House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

Chapter 1 - Tax incentives for early stage investors

Outline of chapter

1.1 Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to encourage new investment in Australian early stage innovation companies (ESICs) with high growth potential by providing qualifying investors, who invest in such companies, with a tax offset and a capital gains tax (CGT) exemption for their investments.

1.2 All references to legislative provisions in this chapter are references to the ITAA 1997 unless otherwise stated.

Context of amendments

1.3 The Australian Government currently provides tax concessions to support innovative Australian companies through the Research and Development (R & D) Tax Incentive, Early Stage Venture Capital Limited Partnership (ESVCLP) and Venture Capital Limited Partnership (VCLP) regimes.

1.4 However, venture capital funds typically focus on companies that have already developed a concept that is anticipated to attract capital and the company is generally seeking higher amounts of capital to grow. Instead, Australian ESICs face difficulty trying to attract seed and pre-commercialisation equity at an earlier stage of their development.

The National Innovation and Science Agenda

1.5 The National Innovation and Science Agenda (NISA) contains complementary measures to ensure innovative companies are supported at different stages of development, by aligning our tax system and business laws with a culture of entrepreneurship and innovation. The Australian Government seeks to encourage innovation through a tax system that encourages an entrepreneurial and risk taking culture.

1.6 The tax incentive for early stage investors (TIFESI) is designed to promote this culture by connecting relevant start-up companies with investors that have both the requisite funds and business experience to assist entrepreneurs in developing successful innovative companies, particularly at the pre-commercialisation phase where a concept is in development, but the company requires additional investment to assist with commercialisation.

1.7 Often it is the high risk period between initial funding to the time a start-up company begins generating revenue that makes it difficult to attract investors or obtain finance to develop a concept past initial funding. In fact, this stage is sometimes described as a 'valley of death' where most start-up companies fail simply because they find themselves vulnerable to cash flow requirements. Accordingly, these amendments focus on providing an attractive tax offset at the outset for investors who invest in ESICs, with an exemption for any subsequent capital gains realised on the investment, but without access to any losses realised on the investment. This treatment is consistent with the ESVCLP incentives in Subdivision 118-F.

1.8 These amendments bridge the funding gap between pre-concept stage financing and support (typically provided through self-funding, friends and family and government offsets such as the refundable R & D tax offset) and financing through the ESVCLP and VCLP regimes for companies further along the development pathway.

1.9 While typical start-up companies may be selective as to the type of investors they wish to bring on board, these amendments are designed to apply to a broad range of potential investors, whether they wish to invest directly or through a company, trust or partnership. However as investments in ESICs can involve high risk, the amendments limit the risk exposure of retail investors to $50,000 per year.

Developing a legislative framework for these amendments

1.10 The Government has developed the TIFESI as a high priority to alleviate industry concern about an investment drought.

1.11 Treasury, the Australian Taxation Office (ATO) and the Department of Industry, Innovation and Science undertook a targeted consultation process on the design of the TIFESI regime. Over 50 stakeholders participated in this process by either attending a targeted roundtable and/or providing a formal submission in response to the Government's discussion paper. These stakeholders included experienced investors, start-up founders and industry bodies that are active in sectors that include the technology, financial technology, medical, corporate, financial and agricultural industries.

1.12 The Government is aware that innovation is an evolving concept which is broader than just R & D activities. As a result, these amendments adopt a principle-based definition of an innovation company that is based on industry concepts and terminology which allows the law to accommodate new innovations not yet envisioned. The legislation also includes regulation making powers to ensure the regime can easily adapt to evolving markets. In particular, these regulation making powers will allow the Government to ensure that the eligibility requirements and the incentives themselves remain up to date and fit for purpose, whilst minimising opportunities for tax avoidance.

1.13 Extending the incentive to indirect investments through an Australian Innovation Fund, as envisaged in the Government's discussion paper, may be considered at a later date depending on stakeholder feedback on these amendments. More generally, the Government intends to review this tax incentive after a period of four years to determine how well it is delivering on these policy outcomes.

Summary of new law

1.14 These amendments create a new Subdivision 360-A 'Tax incentives for early stage investors in innovation companies' within Division 360 'Early stage investors in innovation companies'. This new Subdivision sets out the circumstances when an investor qualifies for the tax offset and the modifications to the CGT treatment of eligible investments.

1.15 These amendments also create a new requirement for ESICs to report information about their investors to the Commissioner of Taxation (Commissioner) so that the ATO can assess whether these investors may qualify for the tax offset and the modified CGT treatment. This approach minimises compliance costs for all parties involved by requiring the reporting of only the minimum amount of information necessary for the ATO to effectively administer the regime. The legislative framework supporting this reporting provides the Commissioner with administrative flexibility to further minimise the compliance burden on ESICs.

Comparison of key features of new law and current law

Detailed explanation of new law

What investors qualify for the tax incentives?

1.16 The tax incentives introduced by these amendments are available to all types of investors, regardless of their preferred method of investment (whether an investment is made directly as a corporation or individual or indirectly through a trust or partnership) other than 'widely held companies' (as defined in section 995 1) and 100 per cent subsidiaries of these companies. An investor can be any entity within the meaning of section 960-100. A trust or partnership will not directly be entitled to the tax offset, however, specific rules apply to ensure the value of these tax incentives flow through to beneficiaries and partners, where such an investment method is chosen. These rules are explained in paragraphs 1.48 to 1.56. [Schedule 1, item 1, paragraph 360-15(1)(a) and subsections 360-15(2) and 360-15(3)]

1.17 To ensure the tax offset is broadly available for all prospective investors, there are also no restrictions on an investor entity's residency. That said, the tax offset may be less attractive to foreign residents that do not have an Australian income tax liability.

Limited entitlement for certain kinds of investors

1.18 Whilst the tax incentives are generally available to all types of investors, investment in innovation companies is inherently risky and some protections are necessary to ensure more vulnerable investors are not over-exposed to this risk. Many investments may lose money, while others have the potential to make large gains.

1.19 There are no restrictions on the amount an entity may invest if the entity meets the requirements of the sophisticated investor test in section 708 of the Corporations Act 2001 (Corporations Act) in relation to a relevant offer of shares (refer paragraph 1.25) at any time in the income year. In the Corporations Act the sophisticated investor test is used for investment opportunities that have reduced disclosure requirements, on the basis that investors that meet this criteria are more likely to be able to evaluate offers of securities and other financial products without needing the protection of a disclosure document.

