House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

Project Wickenby taskforce

Schedule 1 to this Bill amends the secrecy and disclosure provisions in the Taxation Administration Act 1953 to allow the Commissioner of Taxation to make disclosures of taxpayer information to Project Wickenby taskforce officers and to officers in other taskforces that may be prescribed in the regulations. Project Wickenby is a multi-agency taskforce addressing alleged tax avoidance and evasion involving the use of offshore entities.

Date of effect: These amendments apply to disclosures of information to Project Wickenby and other prescribed taskforces made on or after the date of Royal Assent.

Proposal announced: These amendments were announced in the Treasurer's Press Release No. 91 of 17 August 2006.

Financial impact: Nil.

Compliance cost impact: Nil.

Disclosure of information relating to superannuation guarantee complaints

Schedule 2 to this Bill amends the Superannuation Guarantee (Administration) Act 1992 to enable the Commissioner of Taxation or an officer of the Australian Taxation Office to provide information to an employee in response to a complaint that an employer has not complied with its obligations under the Act.

Information may be disclosed for the purposes of the Superannuation Guarantee (Administration) Act 1992 or in the performance of duties under the Act.

Date of effect: These amendments apply to records made, or information divulged or communicated, on or after 1 July 2007.

Proposal announced: This measure was announced in the 2006-07 Budget by the Minister for Revenue and Assistant Treasurer in Press Release No. 15 of 9 May 2006.

Financial impact: This measure has a budgetary cost of $19.2 million over four years.

Compliance cost impact: Nil.

Employee share schemes and stapled securities

Schedule 3 to this Bill amends the Income Tax Assessment Act 1936 and other tax Acts to extend the employee share scheme (ESS) concessions and related capital gains tax treatment to certain stapled securities that include an ordinary share, and that are listed for quotation on the official list of the Australian Securities Exchange.

When a company does not have any unstapled ordinary shares on issue (because all of the company's ordinary shares have been stapled to other interests) it is difficult to provide employees with access to the ESS concessions because the components of the stapled security will need to be treated separately - shares under the ESS provisions, and other interests being subject to fringe benefits tax.

This measure allows more employers to offer ESS to their employees by extending access to the concessions and reducing the associated complexity.

Date of effect: 1 July 2006.

Proposal announced: This measure was announced in the 2006-07 Budget and in the Treasurer's Press Release No. 039 of 9 May 2006.

Financial impact: This measure is estimated to cost a total of $70 million over the period 2006-07 to 2009-10 as follows:

Compliance cost impact: This measure is expected to reduce complexity and compliance costs.

Chapter 1 Project Wickenby taskforce

Outline of chapter

1.1 Schedule 1 to this Bill amends the secrecy and disclosure provisions in the Taxation Administration Act 1953 (TAA 1953) to allow the Commissioner of Taxation (Commissioner) to disclose taxpayer information to Project Wickenby taskforce officers and officers in other taskforces that may be established in the future to protect the public finances of Australia. Project Wickenby is a multi-agency taskforce addressing alleged tax avoidance and evasion involving the use of offshore entities.

1.2 These amendments allow the Commissioner to share information with other government agencies in limited circumstances, in order to facilitate concerted enforcement of Australia's laws.

Context of amendments

1.3 In order to maintain taxpayer privacy, the secrecy provisions in Australia's tax legislation impose strict obligations on tax officers and others who have access to taxation information.

1.4 The taxation secrecy and disclosure provisions seek to balance two important but competing interests. On one side is the interest of taxpayers in having their personal information protected. This must be weighed against the information requirements of government agencies in delivering entitlements and ensuring proper law enforcement.

1.5 The secrecy provisions in the tax law protect taxpayer privacy through general prohibitions against the Commissioner disclosing information about the affairs of a person to a third person.

1.6 However, the Commissioner can make disclosures of information to others under specific exceptions to the secrecy provisions. For instance, information can be disclosed in the '...performance of the person's duties as an officer...' (paragraph 3C(2A)(b) of the TAA 1953, subsection 16(2A) of the Income Tax Assessment Act 1936 (ITAA 1936)), or to law enforcement agencies to establish whether a serious offence has been committed, or for the making or possible making of a proceeds of crime order (section 3E of the TAA 1953).

