legislative instruments.

2.6 An initial review of instruments that are due to sunset is an essential part of the process. The review is to inform the rule-maker's decision about whether the instrument should be left to sunset, be remade with amendment, be remade without amendment or be rolled over by the Parliament.

2.7 While instruments that are clearly spent or redundant do not require a thorough review, where it is not immediately apparent that an instrument serves no further function, a more comprehensive review needs to be undertaken.

2.8 As part of Treasury's initial review of the Income Tax Regulations 1936, a number of provisions in the principal law and regulations were identified as duplicative, inoperative or spent. A number of provisions contained in the regulations were also identified as being more appropriately incorporated into the primary law.

Duplicated provisions

2.9 Most of Australia's taxation laws contain a number of associated taxation administration provisions which provide the machinery to support the collection and recovery of the various taxes.

2.10 Since the introduction of A New Tax System in 2000, successive governments have progressively standardised and consolidated taxation administration laws into the TAA 1953 with the intent of simplifying the administration of the taxation laws and thereby reducing taxpayers' compliance costs.

2.11 A number of taxation administration provisions remain duplicated in different areas of Australia's taxation laws, including those relating to the Commissioner of Taxation's (Commissioner) power to obtain information and rules about evidence in judicial proceedings.

Spent or redundant provisions

2.12 Some provisions in the taxation law are intended to apply for only limited periods. After that period expires the provisions are spent and are no longer operative.

2.13 Other provisions stop applying because of changes to external circumstances (such as, improvements in technology), changes to the way the law is being administered or because other more modern provisions have replaced the need for the other provision. Such provisions are referred to as redundant provisions.

2.14 Spent and redundant provisions have no ongoing effect but remain on the statute book until Parliament acts to repeal them. Keeping spent provisions long after they have become inoperative makes using the legislation difficult, unnecessarily increasing compliance costs.

Moving the content of regulations into the primary law

2.15 At the time legislation is first enacted, the Parliament may make provision for regulations to be made providing additional details unknown at the time the legislation was passed or specifying circumstances or conditions that were expected to frequently change.

2.16 However, in some circumstances, after regulations are first made, there is no need to further amend those regulations or make different regulations.

2.17 It would generally assist users of the tax laws if regulations that are short, longstanding and have become static are moved to the primary law. It would also assist users of the tax laws if complex longstanding regulations can be simplified if moved to the primary law.

Summary of new law

2.18 Schedule 2 to this Bill simplifies the taxation laws by:

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consolidating duplicated taxation administration provisions contained in various taxation Acts into a single set of provisions in Schedule 1 to the TAA 1953;

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repealing spent or redundant taxation laws; and

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moving longstanding regulations into the primary law.

2.19 Schedule 2 to this Bill repeals a number of taxation administration provisions from various taxation laws and consolidates those provisions into Schedule 1 to the TAA 1953 by broadening equivalent provisions already contained in Schedule 1 to that Act so that they cover those various taxation laws.

2.20 Schedule 2 to this Bill also repeals provisions from the Income Tax Assessment Act 1936 (ITAA 1936), Fringe Benefits Tax Assessment Act 1986 and Petroleum Resource Rent Tax Assessment Act 1987 that have become spent or redundant.

2.21 Schedule 2 to this Bill also moves the content of certain longstanding and static regulations from the Income Tax Regulations 1936 into the ITAA 1936 or the TAA 1953.

Detailed explanation of new law

Consolidation of taxation administration provisions

2.22 Schedule 2 amends Schedule 1 to the TAA 1953 to consolidate and centrally locate the rules around the Commissioner's power to obtain information under Division 353 in Schedule 1 so that the rules now cover all the taxation laws, not just a number of specified tax regimes with duplicated rules covering the other tax regimes. [Schedule 2, items 13 to 19, sections 353-10 and 353-15 in Schedule 1 to the TAA 1953 ]

2.23 The equivalent provisions contained in the following Acts are repealed:

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Fringe Benefits Tax Assessment Act 1986;

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ITAA 1936;

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Income Tax Assessment Act 1997 (ITAA 1936);

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Income Tax (Transitional Provisions) Act 1997;

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Petroleum Resource Rent Tax Assessment Act 1987;

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Product Grants and Benefits Administration Act 2000;

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Superannuation Contributions Tax (Assessment and Collection) Act 1997;

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Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act 1997;

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

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Superannuation Guarantee (Administration) Act 1992;

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Superannuation (Unclaimed Money and Lost Members) Act 1999; and

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TAA 1953.