1.20 This means that as long as the investor meets the requirements of the sophisticated investor test in relation to at least one offering of relevant equity interests in the income year, then there are no restrictions on the amount the entity may invest (subject to the $200,000 cap on the value of the tax offset, as described in paragraphs 1.40 to 1.45).

1.21 Other investors (non-sophisticated investors) are limited to investing amounts of $50,000 and below in an income year. These investors will not be entitled to a tax offset if their investment exceeds this maximum threshold, even in relation to any proportion of such an investment below this threshold. [Schedule 1, item 1, section 360-20]

Tax offset for shares in a qualifying ESIC

1.22 These amendments introduce a non-refundable carry-forward tax offset for qualifying investor entities equal to 20 per cent of the amount they paid for qualifying shares.

1.23 The general case set out below describes the rules relating to direct investment, where the investor entity is an individual or corporation. Special rules for members of trusts or partnerships and trustees that are liable for tax are explained in paragraphs 1.48 to 1.60.

Example 1.1

Alex, a sophisticated investor, earns assessable income of $600,000 and has normal deductions of $100,000 in the 2016-17 income year. On the basis that Alex does not qualify for the tax offset, Alex's tax liability on a taxable income of $500,000 would be $214,947.

However, if Alex invested $100,000 in qualifying shares then he would receive a $20,000 tax offset and reduce his tax liability to $194,947.

General case

Entitlement to the tax offset

1.24 Subject to the limitation described in paragraph 1.16 above, an entity (other than a trust or partnership) is entitled to a tax offset for an income year if during that year the entity was issued with shares by a qualifying ESIC, provided the entity was not in a restricted relationship at the relevant time, nor precluded from accessing the offset because in the income year it is the kind of investor described in paragraphs 1.18 to 1.21. The relevant relationship restrictions are explained in paragraphs 1.33 to 1.39. [Schedule 1, item 1, subsection 360-15(1) and section 360-20]

1.25 Qualifying shares are newly issued equity interests that are shares in a qualifying ESIC, where the issue of the shares does not constitute an acquisition of ESS interests under an employee share scheme (refer definition of ESS interest in section 83A-10). [Schedule 1, item 1, paragraphs 360-15(1)(b) and (c) and (e)]

1.26 The basic test for an equity interest is provided in sections 974-70 and 974-75. In addition to this, the equity interest must constitute a share within the meaning of section 995-1.

1.27 These rules ensure that the tax incentives are targeted at new investors in a qualifying ESIC rather than shares issued under an employee share arrangement or in relation to interests with a debt character, such as preference shares.

1.28 The equity interests must be issued by the ESIC, which confines these interests to those that are newly issued. This prevents entities that trade shares in an ESIC from receiving an offset for an investment that does not directly raise any additional funds for the ESIC.

1.29 The time for testing whether an entity is a qualifying ESIC is the time immediately after the relevant equity interests are issued. This 'point in time test' means, for example, investors that acquire equity interests from the conversion of convertible notes are not precluded from qualifying for the tax offset, where the company issuing those equity interests is a qualifying ESIC at the time of the conversion into shares. The requirements for a qualifying ESIC are explained in paragraphs 1.61 to 1.109.

1.30 An investor entity that acquires shares in a company that is a qualifying ESIC at the time of issue, will not be disqualified from accessing a tax offset in relation to those shares if the company subsequently ceases to be a qualifying ESIC (nor will the investor be disqualified from accessing the modified CGT treatment in relation to those shares (refer also to paragraph 1.112)).

Example 1.2

Simon, a sophisticated investor, acquires $50,000 worth of shares in a qualifying ESIC on 1 October 2016. Assuming Simon has a sufficient tax liability at the end of the 2016-17 income year and meets the other requirements in relation to the tax offset, he would receive a tax offset of $10,000.

Should Simon acquire an additional $500,000 worth of shares in the same qualifying ESIC on 1 December 2016 (and assuming he has a sufficient tax liability and still meets the other requirements of the tax offset) he would receive a tax offset of $110,000 in the income year ending 30 June 2017.

Should the company, for whatever reason, no longer be a qualifying ESIC by 1 June 2017, then this will not affect Simon's entitlement to the tax offset in relation to both parcels of shares and the subsequent modified CGT treatment of those shares.

1.31 This approach recognises that a legislative regime that requires ongoing activity checks for a qualifying ESIC, with an associated clawback mechanism for the offset should circumstances change, would impose a regulatory burden on ESICs and create additional risk and uncertainty for investors.

1.32 That said, it is likely that an entity that has met the requirements to be a qualifying ESIC will remain a qualifying ESIC. To the extent that it stops being a qualifying ESIC, the goal of improving access to capital for that company has been met.

Restrictions on the relationships of the investor and the ESIC

The investor and the ESIC must not be affiliates of each other

1.33 In order to qualify for the tax offset, the ESIC must not be an affiliate (refer section 328-130) of the investor entity nor can the investor entity be an affiliate of the ESIC at the time the relevant shares are issued. That is, the ESIC must not act, or reasonably be expected to act, in accordance with the investor's directions or wishes, or in concert with the investor, in relation to the affairs of the business of the ESIC and vice versa. The entities will not be considered affiliates merely because of the nature of the business relationship shared between them. [Schedule 1, item 1, paragraph 360-15(1)(d)]

1.34 The affiliate test is used in this context in order to target the tax incentives to new investors in an ESIC. The tax offset is designed to encourage new investment in ESICs rather than merely subsidise the existing investment. If an investor exerts a degree of influence over an ESIC or vice versa, as per an affiliate relationship, it might be expected that the offset is not attracting this type of new investment.

1.35 For example, a director-owner of an ESIC would be precluded from qualifying for a tax offset, as the ESIC would be an affiliate of the director-owner.

1.36 The affiliate test is also an integrity rule to prevent entities acting in concert to obtain the benefit of the tax offset, where the investment is not for an innovation purpose or does not represent new capital for the ESIC that meets the policy objectives of this measure. For example, where the investor entity is a wholly-owned subsidiary company of the ESIC, the investor entity would be precluded from qualifying for a tax offset, as the investor entity would be an affiliate of the ESIC. An investment in these circumstances would essentially represent shifting capital between two separate legal entities that does not represent new investment.