1.7 The law also limits the ability of recipients of taxpayer information to further disclose information disclosed to them by the Commissioner. Moreover, the information may only be made available to a court in proceeds of crime cases and in prosecutions for tax-related offences.

1.8 Project Wickenby was established in 2004 after information became available that international tax schemes were operating in Australia and that some Australians had participated in them.

1.9 The Project Wickenby taskforce is a multi-agency taskforce investigating internationally promoted arrangements allegedly involving tax avoidance or evasion, which may also entail other features such as large-scale money-laundering, fraud, or breaches of the law relating to the regulation of financial markets or corporations.

1.10 Current tax secrecy and disclosure legislation impedes the ability of the taskforce to function effectively. These amendments will help agencies involved in the Project Wickenby taskforce to better share information to foster concerted law enforcement and to promote the integrity of the Australian taxation system. Individuals and other entities who seek to avoid or evade tax using international arrangements commonly commit offences against laws other than taxation laws. Where the facts that form the basis of a prosecution unrelated to tax also constitute essential steps in the implementation of a tax avoidance or evasion scheme, prosecution of the non-tax offences can be seen to discourage the tax scheme.

1.11 These amendments therefore allow the Commissioner to disclose information to Project Wickenby officers for purposes related to the Project Wickenby taskforce. Project Wickenby officers can use that information pursuant to those purposes, including for the prosecution of offences unrelated to tax and for other criminal, civil and administrative actions.

1.12 Furthermore, should the Government establish future taskforces with a major purpose of protecting the public finances of Australia, these provisions will also permit similar disclosures of information to officers of those taskforces.

Summary of new law

1.13 The new law allows the Commissioner to disclose information acquired under a taxation law to officers of Project Wickenby taskforce agencies for any purpose relevant to the taskforce, including investigating possible contraventions of the law and determining appropriate actions and remedies.

1.14 The new law also allows the Commissioner to disclose information to officers of the agencies of any future prescribed taskforce if that disclosure is relevant to a purpose of the taskforce.

1.15 Under the new law, an officer of a taskforce agency who receives information from the Commissioner may only disclose information to another taskforce officer or for an actual, proposed or possible taskforce-related court or tribunal proceeding, or in the exercise of an administrative power, or the performance of an administrative function.

Comparison of key features of new law and current law

Detailed explanation of new law

Disclosure of taxation information to Project Wickenby officers

1.16 The Commissioner may disclose information acquired under a taxation law to Project Wickenby officers where the Commissioner is satisfied that the information is relevant to a purpose of the Project Wickenby taskforce. [Schedule 1, item 4, subsection 3G(1)]

1.17 A 'taxation law' is defined in subsection 2(1) of the TAA 1953 and includes any Act of which the Commissioner has the general administration and any regulation made under such an Act.

1.18 The word 'acquired' in subsection 3G(1) takes its ordinary meaning. The phrase 'acquired under a taxation law' is intended to have broad application to include information obtained or given under or for the purposes of a taxation law. Information acquired under a taxation law includes information that comes to the Commissioner without his taking any action, and is not limited to information obtained in performing particular functions specified in the law or exercising specific statutory powers. [Schedule 1, item 4, subsection 3G(1)]

1.19 The Commissioner may disclose information to officers of all the agencies in the Project Wickenby taskforce as a collective team, even though not all of the agencies may need or use that information for their specific tasks.

1.20 A sunset clause restricts the Commissioner from disclosing relevant information to the agencies of the Project Wickenby taskforce after 30 June 2012. This is consistent with the Government's decision to allocate funding for the Project Wickenby taskforce until the 2011-12 financial year. However, should the Project Wickenby taskforce be extended beyond that date, the period of disclosure may be extended by regulation. [Schedule 1, item 4, paragraph 3G(1)(b)]

1.21 Project Wickenby officers are people holding an office in, employed by, or performing services for, a Project Wickenby taskforce agency, or a Project Wickenby taskforce supporting agency, whose duties relate to a purpose of the Project Wickenby taskforce. Both of these conditions must be met for a person to be a Project Wickenby officer - they must be part of a taskforce agency or supporting agency and they must also be undertaking work related to the Project Wickenby taskforce. It is not, however, necessary that a Project Wickenby officer's duties relate solely or mainly to the purposes of Project Wickenby. It is sufficient that their role includes duties relating to Project Wickenby. [Schedule 1, item 4, subsection 3G(2)]