[Schedule 2, items 22, 24, 26, 33, 37, 39, 41 to 43, 46 to 48, 50 to 54 and 59 to 65]

2.24 Schedule 2 to this Bill also amends Schedule 1 to the TAA 1953 to consolidate and centrally locate the rules around how documents issued by the Commissioner or by taxpayers are to be treated as evidence in judicial proceedings contained in Division 350 in Schedule 1 so that the rules now cover all taxation laws, not just a number of specified tax regimes with duplicated rules covering the other tax regimes. [Schedule 2, items 9 to 12, sections 350-5 and 350-10 in Schedule 1 to the TAA 1953 ]

2.25 The equivalent provisions contained in the following Acts are repealed:

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

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Fringe Benefits Tax Assessment Act 1986;

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Fuel Tax Act 2006;

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ITAA 1936;

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ITAA 1997;

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Income Tax (Transitional Provisions) Act 1997;

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Petroleum Resource Rent Tax Assessment Act 1987;

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Product Grants and Benefits Administration Act 2000;

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Superannuation Contributions Tax (Assessment and Collection) Act 1997;

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Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act 1997;

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

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Superannuation Guarantee (Administration) Act 1992;

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Superannuation (Unclaimed Money and Lost Members) Act 1999; and

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TAA 1953.

[Schedule 2, items 21 to 25, 30, 33 to 35, 37, 50, 53, 63 and 71]

2.26 The amendments to Schedule 1 to the TAA 1953 do not alter the intended operation of the provisions as they apply to the administration and operation of various taxation laws. The amended TAA 1953 provisions are merely a rewrite and consolidation of the provisions being repealed.

2.27 To remove any doubt that the TAA 1953 (including Schedule 1 to the Act) is intended to bind the Crown in each of its capacities; a new provision has been added to the beginning of the TAA 1953 putting the matter beyond doubt and ensuring the consolidation of the taxation administration provisions into the TAA 1953 does not alter the on-going policy objective. The new provision is consistent with the modern drafting practice that applies in relation to new Commonwealth Acts. New Acts routinely incorporate such a statement where it is intended that the Crown be bound by the Act in order to ensure the law is clear in its operation. [Schedule 2, item 8, section 2B of the TAA 1953]

Spent or redundant provisions

2.28 Schedule 2 to this Bill repeals the following spent or redundant provisions:

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Part VIII of the Fringe Benefits Tax Assessment Act 1986;

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Part IX of the Petroleum Resource Rent Tax Assessment Act 1987; and

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Sections 23AC, 82N and 202DA of the Income Tax Assessment Act 1936.

[Schedule 2, items 85, 89, 100, 103 and 105]

2.29 A number of related provisions referring to these provisions are also repealed or updated to remove redundant material. [Schedule 2, items 74 to 84, 86 to 88, 90 to 94, 101 and 106 to 109]

Moving the content of regulations into the primary law

Convertible notes

2.30 The general principle of income tax is that interest on borrowed money that is incurred by a company in producing its assessable income, or is necessarily incurred by a company in carrying on business for the purpose of producing such income, is deductible when determining a company's taxable income. Conversely, dividends paid by a company on its share capital are not deductible.

2.31 Division 3A of Part III of the ITAA 1936 gives effect to the policy position that interest paid on convertible notes has generally more in common with non-deductible dividends on deferred shares than deductible interest on borrowed money. Accordingly, Division 3A imposes conditions on the deductibility of convertible note interest. However, with the introduction of the debt/equity rules in ITAA 1997, Division 3A now applies only for the limited purpose of calculating an eligible controlled foreign company's attributable income for the purposes of Pt X of the ITAA 1936.