30 per cent equity interest restriction

1.37 In order to qualify for the tax offset, the investor entity must not hold more than 30 per cent of the equity interests of an ESIC, including any entities 'connected with' (refer section 328-125) the ESIC, tested immediately after the time relevant equity interests are issued. [Schedule 1, item 1, paragraph 360-15(1)(f)]

1.38 This restriction encourages investors to spread their investments across more than one ESIC.

1.39 An ESIC is connected with another entity if the ESIC controls the other entity (or vice versa) or both are controlled by the same third entity. The connected with test is used in this context to ensure that the policy intention behind the 30 per cent cap is not circumvented by an investor that invests in multiple related ESICs, holding less than 30 per cent of the issued capital in each, but has not, in reality, spread their investments, as there is a control relationship between the ESICs.

Amount of the offset

1.40 In the general case (described in paragraph 1.24), the amount of the offset for a qualifying investor in an income year will be equal to 20 per cent of the amount paid for the qualifying shares (refer to paragraph 1.25). However, the maximum offset for an investor entity and its affiliates in any income year is $200,000 less the sum of any previously claimed TIFESI tax offsets carried forward into the income year (refer paragraphs 1.46 to 1.47 about the carry-forward nature of the tax offset). [Schedule 1, item 1, section 360-25]

1.41 This means that for investments up to $1 million, qualifying investors receive the full 20 per cent non-refundable tax offset. Investment amounts greater than $1 million in an income year do not increase the amount of the offset available.

1.42 Where the offset is carried forward and further eligible investments are made, the offset that may be claimed from investments made in any one year is capped at $200,000.

1.43 Potential investors should take these limits into account (as well as the CGT treatment of qualifying shares) when making investment decisions.

1.44 The $200,000 annual cap on the value of the offset for an investor applies on an affiliate-inclusive basis in order to prevent entities entering into arrangements to circumvent the cap.

1.45 For example, this would prevent an investor entity obtaining the benefit of multiple offsets, exceeding the $200,000 cap, in situations where an investor enters into arrangements with its affiliates in order to trade the value of offsets.

Other characteristics of the tax offset

1.46 The tax offset is non-refundable, so it is of no immediate benefit to an entity without an income tax liability. However, the tax offset may be carried forward. By making the tax offset carry-forward, it reduces the chance that the benefit of the offset will be lost to investors. As a carry-forward tax offset, recipients should apply offsets that cannot be refunded or carried forward first and before refundable offsets, so the benefit of these offsets is not lost or deferred. There are only minimal differences in the relative priority of this offset compared with other existing carry-forward offsets. This offset falls in priority below the carry-forward tax offset for ESVCLP investment (refer Schedule 2 of this Bill) but above carry-forward offsets arising under the R & D tax incentive.

1.47 An investor entity may only carry forward so much of the tax offset that it would be eligible to claim if it had an income tax liability. This means that the amount an investor entity may carry forward is capped at $200,000.

Example 1.3

During the 2016-17 income year, Michael (a sophisticated investor) is issued with $3,000,000 of shares in Shar Rock Services Co (which is a qualifying ESIC immediately after that time). Subject to meeting the other eligibility requirements, Michael is eligible to claim a tax offset of $200,000 in relation to those shares for 2016-17 (whilst 20 per cent of $3,000,000 is $600,000, the value of the offset is capped at $200,000).

However, Michael does not have a tax liability in 2016-17, so the tax offset is of no value to him in that income year. Michael may carry forward the $200,000 offset to apply against his income tax liability in 2017-18. Michael can only carry forward the portion of the tax offset that he is entitled to and has not used in the current income year ($200,000 and not the full $600,000). The remaining $400,000 that does not qualify for the tax offset in the 2016-17 income year is not carried forward for use as a tax offset in any future income years.

Members of trusts or partnerships

Entitlement to the tax offset

1.48 As flow-through entities, partnerships are not subject to tax in their own right and trusts are generally not subject to tax in their own right, and in such cases would not receive any benefit from a tax offset. Instead, this measure provides an equivalent tax offset for members of trusts or partnerships, who are, in substance, the ultimate investors.

1.49 A member of a trust or partnership (a beneficiary or unit holder of a trust or a partner in a partnership - see section 960-130) at the end of an income year is entitled to a carry-forward tax offset for that income year, if the trust or partnership were an individual and would be entitled to a tax offset in the general case discussed in paragraphs 1.24 to 1.32. [Schedule 1, item 1, subsection 360-15(2)]

1.50 In some cases the members of a trust or partnership may include another trust or partnership. In this situation the members of that other trust or partnership are generally entitled to the offset. If those members are themselves trusts or partnerships, then the offset will also pass to the members of these entities under the same process outlined in paragraphs 1.51 to 1.56 below, until it ultimately reaches an entity that is not a trust or partnership. [Schedule 1, item 1, subsection 360-15(2)]

Amount of the tax offset

1.51 The amount of the offset is the product of:

•

the determined share of notional tax offset - that is the member's share of the offset as determined by the trustee or partnership; and

•

the notional tax offset amount - that is the amount of the offset that would be available to the trust or partnership were it an individual.

[Schedule 1, item 1, subsections 360-30(1) and (2)]

1.52 The partnership or trustee must notify the member of the share that has been determined for them within three months of the end of the income year, or such further time as the Commissioner may allow. This notice must inform the member about the amount that has been determined to be their share of the tax offset. [Schedule 1, item 1, subsection 360-30(4)]

1.53 If no determination is made or the determination does not allocate all of the available tax offset then no member will be entitled to the amount of the tax offset to the extent of the shortfall in amounts or proportions determined by the trustee.

1.54 If a member of a trust or partnership is entitled to a fixed proportion of any capital gain from investments that would result in the trust or partnership being entitled to the tax offset if that entity was an individual, then the member's share of the offset must be that proportion. For example, such a fixed entitlement normally exists for the holders of units in unit trusts. Where such a fixed entitlement exists, the trustee must determine that the member is entitled to that amount or proportion and cannot make a contrary determination. [Schedule 1, item 1, subsection 360-30(3)]

1.55 Whether a taxpayer has a fixed entitlement is based on the terms of the trust or partnership. It is not relevant whether the trust has a capital gain or net income for an income year or is in a loss position or how any such income or loss may have been distributed. In particular, it is not relevant if, for example, a trustee of a discretionary trust may have distributed the income or capital of a trust in different proportions to the offset.