1.22 These amendments set out the agencies in the Project Wickenby taskforce and the agencies supporting the taskforce, and allow additional agencies and supporting agencies to be added to the taskforce by regulation. The inclusion of supporting agencies ensures that agencies providing a supporting function in relation to Project Wickenby can also receive information in relation to the taskforce. [Schedule 1, item 4, subsections 3H(3) and (4)]

1.23 The Australian Government Solicitor's inclusion as a supporting agency is to provide for those situations in which the Australian Government Solicitor may attend a cross-agency meeting in a role other than as a legal advisor to the Commissioner. Project Wickenby agencies are not limited to using the legal services of the Australian Government Solicitor in pursuing the purposes of the Project Wickenby taskforce. Alternative sources of legal advice can be utilised.

1.24 Subsection 3G(5) sets out the purposes of the Project Wickenby taskforce. A disclosure by the Commissioner to a Project Wickenby officer under subsection 3G(1) only requires one of these purposes to be met. For example, a disclosure of information might be allowed as being relevant to the purpose of deterring participation in an international arrangement relating to money laundering. [Schedule 1, item 4, subsection 3G(5)]

1.25 The use of the word 'purported' in subsection 3G(5) means that should the offshore aspects of an arrangement be revealed as a sham, so that in effect there is no international transaction, disclosures would still be lawful.

Example 1.1

Mr and Mrs X are directors of an Australian company which apparently receives services from an offshore company and makes payment for the services. The invoices are inflated and the difference between the actual amount and the inflated amount is deposited by the service company into a Swiss bank account. Credit cards in the names of Mr and Mrs X are linked to the Swiss bank account. The purported business arrangement has 20 steps, the first and last steps are onshore but the remaining 18 steps are offshore. The offshore steps are a sham leaving only the onshore or domestic arrangement in place. This is an arrangement of a purported international character relating to concealing income or assets. The Commissioner may disclose information to a Project Wickenby officer if it is relevant to detecting, deterring or investigating the promotion of, or participation in, such an arrangement, or if it is relevant to enforcing the law relating to the promotion of, or participation in, such an arrangement despite the offshore steps being a nullity.

1.26 The expression 'enforce the law' in paragraph 3G(5)(d) includes prosecutions, civil proceedings, administrative action and proceeds of crime action taken under relevant laws.

Disclosure of taxation information to officers in prescribed taskforces

1.27 The Commissioner may also disclose information acquired under a taxation law to taskforce officers in other prescribed taskforces where the Commissioner is satisfied that the information is relevant to a purpose of that prescribed taskforce. [Schedule 1, item 4, subsection 3H(1)]

1.28 The Commissioner may disclose information to officers of all the agencies in a taskforce as a collective team, even though not all of the agencies may need or use that information for their specific tasks.

1.29 Taskforce officers must be part of a prescribed taskforce agency, and their duties must relate to a purpose of the prescribed taskforce. A link is required between the information, the purpose of the taskforce and the duties of the taskforce officer. An officer of a prescribed taskforce cannot receive information related to any other prescribed taskforce; the duties of the taskforce officer must be related to a purpose of that particular taskforce. [Schedule 1, item 4, subsection 3H(2)]

1.30 A taskforce may be prescribed in the Taxation Administration Regulations 1976 if a major purpose of the taskforce is protecting the public finances of Australia. A taskforce may have other purposes besides protecting the public finances and protecting the public finances need not be the most important purpose of the taskforce. [Schedule 1, item 4, subsection 3H(3)]

1.31 Public finances include public revenues (Australian and state government taxes and similar charges) as well as public assistance and payment programmes.