2.32 The object of Division 3A is achieved by imposing a number of tests to ensure that the option to convert the note into share capital will rest solely with the lender, that the note holder's rights will at all times be constant and the right to convert the loan into share capital will not prejudice either the note holder nor existing shareholders for any interest paid to be deductible.

2.33 One of the tests is the conversion price test and it relies on a market price being ascertainable from a public market. Division 3A mandates that the market price be determined by reference to a prescribed stock exchange. However, the prescribed stock exchanges included in the Income Tax Regulations 1936 are out of date.

2.34 Schedule 2 to this Bill replaces the existing power to prescribe stock exchanges for the purposes of Division 3A with a cross reference to the stock or securities exchanges that are prescribed for the purposes of the ITAA 1997 that operate in Australia. [Schedule 2, item 102, section 82L definition of 'prescribed stock exchange']

2.35 This will update the list of stock or securities exchanges that apply for the purposes of the convertible note rules and consolidate the various lists of stock or securities exchanges that are approved for the purposes of the income tax law.

Interest withholding tax and publicly offered debentures

2.36 Section 128F of the ITAA 1936 exempts from withholding tax interest on certain publicly offered debentures and debt interests. To qualify for the exemption, companies, and Australian public bodies in the case of debt issued in Australia by the Commonwealth or Commonwealth authorities, must satisfy one of tests set out in the section. These tests are designed to ensure that the debentures are offered as part of a genuine large-scale capital raising in either the wholesale or retail capital markets.

2.37 Subsection 128F(8) ensures that interest withholding tax exemption is available where the finance is raised through a foreign resident wholly-owned subsidiary of an Australian resident company. Interest paid by the subsidiary to a foreign lender is not generally liable to Australian income tax as the transaction is between two foreign residents and the interest would not usually be an expense of an Australian business. The exemption provided by subsection 128F(8) applies to interest paid by the Australian parent company to the foreign resident subsidiary on the loan advanced by the subsidiary to the parent.

2.38 However, the exemption is restricted and is only available where:

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the only business of the foreign resident subsidiary is raising finance for the purposes of the parent company;

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the finance is raised by the foreign resident subsidiary by the issue of a debenture in a country specified in the Income Tax Regulations 1936 (but not Australia); and

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the foreign resident subsidiary is a resident of the same foreign country in which the debentures are issued, determined under the taxation laws of that country at the time the debentures are issued.

2.39 Only the United States of America has been specified in the Income Tax Regulations 1936 which was so specified in 1997.

2.40 In order to assist users of the law, this Schedule moves the specification of the United States of America into the primary law by amending subsection 128F(8). However, the regulation making power will be retained to allow other countries to be specified in the future. [Schedule 2, item 104, subsection 128F(8) of the ITAA 1936]

Annual investment income reports and tax file number reports

2.41 Part 6 of the Income Tax Regulations 1936 contains the rules around the provision by investment bodies, such as banks and public companies, of quarterly tax file number reports and annual investment income reports.

2.42 Investment bodies are required, by the regulations, to report investment income paid to their investors. All investment bodies are required to provide the Commissioner with an annual investment income report detailing:

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investment income paid to the accounts of investors;

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any tax withheld from these accounts;

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tax file numbers and Australian business numbers quoted against investments, and

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movements of principal in farm management deposits.

How the annual investment income report information is used

2.43 The tax file number system is designed to detect non-disclosure of income and to enable the Commissioner to match the details of income disclosed in a taxpayer's income tax return with details received from other sources. These sources include employers reporting employment income and investment bodies reporting investment income. The purpose of the annual investment income report is to facilitate the matching process for investment income.

2.44 For income matching purposes, the information which the investment body supplies in the report needs to mirror the information which the investors provide in their tax return. When an annual investment income report is received, the investor's identity is matched to records held by the Australian Taxation Office (ATO). This is done by using the tax file number or Australian business number and name supplied by the investor or, if no number is supplied, by identity matching using the investor name supplied in the report.