1.56 For the avoidance of doubt, the amendments make it clear that the trustee or partnership may not determine that the members of the trust or partnership are entitled to more than 100 per cent of the notional tax offset that would have been available to the trust or partnership. [Schedule 1, item 1, subsection 360-30(5)]

Trustees that are liable for tax

Entitlement to the tax offset

1.57 Although trusts are generally not subject to income tax in their own right, in certain circumstances trustees are required to pay tax on behalf of the trust. Depending on the nature and circumstances of the trust and its beneficiaries, the trustee may be the only entity liable for tax on the net income of the trust.

1.58 Despite the rule that the offset is available to the beneficiaries or unit holders of a trust (refer paragraphs 1.48 to 1.50), a trustee of a trust is entitled to a tax offset if:

•

the trust would be entitled to the tax offset if it was an individual; and

•

the trustee of the trust is liable to some extent for tax in respect of the activities of the trust (under sections 98, 99 or 99A of the Income Tax Assessment Act 1936 (ITAA 1936)).

[Schedule 1, item 1, subsection 360-15(3)]

Amount of the tax offset

1.59 The amount of the offset available to the trustee is the amount that would be available to the trust if it were an individual, less any tax offset amounts to which beneficiaries of the trust are entitled to that relate to the same equity interests which give rise to the trustee's tax offset entitlement. [Schedule 1, item 1, section 360-35]

1.60 The only amount of the offset that the trustee is entitled to is the portion of any capital gains (if any) the trustee is not entitled to distribute to beneficiaries of the trust. This means that where the trustee is required to distribute all capital gains (such as, for example, unit trusts), the trustee can never be entitled to any amount of the offset, as there can be no undistributed amount.

What is a qualifying ESIC?

1.61 Generally, an Australian-incorporated company will qualify as an ESIC if it is at an early stage of its development (the early stage limb) and it is developing new or significantly improved innovations with the purpose of commercialisation to generate an economic return (the innovation limb). Specific, objective threshold tests apply to determine if the company is at an early stage of its development whereas a combination of tests may apply to determine if the company is developing a type of innovation. These different tests recognise that whilst objective tests are easier to apply in Australia's self-assessment income tax system, companies may be innovating in a variety of different ways and so may need to apply a combination of different tests depending on their circumstances.

The early stage limb

1.62 A company must pass four tests to satisfy the early stage limb of the qualifying ESIC test. Each of these tests is discussed below.

It has been recently incorporated or registered in the Australian Business Register

1.63 The company:

•

must have been incorporated in Australia within the last three income years (the latest being the current income year at the test time); or

•

if it has not been incorporated within the last three income years - then it must have been registered in the Australian Business Register (ABR) within the last three income years (the latest being the current income year at the test time); or

•

if it has not been registered in the ABR within the last three income years - then:

-

it must have been incorporated in Australia within the last six income years; and

-

it and any wholly-owned subsidiaries must have incurred expenses of no more than $1,000,000 in total across all of the last three income years (the latest being the current income year at the test time).

[Schedule 1, item 1, paragraph 360-40(1)(a)]

1.64 The ATO's company tax return requires companies to report 'total expenses' at item six as part of the total profit or loss calculation. A company that has submitted a company tax return in the previous income year must rely on the amount reported in item six for the purposes of this test. Alternatively, if the company was not required to submit a company tax return, it may use the amount corresponding to this item.

1.65 A company that does not meet any of these three requirements will not qualify as an ESIC.

It has total expenses of $1 million or less

1.66 The company and any of its wholly-owned subsidiaries must have not incurred 'total expenses' (as explained in paragraph 1.64) of more than $1,000,000 in the previous income year. [Schedule 1, item 1, paragraph 360-40(1)(b)]

It has assessable income of $200,000 or less

1.67 The company and any of its wholly-owned subsidiaries must have derived assessable income of no more than $200,000 in the previous income year. [Schedule 1, item 1, paragraph 360-40(1)(c)]

1.68 Companies that had no assessable income in the previous income year will satisfy this test.

1.69 In determining the company's assessable income, the company may disregard the value of an Accelerating Commercialisation Grant it received in that year (refer also to paragraph 1.93). [Schedule 1, item 1, subsection 360-40(2)]

It is not listed on a stock exchange

1.70 The company must not be listed on any stock exchange (either in Australia or overseas). These tax incentives target companies experiencing difficulty accessing equity finance and without access to fundraising via listed securities. [Schedule 1, item 1, paragraph 360-40(1)(d)]

The innovation limb

1.71 The principle-based definition of innovation is designed to provide enough legislative flexibility to accommodate both existing and future forms of innovations while specifically targeting high growth potential companies based on the innovation company's focus and potential business capabilities.

1.72 However, recognising that not all companies will want to self-assess, or seek a ruling from the ATO about whether they satisfy such a test, these amendments also provide some objective activity-based criteria that companies can apply against their own circumstances. In practice, this may be the simplest and fastest way for companies to determine if they satisfy the innovation limb of the qualifying ESIC test.

1.73 As such, companies may choose to:

•

apply their circumstances against the objective tests;

•

self-assess their circumstances against the principles-based test; or

•

seek a ruling from the Commissioner about whether their circumstances satisfy the principles-based test.

1.74 In providing a ruling, the ATO may need to consult with the Department of Industry, Innovation and Science in considering if the company meets the principles-based test. The ruling would only apply to the facts given in the ruling request and the company may need to reassess its eligibility if circumstances change.

1.75 These amendments also provide that the regulations may specify types of activities or forms of innovation that are excluded from being able to satisfy the innovation test. This provides ongoing flexibility should the Government wish to more tightly target the TIFESI in the future or if the incentive is being used for inappropriate purposes. [Schedule 1, item 1, subsections 360-40(3) and (4)]

The principles-based test

1.76 Implicit in the definition of innovation is the requirement that the company is developing a new or significantly improved type of innovation such as a product, process, service, marketing or organisational method. This list of various types of innovations provides flexibility for innovation companies and is adaptable to current and future innovations. The Oslo Manual, published by the Organisation for Economic Co-operation and Development (OECD) provides a description of these different types of innovations and a copy of this manual is available on the OECD website ( www.oecd.org ).

1.77 A qualifying ESIC will need to be genuinely focused on developing its new or significantly improved innovation for the purpose of commercialisation and show that the business relating to that innovation:

•

has the potential for high growth;

•

has scalability;

•

can address a broader than local market; and

•

has competitive advantages.

Further information about these elements is set out below. [Schedule 1, item 1, paragraph 360-40(1)(e)]

1.78 A qualifying ESIC could demonstrate how it satisfies the different elements of this test through the use of its existing documentation such as business plans, commercialisation strategies, competition analysis or other company documents. In addition, the company must show that tangible steps have been or will be undertaken in relation to that focus or capability.