1.32 Regulations prescribing any future taskforce for the purpose of section 3H would be expected to state the purposes of the taskforce, list the agencies in the taskforce (including supporting agencies if required) and indicate the timeframe of the taskforce. [Schedule 1, item 4, subsection 3H(4)]

On-disclosure by Project Wickenby officers

1.33 Subsection 3G(6) contains a general prohibition against a 'Project Wickenby officer' (or former Project Wickenby officer) recording or disclosing information received from the Commissioner or from another taskforce officer under section 3G. A person is guilty of an offence punishable by a maximum of two years imprisonment for making a record of, or disclosing, information received from the Commissioner in relation to the taskforce. [Schedule 1, item 4, subsection 3G(6)]

1.34 The offence in subsection 3G(6) only applies to disclosures of information obtained by a person under section 3G. If a person obtains information under another taxation disclosure provision (eg, section 3E of the TAA 1953 or section 16 of the ITAA 1936), penalty provisions under those laws may apply. [Schedule 1, item 4, paragraph 3G(6)(c)]

1.35 Section 4B of the Crimes Act 1914 allows a custodial sentence to be commuted into a pecuniary penalty.

1.36 Project Wickenby officers may record information or communicate it to other Project Wickenby officers for a purpose of the Project Wickenby taskforce. [Schedule 1, item 4, subsection 3G(7)]

1.37 When a Project Wickenby officer records or discloses information to a person and relies on the exceptions contained in subsection 3G(7), (8) or (10), the evidential burden of proof (explained in subsection 13.3(s) of the Criminal Code Act 1995) lies with the officer to point to evidence suggesting a reasonable possibility that the record or disclosure was for a purpose of the Project Wickenby taskforce. This approach is consistent with existing provisions relating to on-disclosure of taxation information by law enforcement agencies.

On-disclosure by officers in prescribed taskforces

1.38 Subsection 3H(5) contains a general prohibition against a taskforce officer (or former taskforce officer) recording or disclosing information received from the Commissioner or from another taskforce officer. A person is guilty of an offence punishable by a maximum of two years imprisonment for making a record of, or disclosing, information received from the Commissioner in relation to the taskforce. [Schedule 1, item 4, subsection 3H(5)]

1.39 However, taskforce officers may record or disclose information to another person for a purpose of a prescribed taskforce. [Schedule 1, item 4, subsections 3H(6) and (7)]

1.40 Taskforce officers of one prescribed taskforce may only communicate information to other taskforce officers of that prescribed taskforce or other specified persons for a purpose of that taskforce. Taskforce officers of different prescribed taskforces are not permitted to exchange information under these provisions.

1.41 When a taskforce officer records or discloses information to a person and relies on the exceptions contained in subsection 3H(6), (7) or (9), the evidential burden of proof (explained in subsection 13.3(s) of the Criminal Code Act 1995) lies with the officer to point to evidence suggesting a reasonable possibility that the record or communication was for a purpose of the relevant taskforce. This approach is consistent with existing provisions relating to on-disclosure of taxation information by law enforcement agencies.

Disclosures in relation to criminal, civil or administrative proceedings by Project Wickenby officers

1.42 Project Wickenby officers may record or disclose information to a person for the purposes of, or in connection with, an actual, proposed or possible criminal, civil or administrative proceeding or the exercise of an administrative power, or the performance of an administrative function relating to a purpose of the Project Wickenby taskforce. [Schedule 1, item 4, paragraph 3G(8)(a)]

1.43 The provision also allows disclosures such as briefings to legal counsel or disclosure to a bank in order to obtain information in relation to actual, proposed or possible criminal, civil or administrative proceedings, or disclosures for the purposes of, or connected with, the exercise of administrative powers, or the performance of administrative functions. Legal counsel could include legal representatives external to the public service.

1.44 Disclosures for the exercise of an administrative power could include disclosures to a delegate empowered to make decisions such as disqualifying a person from managing corporations, or banning a person from providing financial services, provided the exercise of the administrative power is related to a purpose of the Project Wickenby taskforce.

1.45 Where a person receives information from a Project Wickenby officer in these circumstances, they may not record or disclose that information to another person, except for the purposes of, or in connection with, the same criminal, civil or administrative proceeding, the exercise of an administrative power, or the performance of an administrative function. [Schedule 1, item 4, subsections 3G(9) and (10)]

1.46 This allows members of a legal team to make records and consult internally in relation to a particular proceeding relating to a purpose of the Project Wickenby taskforce.