2.45 More recently, the information supplied in an annual investment income report has been used to pre-fill information into the tax returns of taxpayers, reducing their compliance costs and making it easier for them to comply with their taxation obligations.

2.46 Part 6 of the Income Tax Regulations 1936 is out of date, overly prescriptive and difficult to understand and comply with. It is also not sufficiently flexible to allow the Commissioner to continue to develop the report as a means to reduce the compliance costs of taxpayers and investment bodies.

2.47 Schedule 2 to this Bill rewrites and relocates the rules providing for tax file number reporting and investment income reporting into Schedule 1 to the TAA 1953. [Schedule 2, item 72, Division 393 in Schedule 1 to the TAA 1953]

2.48 The rewrite has removed much of the content requirements of the previous annual investment income reports and instead leaves such requirements to the Commissioner to determine in approving the manner and form in which this report is to be provided to him or her.

2.49 The rewrite also gives the Commissioner the ability to enter into arrangements with investment bodies for the report to be provided in a different manner. The new discretion will facilitate the movement to new modern reporting methods that are less compliance costs intensive and facilitate a simpler interaction between the ATO, investment bodies and taxpayers. [Schedule 2, item 72, subsection 393-10(6) in Schedule 1 to the TAA 1953]

Tax file numbers and indirectly held investments

2.50 Section 202DDB of the ITAA 1936 effectively relieves solicitors and bodies corporate of their tax file number obligations in certain cases when they reinvest funds on behalf of another person. Section 202DDB applies to solicitors and bodies corporate satisfying one of the two conditions set out in the section and also the conditions set out in the regulations.

2.51 The condition set out in the regulations which must be satisfied if exemption is to apply (whether the interposed entity is a body corporate or solicitor), is that the condition that the secondary investment must have a descriptive title which identifies all of the primary investors. In fact, only one condition has ever been prescribed.

2.52 In order to assist users of the law, this Schedule moves the condition into the primary law by amending section 202DDB. However, the regulation making power will be retained to allow other conditions to be specified in the future. [Schedule 2, item 109, section 202DDB of the ITAA 1936]

Approved forms

2.53 Schedule 2 to this Bill also removes the power of the Governor-General to prescribe the contents of certain documents to be provided to the Commissioner under a number of taxation laws. [Schedule 2, items 112 to 115]

2.54 The powers are replaced with cross references to the standardised approved form rules contained in Division 388 in Schedule 1 to the TAA 1953.

2.55 In 2000, the taxation administration law was reformed to consolidate into one place, a single set of rules about the manner and form in which information is to be provided to the Commissioner, these rules are known as the 'approved form rules'.

2.56 Existing laws providing for the content to be approved or prescribed have been progressively replaced with a reference instead to the standardised approved form rules. This Schedule continues those reforms.

Consequential amendments

2.57 The amendments update checklists contained in the ITAA 1997 to remove references to repealed provisions. [Schedule 2, item 111, section 11-15 of the ITAA 1997]

2.58 Cross references to consolidated and repealed provisions have been updated to refer instead to the rewritten provisions contained in the TAA 1953. [Schedule 2, items 1 to 7, 20, 27 to 29, 31 to 32, 35 to 36, 38, 40, 55 to 58, and 66 to 69]

Application and transitional provisions

2.59 The amendments generally commence and apply from Royal Assent. [Clause 2]

2.60 For the purposes of transition, the repeal of the taxation administration provisions being consolidated into the TAA 1953 is delayed until 1 July 2015 (or 90 days after Royal Assent if this date is after 1 July 2015). This will allow the Commissioner time to make changes to administrative systems as a result of the amendments (for example, changes to identification passes, changes to standardised forms relating to a formal request for information). [Clause 2]

2.61 Similarly, the replacement investment income reports will commence on or after 1 July 2015. [Schedule 2, item 73]

2.62 The transitional provisions applying to the repeal of the spent or redundant laws ensure that the administration, collection and recovery of liabilities under those provisions relating to past tax years can still occur despite the repeal of those provisions. They also preserve the rights and obligations of taxpayers relating to past years. [Schedule 2, items 95 to 99]

Finding tables

2.63 This Chapter includes finding tables to assist in identifying which provision in this Bill corresponds to a provision in the old law that has been rewritten, and vice versa.