New or significantly improved

1.79 The innovation that is being developed by a qualifying ESIC must either be new or significantly improved for the applicable addressable market. A company's addressable market refers to the available revenue opportunity or market demand arising from the innovation, or the business relating to that innovation. The addressable market identified by the ESIC must be objective and realistic. For example, if the addressable market for the innovation was the Australian market, then the innovation must be new or significantly improved for that market. [Schedule 1, item 1, paragraph 360-40(1)(e)(i)]

1.80 Improvements resulting from the customisation of existing products, minor extensions such as updates to existing equipment or software, changes to pricing strategies, changes to goods resulting from cyclical or seasonal change and the trading of new products for a wholesaler, retail outlet or distribution business where activities are similar to the approach of competitors are unlikely to satisfy the significantly improved threshold. Further, ceasing to utilise a process or method will not satisfy the new or significantly improved thresholds.

Example 1.4

PAM One Co is a start-up clothing company that has developed a new organisational method where the company utilises an integrated cross-functional structure resulting in reduced response times to shifting customer styles. PAM One Co has also identified that the company's addressable market is the Australian market.

As existing clothing companies in PAM One Co's addressable market are typically organised around individual functions, the integrated cross-functional structure is new to that addressable market. As a result, PAM One Co has developed a new or significantly improved organisational method.

Example 1.5

JM Technology Co is a new wholesale distribution company which specialises in personal technology products. If JM Technology Co begins to sell a new personal technology product which was released by one of their offshore suppliers, JM Technology Co has not developed a new or significantly improved service or innovation.

Commercialisation

1.81 In addition, the company must be focussed on developing its innovation for a commercial purpose, or in other words, for the purpose of generating economic value and revenue for the ESIC. This requirement draws the distinction between simply having an idea and generating economic value from that idea. Commercialisation encompasses a spectrum of activities including those leading to the sale of new or significantly improved product, process or service as well as activities involving the implementation of a new, or significantly improved, process or method, where the process, or method directly leads to the generation of economic value for the company. [Schedule 1, item 1, paragraph 360-40(1)(e)(i)]

Example 1.6

JS & RD Co is a small start-up company in the pharmaceutical industry seeking funding to develop a new process to manufacture a known pain relief medication. If the company can successfully scale up its process, the new process promises to be more efficient and more environmentally friendly than the conventional manufacturing process used by incumbents.

Even though JS & RD Co does not intend to licence the innovation to another company, the innovation has the potential to provide the company with a direct competitive advantage over its rivals and generate significant economic value. As a result, JS & RD Co has developed the innovation for a commercial purpose.

High growth potential

1.82 The TIFESI is specifically designed to encourage capital investment into innovative companies with high growth potential, as distinct from typical small to medium enterprises such as cafes, local retail stores, local service providers that service a single local market. Specifically, a qualifying ESIC would need to show that it has the potential for high growth within a broad addressable market. [Schedule 1, item 1, paragraph 360-40(1)(e)(ii)]

Example 1.7

Sheng Da Co is a company developing a new mobile application which provides specialised on demand concierge services for the convenience of its users. While the company initially aims to test the service in Melbourne, it shows its high growth potential through its ability to expand the use of its mobile platform and the location of the services to include all major cities in Australia and beyond. The company has outlined this expansion strategy in its business plan and has started to contact service providers in other major cities. As a result, Sheng Da Co has high growth potential.

Scalability

1.83 A qualifying ESIC must have the potential to successfully scale its business. As the company increases its share of the market or enters into new markets, the company needs to have operating leverage, where existing revenues can be multiplied through incurring a reduced or minimal increase in operating costs. [Schedule 1, item 1, paragraph 360-40(1)(e)(iii)]

Example 1.8

RTing Co, a start-up manufacturing company is developing a new formula for a perishable consumer goods product which allows the product to have an extended shelf life.

The company has outlined its strategy to acquire its own manufacturing plant as the demand for the product grows. If production of the product is increased, the company has further indicated that the cost per unit can be reduced by leveraging the existing operating costs of the plant as it sells the product into new markets. As a result, RTing Co has the potential to successfully scale its business.

Example 1.9

Yien-Yih Co is a new local service provider of dental care. The company's strategy for high growth is to expand the number of clinics to increase its revenue. However, the company's operating costs (new premises, staff, etc.) increase by the same amount as the additional revenue generated from each clinic and so Yien-Yih Co does not possess the potential to successfully scale the business.

Broader than local market

1.84 A qualifying ESIC would need to demonstrate that it has the potential to address a market that is broader than a local city, area or region. While the company does not need to have a serviceable market at a national, multinational or global scale at the test time, it does need to show the capability to address a market that is broader than a local market and also show that this business can be adapted to a national, multinational or global scale in the future. [Schedule 1, item 1, paragraph 360-40(1)(e)(iv)]

Example 1.10

Further to example 1.8, RTing Co plans to initially test and sell its new product to the Victorian market and has an expansion strategy to sell to the broader Australian market and if successful, eventually adapt its product for the Asia-Pacific market. As a result, RTing Co has the potential to service a broader than local market and adapt to a global scale.

Competitive advantages

1.85 A qualifying ESIC will need to demonstrate that it has the potential to have competitive advantages, such as a cost or differential advantage over its competitors which are sustainable for the business. A method of evaluating a competitive advantage can be through the measures of the level of value for customers, rarity, imitability and substitutability of the advantage. [Schedule 1, item 1, paragraph 360-40(1)(e)(v)]

Example 1.11

SLIS Tech Co is developing a new peer to peer service providing website for the Australian market. After conducting a competition analysis of the marketplace, a differentiating competitive advantage identified was the website's use of a marketplace platform.

SLIS Tech Co has identified that this attribute will allow the company to outperform its competition. In addition, the company has taken initial steps in developing the platform and has also started to engage with the service providers to be part of the websites network. As a result, SLIS Tech Co has the potential to have competitive advantages.