1.47 Generally, Project Wickenby officers are allowed, but not compelled, to provide information to a court or tribunal in the course of a criminal, civil or administrative proceeding relating to a purpose of the Project Wickenby taskforce. However, Project Wickenby taskforce officers may be required to disclose information to a court or tribunal for the purposes of a taxation law (eg, the review of a tax assessment). This reflects the existing taxation secrecy and disclosure provisions in subsection 16(3) of the ITAA 1936 and subsection 355-5(6) of Schedule 1 to the TAA 1953. [Schedule 1, item 4, paragraph 3G(8)(b) and subsection 3G(11)]

Disclosures in relation to criminal, civil or administrative proceedings by officers in prescribed taskforces

1.48 Taskforce officers may record or disclose information to a person for the purposes of, or in connection with, an actual, proposed or possible criminal, civil or administrative proceeding, the exercise of an administrative power, or the performance of an administrative function relating to a purpose of the relevant taskforce. [Schedule 1, item 4, paragraph 3H(7)(a)]

1.49 Taskforce officers of one prescribed taskforce may not disclose information for proceedings relating to a purpose of another taskforce.

1.50 Where a person receives information from a taskforce officer under subsection 3H(7), they may not record or disclose that information to another person, except for the purposes of, or in connection with, the same actual, proposed or possible criminal, civil or administrative proceedings, the exercise of administrative powers, or the performance of administrative functions. [Schedule 1, item 4, subsections 3H(8) and (9)]

1.51 Generally, taskforce officers are allowed, but not compelled, to provide information to a court or tribunal in the course of a criminal, civil or administrative proceeding relating to a purpose of the prescribed taskforce. However, taskforce officers may be required to disclose information to a court or tribunal for the purposes of a tax-related proceeding. This reflects the existing taxation secrecy and disclosure provisions in subsection 16(3) of the ITAA 1936 and subsection 355-5(6) of Schedule 1 to the TAA 1953. [Schedule 1, item 4, paragraph 3H(7)(b) and subsection 3H(10)]

Interaction with other secrecy and disclosure provisions

1.52 Existing tax secrecy provisions do not limit the effect of this new provision. Disclosures may be made under the new sections 3G and 3H despite any other tax secrecy provisions. [Schedule 1, item 4, paragraphs 3G(12)(a) and 3H(11)(a)]

1.53 These disclosure provisions are in addition to existing disclosure provisions in the taxation law. No other disclosure provision is affected by sections 3G and 3H. For example, disclosures allowed under section 16 of the ITAA 1936 are not affected by this provision. [Schedule 1, item 4, paragraphs 3G(12)(b) and 3H(11)(b)]

Application and transitional provisions

1.54 These amendments apply to disclosures of information made on or after the date of Royal Assent, regardless of when the information was obtained. Information obtained by the Commissioner before the date of Royal Assent can be disclosed under these provisions. [Schedule 1, item 5 ]

Consequential amendments

Annual report

1.55 Section 3B of the TAA 1953 currently requires the Commissioner to furnish an annual report to the Minister detailing, amongst other things, the number of occasions the Commissioner made disclosures of information to law enforcement agencies. This amendment requires the Commissioner to also include in the annual report the number of requests for, and lawful disclosures of, documents made to an officer of an agency in the Project Wickenby taskforce and other prescribed taskforces. [Schedule 1, item 3 ]

1.56 The Project Wickenby taskforce and other prescribed taskforces are required to report disclosures of documents rather than all information disclosed. This reflects the nature of taskforce work, where discussions between officers from different agencies may be frequent and on-going, making it difficult to record and report each specific oral disclosure of information.

Minor consequential amendments

1.57 A consequential amendment to the Administrative Decisions (Judicial Review) Act 1977 ensures that the Commissioner's decisions on whether or not to disclose information to Project Wickenby officers or taskforce officers are not decisions to which the above Act applies. Decisions made under subsections 3G(1) and 3H(1) are added to Schedule 1 ('Classes of decisions that are not decisions to which this Act applies') to the Administrative Decisions (Judicial Review) Act 1977. This approach is consistent with existing laws relating to disclosures of information to law enforcement agencies. [Schedule 1, item 1 ]

1.58 A consequential amendment to the Freedom of Information Act 1982 ensures that where disclosure of a document, or information contained in a document, is prohibited under this Bill, that document is exempt under the Freedom of Information Act 1982. This amendment ensures consistency with other taxation laws listed in Schedule 3 to the Freedom of Information Act 1982. [Schedule 1, item 2 ]

Chapter 2 Disclosure of information relating to superannuation guarantee complaints

Outline of chapter

2.1 Schedule 2 to this Bill amends the Superannuation Guarantee (Administration) Act 1992 to allow the Commissioner of Taxation (Commissioner) to provide more information to employees on the progress of their superannuation guarantee (SG) complaints.