2.64 References to old law in the finding tables are to these provisions in the ITAA 1936.

2.65 References to the new law are to provisions of the TAA 1953, unless otherwise indicated. Also, in the finding tables:

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No equivalent means that this is a new provision that has no equivalent in the old law. Typically, these would be guide material.

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Omitted means that the provision of the old law has not been rewritten in the new law.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 Consolidation and repeal of tax provisions

2.66 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

2.67 Schedule 2 to this Bill simplifies the taxation laws by:

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consolidating duplicated taxation administration provisions contained in various taxation Acts into the Taxation Administration Act 1953;

•

repealing spent or redundant taxation laws; and

•

moving longstanding regulations into the primary law.

2.68 This Schedule does not make any policy changes. No changes in the application of law to any taxpayer will result from these changes.

Human rights implications

2.69 This Bill engages the following human right.

Right to privacy

2.70 Article 17 of the International Covenant on Civil and Political Rights (ICCPR) provides that no one shall be subjected to arbitrary or unlawful interference with his privacy. This includes provisions that involve the collection, storage, security, use and disclosure of personal information.

2.71 Article 17 does not set out reasons for which the guarantees under the right to privacy may be limited where there is a legitimate objective. However, the UN Human Rights Committee notes in General Comment 16 that an interference that is provided for by law should be in accordance with the provisions, aims and objectives of the ICCPR and should be reasonable in the particular circumstances. ^[1] Therefore, permissible limitations contained in other articles, for example, those which are necessary in a democratic society in the interests of national security, public order or the protection of the rights and freedoms of others may also be applicable in relation to the right to privacy.

2.72 'Reasonableness' incorporates notions of proportionality to the legitimate objective sought, and in this content generally means that provisions interfering with privacy should be precise, that they should only be made by the authority designated under the law, and that the gathering and holding of personal information must be regulated by law to ensure that the information does not reach the hands of unauthorised people. ^[2]

2.73 Information gathering powers and monitoring regimes like the one being amended in this Bill engage the right to privacy in Article 17 of the ICCPR.

2.74 The provisions to facilitate investigation should be reasonable, necessary and proportionate to meeting the legitimate objective of ensuring taxpayers comply with their obligations under the taxation system.

2.75 Information provided by taxpayers to the Commissioner of Taxation (Commissioner) must be correct and accurate for the tax system to function effectively and to ensure community confidence in taxation system.

2.76 The information gathering and monitoring power enables the Commissioner to validate the accuracy of the information provided to him or her in the administration of the taxation laws and to gather information from taxpayer's who actively choose not to engage with the Commissioner or comply with the taxation laws.

2.77 The investigation and monitoring powers of the Commissioner override the privilege against self-incrimination by providing that, a person is not excused from producing information or documents or answering a question on the grounds that doing so would incriminate him or herself.

2.78 Consistent with the Guide to Framing Commonwealth Offences it is appropriate to override the privilege where its use could seriously undermine the effectiveness of a regulatory scheme and prevent the collection of evidence.

2.79 For example, the privilege against self-incrimination does not apply in relation to most Australian Taxation Office's coercive information gathering powers, as the Courts have accepted, that retaining such a privilege in such cases would frustrate the regulator in the exercise of its functions. This is, because all the evidence is held by the taxpayer and only the taxpayer can, in most instances, provide the information necessary for the Commissioner to undertake his or her functions.

2.80 It is also critical for the legislation to contain safeguards to protect the interests of the taxpayer, so any evidence obtained by the Commissioner is subject to strict confidentiality rules that generally prevent the use of that information, other than for use in administrating the tax system unless provided otherwise by law.

Conclusion

2.81 This Schedule is compatible with human rights as it is necessary and proportionate to achieve a legitimate objective.