Objective tests

1.86 As an alternative to satisfying the principle-based test for a qualifying ESIC, a company may be a qualifying ESIC if it has at least 100 points for meeting certain objective innovation criteria. [Schedule 1, item 1, paragraph 360-40(1)(e) and subsection 360-45(1)]

Research and development claims above a certain threshold

1.87 A company will be awarded 75 points if it has at least 50 per cent of its total expenses for the previous income year constituting expenses which are eligible for the tax offset for R & D activities provided under Division 355. [Schedule 1, item 1, item 1 in the table in subsection 360-45(1)]

1.88 A company will be awarded 50 points if it has at least 15 and less than 50 per cent of its total expenses for the previous income year constituting expenses which are eligible for the tax offset for R & D activities provided under Division 355. [Schedule 1, item 1, item 3 in the table in subsection 360-45(1)]

1.89 For the purposes of these criteria, 'total expenses' will correspond to the amount reported by the entity in the previous income year's company tax return as 'total expenses' (refer to paragraph 1.64).

1.90 The points described in paragraph 1.88 are not available if an entity is relying on points described in paragraph 1.87.

1.91 The fact that a company has invested in R & D does not necessarily mean the company is focused on developing for commercialisation a new or significantly improved product, process, service, marketing or organisational method. However, spending a significant amount on R & D is likely to be a strong indicator that this is the case.

Received an Accelerating Commercialisation Grant

1.92 A company will be awarded 75 points if, at any time, it has received an Accelerating Commercialisation Grant under the Accelerating Commercialisation element of the Commonwealth's Entrepreneurs' programme. [Schedule 1, item 1, item 2 in the table in subsection 360-45(1)]

1.93 Note: For the purposes of calculating a company's assessable income in order to assess whether the company is a qualifying ESIC, the value of an Accelerating Commercialisation Grant may be disregarded (refer paragraphs 1.67 to 1.69). This prevents a company being precluded from satisfying the requirements for a qualifying ESIC because the value of such a grant results in the company exceeding the $200,000 assessable income threshold. [Schedule 1, item 1, subsection 360-40(2)]

1.94 The Commonwealth's Accelerating Commercialisation Grant is targeted at assisting entrepreneurs commercialize a novel product, process or service. A company that has received such a grant is therefore likely to also meet the principle-based definition of a qualifying ESIC.

Completed or undertaking eligible accelerator programme

1.95 A company will be awarded 50 points if it is undertaking or has completed an eligible accelerator programme. An eligible accelerator programme is a programme that provides time-limited support for start-ups, for which an open, independent and competitive application process is required for entry, provided the entity running that programme has been operating for at least a six month period and has provided a complete programme of this kind to at least one cohort of entrepreneurs. Accelerator programmes that cannot provide value adding support (mentorship, training, education and networks) to the accepted companies or have had no successful companies coming through the programme are unlikely to be effective accelerator programmes. [Schedule 1, item 1, item 4 in the table in subsection 360-45(1)]

1.96 Entry into an accelerator programme involves a merits-based screening process, where entities with business and start-up experience select promising start-ups to support in the commercialisation process for a new innovation. A company that has been selected through such a process is likely to meet the principle-based test for a qualifying ESIC.

1.97 Requiring the entity running the accelerator programme to have been operating for a minimum period and to have provided a complete accelerator programme to at least one cohort of entrepreneurs minimises opportunities to manipulate this criterion.

Third party has previously invested at least $50,000

1.98 A company will be awarded 50 points if it has previously (at least one day before) issued shares to a third party, provided that the third party:

•

paid at least $50,000 for those shares;

•

was not an associate (within the meaning of section 318 of the ITAA 1936) of the company immediately before the time those shares were issued; and

•

did not acquire those shares primarily to assist another entity become entitled to the TIFESI.

[Schedule 1, item 1, item 5 in the table in subsection 360-45(1)]

1.99 These criteria recognise situations where a genuine third party investor has identified an innovative company and has been willing to invest a significant amount of their own money in support of the company. However, the points are not available if the third party investor has invested in the company primarily to assist the other investor (the investor seeking access to the tax offset) qualify for the TIFESI.

Holds certain enforceable intellectual property rights

1.100 A company will be awarded 50 points if it has one or more enforceable rights on an innovation through a standard patent or plant breeder's right that has been granted in Australia or an equivalent intellectual property right granted in another country. The property right must have been granted in the last 5 years. [Schedule 1, item 1, item 6 in the table in subsection 360-45(1)]

1.101 A company will be awarded 25 points if it has one or more enforceable rights on an innovation through an innovation patent or design right or an equivalent intellectual property right granted in another country. Where the property right relates to an innovation patent or foreign equivalent, the right must have been granted and certified within the last 5 years. Where the property right relates to a design or foreign equivalent, it must have been registered within the last 5 years. [Schedule 1, item 1, item 7 in the table in subsection 360-45(1)]

1.102 The points described in paragraph 1.101 are not available if an entity is relying on points described in paragraph 1.100.

1.103 It is likely that a company that has an intellectual property right of the kind described above is focused on developing for commercialisation a new or significantly improved product, process, service, marketing or organisational method. Generally, this requires the company to have gone through a rigorous registration process.

1.104 A company that holds a licence to the intellectual property of another party may also qualify for these points. The inclusion of licensing in this criterion recognises that this is a common strategy for commercialising intellectual property and the objective of these amendments is to facilitate the extraction of economic value from such underlying creations or inventions.

Collaborative agreement with research organisation or university to commercialise an innovation

1.105 A company will be awarded 25 points if it has a written agreement to co-develop and commercialise an innovation with either:

•

an institution or body listed in Schedule 1 to the Higher Education Funding Act 1988; or

•

an entity registered under section 29A of the Industry Research and Development Act 1986.

[Schedule 1, item 1, item 8 in the table in subsection 360-45(1)]

1.106 The list in Schedule 1 to the Higher Education Funding Act 1988 captures institutions or bodies eligible for special research assistance under that Act.

1.107 The entities registered under section 29A of the Industry Research and Development Act 1986 captures entities that are assessed as having the appropriate scientific or technical expertise and resources to perform R & D on behalf of other companies. This registration process is managed by Innovation Australia and the criteria for registration is contained in Part 3 of the Industry Research and Development Regulations 2011.

Adding additional criteria

1.108 Additional criterion may be specified by regulation in the future. This flexibility allows for the future provision of objective criteria that provide greater certainty to entities, making it easier for prospective innovation companies and investors to self-assess meeting these requirements. [Schedule 1, item 1, subsection 360-45(2)]

1.109 Some examples of possible criteria that could be developed and specified in the future are criteria relating to:

•

a company's acceptance into a Commonwealth, State or Territory government innovation-related programme;

•

a company's acceptance into an eligible incubator programme; and

•

a company's acceptance into an accelerator programme that has been through an accreditation or approval process (this could attract a higher number of points than the criteria described at paragraphs 1.95 to 1.97 above).