Context of amendments

2.2 Secrecy provisions contained in section 45 of the Superannuation Guarantee (Administration) Act 1992 prohibit the disclosure of information about, or provision of details on, the progress of any action in relation to or against another person. This prevents the Commissioner from providing much information to employees on the progress of their SG complaints.

Summary of new law

2.3 The Commissioner may provide information to an employee in response to the employee's SG complaint.

Comparison of key features of new law and current law

Detailed explanation of new law

Employee complaint

2.4 An employee or former employee may make a complaint to the Commissioner where they think that their employer has not complied with its obligations under the Superannuation Guarantee (Administration) Act 1992. The complaint must specify the obligations in question. [Schedule 2, item 1, subsection 45A(1)]

2.5 The reference to obligations includes the obligations of an employer to make a minimum level of superannuation contributions to a complying superannuation fund or retirement savings account (RSA) for the benefit of its employees in order to avoid the imposition of the SG charge. An employer may also have choice of superannuation fund obligations in respect of its eligible employees.

2.6 A person is able to make a complaint even where there is dispute or uncertainty at the time of the complaint about whether the person is actually an employee. A person is also able to make a complaint even where there is dispute or uncertainty at the time of the complaint about whether the person is actually a former employee. [Schedule 2, item 1, subsection 45A(2)]

Information which may be provided by the Commissioner

2.7 The Commissioner may provide certain specified information to the employee where a complaint has been made. The Commissioner may also make a record associated with disclosing this information. [Schedule 2, item 1, subsection 45A(3)]

2.8 The Commissioner may provide information about:

•

the steps taken to investigate the complaint;

•

the actions taken in relation to the complaint, under the Superannuation Guarantee (Administration) Act 1992 or the Taxation Administration Act 1953 (TAA 1953); and/or

•

the steps taken to recover any SG charge from the employer.

[Schedule 2, item 1, subsection 45A(4)]

Steps and actions that relate to the Commissioner's response to the complaint

2.9 Steps and actions covered by subsection 45A(4) would include whether:

•

the Commissioner has contacted the employer and if so, the result of the contact;

•

the Commissioner is waiting on information from the employer and if so, when the information is expected;

•

the trustee of a complying superannuation fund or RSA provider has been contacted by the Commissioner and if so, when the Commissioner expects a response;

•

the employer has made a contribution on behalf of the employee and if so, to which fund or RSA the contribution has been made;

•

the Commissioner considers there is an individual SG shortfall for the employee and if so, the shortfall amount;

•

the Commissioner has assessed an SG shortfall in respect of that employee for the period relating to the complaint, and if so, the date of the assessment;

•

the employer has objected to the Commissioner's assessment of the SG shortfall; and/or

•

the Commissioner has recovered or is seeking to recover a relevant amount of SG charge owing in relation to the employee.

The general financial affairs of the employer

2.10 Subsection 45A(4) does not extend to providing information about the general financial affairs of the employer. [Schedule 2, item 1, subsection 45A(5)]

2.11 Matters about the general financial affairs of the employer include:

•

other SG shortfall amounts in respect of the employer which are not subject to the employee's complaint;

•

the employer's other taxation affairs; and/or

•

the employer's overall financial position.

Treatment of provisions which restrict information which may be provided by the Commissioner

2.12 Providing information under subsection 45A(3) does not breach provisions in a taxation law that prohibit the Commissioner or an officer from making a record of, or disclosing information. [Schedule 2, item 1, subsection 45A(6)]

2.13 Section 995-1 of the Income Tax Assessment Act 1997 states that taxation law means an Act of which the Commissioner has the general administration or regulations under such an Act.

