Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)Chapter 4 Stronger penalties to combat tax avoidance and profit shifting
Outline of Chapter
4.1 The amendments in Schedule 3 double the maximum administrative penalties that can be applied by the Commissioner of Taxation to significant global entities that enter into tax avoidance or profit shifting schemes.
4.2 The increased penalties will help to deter tax avoidance.
Context of amendments
Operation of the existing law
4.3 The administrative penalties for entering into tax avoidance or profit shifting schemes are in Subdivision 284-C in Schedule 1 to the Taxation Administration Act 1953. All legislative references in this Chapter are to Schedule 1 to that Act unless otherwise specified.
4.4 Section 284-145 imposes an administrative penalty if an entity seeks to obtain a scheme benefit under a tax avoidance or transfer pricing scheme. The amount of the scheme benefit is generally the amount by which the entity's tax-related liability would be reduced under the scheme if the relevant anti-avoidance or transfer pricing provision did not apply (section 284-150).
4.5 Penalties are worked out by reference to a base penalty amount for a particular breach. The base penalty amount generally reflects a portion of the underlying scheme benefit sought. To work out the penalty imposed, adjustments may be made to the base penalty amount to take into account aggravating or mitigating factors (sections 284-220 to 284-225 in Subdivision 284-D).
4.6 Division 298 sets out the machinery provisions for the assessment, collection and remission of penalties.
Summary of new law
4.7 The amendments in the Schedule 3 double the penalties imposed on significant global entities that enter into tax avoidance or profit shifting schemes. The amendments will not apply to taxpayers that adopt a tax position that is reasonably arguable.
Comparison of key features of new law and current law
| New law | Current law |
| The maximum penalty applicable is generally 100 per cent of the amount of tax avoided under the scheme (but can be up to 120 per cent where aggravating factors apply).
The increased penalty only applies to significant global entities. Taxpayers that adopt a tax position that is reasonably arguable will not be liable to increased penalties. |
Administrative penalties are imposed on taxpayers that enter into tax avoidance or profit shifting schemes. The maximum penalty applicable is generally 50 per cent of the amount of tax avoided under the scheme (but can be up to 60 per cent where aggravating factors apply). |
Detailed explanation of new law
4.8 The amount of the penalty imposed for entering into a tax avoidance or profit shifting scheme is doubled for significant global entities that do not have a reasonably arguable position. [Schedule 3, item 1, subsection 284-155(3)]
Significant global entity
4.9 The amendments apply to a significant global entity. A significant global entity is broadly an entity with an annual global income of $1 billion or more (see Chapter 2 for a more detailed explanation of significant global entities). [Schedule 3, item 1, paragraph 284-155(3)(a)]
4.10 Schedule 1 to this Bill introduces a standard and centralised set of concepts that can be used to determine whether an entity is a 'significant global entity'.
Reasonably arguable position
4.11 The amendments do not apply to taxpayers who have a 'reasonably arguable position' on the application of the relevant adjustment provision. [Schedule 3, item 1, paragraph 284-155(3)(b)]
4.12 The purpose of this exclusion is to ensure that penalties are not increased where the breach is the result of uncertainty in the tax laws.
4.13 Subsection 284-15(1) sets out the test to determine whether a particular way of applying the law is reasonably arguable.
4.14 The reasonably arguable position is an objective standard involving an analysis of the law and application of the law to the relevant facts. The position must be a contentious area of law, where the relevant law is unsettled or where, although the principles of the law are settled, there is a serious question about the application of those principles to the circumstances of the particular case. Miscellaneous Taxation Ruling 2008/2 provides further information on the interpretation of this standard.
4.15 Additional documentation requirements, imposed under Subdivision 284-E, must be satisfied before a taxpayer can have a reasonably arguable position in transfer pricing matters.
Summary of penalty amounts
4.16 The following table sets out the new penalties that apply to significant global entities that enter into tax avoidance or profit-shifting schemes. Penalties are expressed as a percentage of the relevant scheme shortfall amount.
| Culpable behaviour | Base penalty amount | Aggravating factors apply | Disclosure during examination | Disclosure before examination |
| Tax avoidance schemes*
[if position is reasonably arguable] |
100
[25] |
120
[30] |
80
[20] |
20
[5] |
| Profit-shifting schemes
[if position is reasonably arguable] |
50
[10] |
60
[12] |
40
[8] |
10
[2] |
* Tax avoidance schemes include profit-shifting schemes where the taxpayer has a sole or dominant purpose of obtaining a transfer pricing benefit from the scheme.
Application and transitional provisions
4.17 The amendments apply to scheme benefits that an entity gets in relation to an income year commencing on or after 1 July 2015 (regardless of when the scheme was entered into or carried out). [Schedule 3 , item 2]
STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Stronger penalties to combat tax avoidance and profit shifting
4.18 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
4.19 Schedule 3 to this Bill amends the Taxation Administration Act 1953 to double the penalties imposed on significant global entities that enter into tax avoidance or profit shifting schemes. The amendments will not apply to taxpayers that adopt a tax position that is reasonably arguable.
Human rights implications
4.20 This Schedule does not engage any of the applicable rights or freedoms as it applies to multinational entities not individuals.
Conclusion
4.21 This Schedule is compatible with human rights as it does not raise any human rights issues.