What CGT treatment applies to shares in qualifying ESICs?

1.110 An investor that acquires shares in a qualifying ESIC will be taken to hold these shares on capital account. This means that the disposal of these shares, for example, would give rise to a capital gain or a capital loss rather than other income tax consequences. The core CGT rules are contained in Parts 3-1 and 3-3. [Schedule 1, item 1, subsection 360-50(2)]

1.111 In determining what shares qualify for this modified treatment, it does not matter whether the investor has actually received the tax offset in relation to the shares. This is because the relevant test is whether the investor has an entitlement to the tax offset in relation to those shares. [Schedule 1, item 1, subsection 360-50(1)]

1.112 It also does not matter if the company which issued the shares subsequently ceases to be a qualifying ESIC. Refer to paragraph 1.30 above.

Example 1.12

John is an individual, sophisticated investor.

During the income year, John invests $1,000,000 in an ESIC ('Innovation Co') that issues shares to him for his investment. In the same income year, John also invests $500,000 in another ESIC ('Designer Co') that also issues shares to him.

If there was no cap on the offset, John would have been eligible for a 20 per cent offset in respect of the shares issued to him by both Innovation Co and Designer Co (assuming all of the other remaining conditions, such as John not being an affiliate of Innovation Co or Designer Co, were satisfied).

However, because the maximum amount of the offset in an income year (taking into account any amount carried forward to the current year) cannot exceed $200,000, not all of the shares that have been issued to John from Innovation Co and Designer Co, in the income year will entitle John to an offset. For example, John will only be able to claim the offset in relation to the shares issued to him by Innovation Co (i.e. these shares represented a $1,000,000 investment, 20 per cent of which equals $200,000, the maximum amount of offset for the income year).

Even though John is not able to claim a tax offset for the shares issued to him during the income year by Designer Co, the CGT modifications will still apply to those shares.

1.113 The specific CGT consequences arising for these shares depends on:

•

when the investor entity deals with the shares (and the relevant CGT event happens); and

•

whether the investor entity realises a capital gain or a capital loss from that event.

1.114 In addition, specific rules apply in situations when the shares qualify for a CGT roll-over. The CGT provisions provide various roll-overs in specific situations to defer the immediate consequences of a change in ownership of CGT assets. These rules are explained in paragraphs 1.120 to 1.124.

1.115 Additional rules apply in relation to shares held by partnerships. These rules recognise that for CGT purposes, each partner in a partnership is taken to hold a separate CGT asset whereas other entities, including trustees, hold CGT assets directly. [Schedule 1, item 1, section 360-55]

Shares held for less than 12 months

1.116 An investor that has continuously held a qualifying share for less than 12 months may not disregard any capital gains arising to that share but must disregard any capital losses. [Schedule 1, item 1, subsections 360-50(3) and (4)]

Shares held for more than 12 months and less than ten years

1.117 An investor that has continuously held a qualifying share for between 12 months and less than ten years may disregard a capital gain arising from the share. As noted in paragraph 1.7, capital losses are disregarded. [Schedule 1, item 1, subsections 360-50(3) and (4)]

Shares held for ten years or more

1.118 An investor that has continuously held a qualifying share for at least ten years will receive a market value, as determined on the ten year anniversary date, as the first element of the cost base and reduced cost base of the share. [Schedule 1, item 1, subsection 360-50(5)]

1.119 Providing a market value for the first element of the cost base and reduced cost base ensures that any incremental gains (or losses) in value after 10 years will be taxable. The ATO provides guidance about acceptable methods for calculating an asset's market value, including those that are not regularly traded.

Shares subject to CGT roll-over

1.120 As noted in paragraph 1.114, the CGT rules provide a number of different roll-overs to defer the CGT consequences arising from a change in asset ownership (same asset roll-overs) or a change in ownership of assets (replacement asset roll-overs).

1.121 In most cases, these amendments preserve the modified treatment for qualifying shares that are subject to a CGT roll-over by preserving the original acquisition date of the qualifying shares. However, in some other cases, these amendments provide a mechanism to terminate the modified treatment early.

Same asset roll-overs

1.122 To the extent a share otherwise qualifies for a CGT same asset roll-over, then that asset is taken to have been acquired by the new entity at the same time the share was initially issued by a qualifying ESIC to the original investor. [Schedule 1, item 1, section 360-60]

Replacement asset roll-overs

1.123 With some exceptions (see below), to the extent a share otherwise qualifies for a CGT replacement asset roll-over, then the replacement assets are taken to have been acquired by the investor entity at the same time the shares in the qualifying ESIC were originally issued. [Schedule 1, item 1, section 360-60]

The scrip for scrip and newly incorporated company roll-overs

1.124 To the extent that a share qualifies for the scrip for scrip roll-over (see Subdivision 124-M) or a newly incorporated company roll-over (see Division 122) then the share receives a market value as the first element of the cost base and reduced cost base immediately before the exchange of assets under the roll-over. This rule ensures that any accrued capital gains or capital losses in the share are not subsequently subject to CGT when the replacement asset is realised. [Schedule 1, item 1, section 360-65]

Integrity rules to deter tax evasion and tax avoidance

Schemes to reduce income tax

1.125 These amendments insert a reference to an innovation tax offset to Part IVA of the ITAA 1936, which ensures that the innovation tax offsets come within the scope of the general anti-avoidance rules in Part IVA. These rules will apply to prevent taxpayers from being able to obtain tax benefits by entering into artificial or contrived arrangements to access the TIFESI tax offset (introduced by this Schedule) or the ESVCLP tax offset (introduced by Schedule 2).

1.126 Part IVA of the ITAA 1936 applies in situations where a scheme or arrangement is entered into in order to obtain a tax benefit. These rules allow the Commissioner to cancel the relevant tax benefit where the conditions under Part IVA are satisfied. For example, this can include situations where a taxpayer enters into an arrangement with a dominant purpose of securing a tax benefit that is an innovation tax offset. Part IVA pf the ITAA 1936 also applies where the scheme or arrangement is undertaken to secure the CGT concessions and thereby not include an amount in the taxpayer's assessable income or results in a capital loss in situations when such tax benefits would not reasonably be expected to have been made had the taxpayer not entered into the scheme. [Schedule 1, items 2-11]

1.127 Whether a taxpayer has entered into an artificial scheme to qualify for the tax offset or the modified CGT treatment for shares in a qualifying ESIC, or contriving an arrangement to qualify for both the tax offset and any subsequent CGT outcome, will be a question of fact and subject to the same enquiries and considerations as ordinarily undertaken by the Commissioner in the application of Part IVA.

Example 1.13

Lucy is an individual who invests $50,000 in a qualifying ESIC and receives a tax offset of 20 per cent ($10,000) that she can use to offset against her income tax liability. In the event that the ESIC is not successful and the value of its shares decreases and become worthless, Lucy will not be able to utilise any capital loss resulting from those shares.

To circumvent this, Lucy contrives an artificial scheme utilising interposed entities, enabling her to indirectly obtain the benefit of the tax offset and directly obtain the tax benefit of the capital losses (which could arise from Lucy's interest in the interposed entity) resulting from the investment in the shares in the ESIC. If the scheme had not been entered into, then Lucy would not have been able to utilise those capital losses.

As a result, Part IVA will apply to this scheme and the Commissioner may determine that the whole part of the capital loss (relating to the ESIC shares) was not incurred. Further, the Commissioner may impose additional administrative penalties for the intentional disregard of the law which would equate to 75 per cent of the tax shortfall resulting from the Commissioner's amended assessment.

The promoter penalty regime

1.128 In addition, Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) provides a legislative framework for deterring the promotion of tax avoidance schemes and tax evasion schemes, commonly known as the promoter penalty regime. Entities that seek to promote such schemes, including any schemes relating to the TIFESI, may be subject to injunctions and civil penalties. Depending on the conduct of the promoter, criminal penalties, including criminal convictions may also apply.

ESIC reporting requirements

1.129 ESICs that receive investments from one or more investor entities in a financial year will need to provide information about those entities to the Commissioner 31 days after the end of the financial year. For most companies, this would be 31 July of the following financial year. ESICs will need to provide this information in the 'approved form'. The concept of approved forms, as set out in section 388-50 of Schedule 1 to the TAA 1953, is used in the taxation laws to provide the Commissioner with administrative flexibility to specify the form of information required and the manner of providing it. The Government expects the ATO will develop a form that is designed to minimise the compliance costs for ESICs. [Schedule 1, items 17 and 18]

1.130 This information, including information relating to the shares acquired by the investors, will assist the ATO in administering this regime, minimise opportunities for entities to inappropriately claim the tax offset and provide sufficient information to assure the Government that the measure remains appropriately targeted and effective.

Consequential amendments

1.131 This schedule makes consequential amendments to incorporate this tax offset within the standard legislative framework for tax offsets, disregard the tax offset amount from the calculations of Pay As You Go (Instalments) payments and incorporate the cost base and reduced cost base modifications in the CGT regime. [Schedule 1, items 12-16]

1.132 This schedule also includes guidance material for Division 360. [Schedule 1, item 1, sections 360-5 and 360-10]

Application and transitional provisions

1.133 These amendments apply in relation to shares issued on, or after, the later of 1 July 2016 or Royal Assent.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

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

Schedule 1 of the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016

1.134 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

1.135 Schedule 1 to this Bill inserts new Division 360 to create an early stage investor regime that provides tax incentives for qualifying investors through a non-refundable tax offset and CGT exemption on innovation related investments. The Schedule also creates new reporting obligations requiring ESICs to report on specific innovation related investments, which will be inserted into the third party reporting regime in Subdivision 396-B of Schedule 1 to the TAA 1953.

Human rights implications

1.136 The amendments made by this Schedule engage the prohibition on arbitrary or unlawful interference with privacy contained in Article 17 of the International Covenant on Civil and Political Rights (ICCPR), as third parties will need to provide personal information to the Commissioner that they collect about their investors that may qualify for the non-refundable tax offset.

1.137 These reporting obligations are compatible with the prohibition, as they are neither arbitrary nor unlawful. In addition, they are aimed at a legitimate objective of allowing the ATO to effectively administer the TIFESI regime, as introduced by these amendments. The reporting obligations constitute a proportionate means of achieving this objective as only the minimum amount of information necessary to identify relevant taxpayers, investments and assess eligibility for the tax concessions introduced by these amendments is required to be reported.

1.138 The United Nations Human Rights Committee has stated, in their General Comment No. 16, that:

•

'unlawful means that no interference can take place except in cases envisaged by the law. Interference authorized by States can only take place on the basis of law, which must itself comply with the provisions, aims and objectives of the Covenant [the ICCPR]'; and

•

'the concept of arbitrariness is intended to guarantee that even interference provided for by law should be in accordance with the provisions, aims and objectives of the Covenant and should be, in any event, reasonable in the particular circumstances'. ^[1]

1.139 The objective of requiring ESICs to report on their investors that may qualify for the tax offset is to allow the ATO to verify taxpayer claims in relation to their eligibility for the tax concessions introduced by these amendments, in a way that minimises the compliance burden for all parties involved in such investments.

1.140 This approach provides more certainty and consistency of treatment for entities than the alternative, where the Commissioner collects information under his or her general information gathering powers on an ad-hoc basis. The information to be reported by entities would typically be limited to that information they already hold having collected it in the ordinary course of their business. Taxpayer information held by the ATO is subject to strict confidentiality rules that prohibit tax officials from making records or disclosing this information unless a specific legislative exemption applies.

1.141 Subject to the amendments introduced by the Schedule, the third party reporting regime in Subdivision 396-B of Schedule 1 to the TAA 1953 provides that the Commissioner may only require third parties to report information that relates to the identification, collection or recovery of a possible tax-related liability or the identification of a possible reduction of a possible tax-related liability, as well as the identity of the taxpayer to which the tax-related liability may arise. Subdivision 396-B of Schedule 1 to the TAA 1953 also allows the ATO to exempt entities from reporting where, for example, the Commissioner does not expect to be able to productively use the information or where reporting the information places disproportionately high compliance costs on the third party relative to the benefit of providing the information to the ATO.

1.142 The Commissioner also has the flexibility to vary the timeframes for reporting, to achieve a balance between the needs of the Commissioner to receive timely information to administer the TIFESI regime and any increase in compliance costs that short timeframes may impose on entities reporting under the third party reporting regime.

Conclusion

1.143 This Bill is consistent with Article 17 of the ICCPR on the basis that its engagement of the right to privacy will neither be unlawful nor arbitrary. To this extent, the Bill complies with the provisions, aims and objectives of the ICCPR.