2.14 The secrecy provisions contained in section 45 of the Superannuation Guarantee (Administration) Act 1992 do not prohibit the Commissioner or an officer from making a record of, or disclosing information under section 45A.

2.15 Also, the secrecy provisions in section 3C of the TAA 1953 do not prohibit the Commissioner or an officer from making a record of, or disclosing information under section 45A of the Superannuation Guarantee (Administration) Act 1992.

Application and transitional provisions

2.16 Records may be made or information may be provided under section 45A of the Superannuation Guarantee (Administration) Act 1992 on or after 1 July 2007. [Schedule 2, item 2, section 1 ]

2.17 The information disclosed under section 45A may have been obtained prior to 1 July 2007. [Schedule 2, item 2, section 2 ]

Chapter 3 Employee share schemes and stapled securities

Outline of chapter

3.1 Schedule 3 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936), the Income Tax Assessment Act 1997 (ITAA 1997), the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) and the Taxation Administration Act 1953 (TAA 1953) to extend the employee share scheme (ESS) concessions and related capital gains tax (CGT) treatment to stapled securities that include an ordinary share, and that are listed for quotation on the official list of the Australian Securities Exchange.

Context of amendments

3.2 Stapled securities are created when two or more different securities are contractually bound together so that they cannot be traded separately. For example, a property trust may have its units stapled to the shares of a company with which the trust is closely associated.

3.3 When a company does not have any unstapled ordinary shares on issue (because all of the company's ordinary shares have been stapled to other interests) it is difficult to provide employees with access to the ESS concessions because the components of the stapled security will need to be treated separately - the ordinary share under Division 13A of the ITAA 1936, and the other securities subject to fringe benefits tax (FBT).

3.4 Extending the ESS concessions to stapled securities that include an ordinary share and that are listed for quotation on the official list of the Australian Securities Exchange will allow more employers to offer ESS to their employees, and reduce the associated complexity and cost.

Summary of new law

3.5 Where an employee is provided with shares or rights under an ESS, any discount that the employee receives from acquiring the shares or rights below their market value is assessable as income.

3.6 If the shares or rights provided to an employee are qualifying, then the employee may be eligible to access one of two tax concessions in relation to the discount: the tax upfront concession, or the tax deferred concession. Special CGT rules contained in Subdivision 130-D of the ITAA 1997 also apply to ESS shares or rights.

3.7 These amendments ensure that stapled securities are generally treated in the same way as qualifying shares or rights for the purposes of Division 13A and Subdivision 130-D, with some minor modifications.

3.8 These amendments also introduce two 'cessation times' (taxing points) for stapled securities - when a component of the stapled security is unstapled, and when the stapled security ceases to be listed for quotation on the official list of the Australian Securities Exchange. When either of these events occur, deferral of the tax on the discount on the stapled securities will cease.

3.9 These amendments also make several other consequential changes to the ITAA 1936, the ITAA 1997, the FBTAA 1986, the GST Act and the TAA 1953 to allow a stapled security or a right to acquire a stapled security to be broadly treated in the same way as a qualifying share or a qualifying right.

Comparison of key features of new law and current law

Detailed explanation of new law

3.10 These amendments allow the ESS concessions in Division 13A to apply to stapled securities that include an ordinary share, and that are listed for quotation on the official list of the Australian Securities Exchange, and to rights to acquire such stapled securities. [Schedule 3, item 2, section 139DSA ]

Basic conditions

3.11 These amendments achieve this by treating a stapled security in the same way as a share in a company, and by treating a right to acquire a stapled security in the same way as a right to acquire a share in a company, but only for Division 13A (except Subdivision DB) and with some modifications. It also treats a stapled security as an ordinary share, and a right to acquire a stapled security as a right to acquire an ordinary share. Therefore, a stapled security or right that meets the basic conditions will meet any ordinary share requirement in Division 13A. [Schedule 3, item 2, subsection 139DSB(1)]

3.12 For the purposes of Division 13A, a security will be a stapled security only if it is:

•

a security consisting of an ordinary share in a company, and one or more interests in a company or a unit trust. A stapled security can consist of two or more interests [Schedule 3, item 6, paragraphs 139GCD(1)(a) and (b)] ;

•

a security where the ordinary share and every other interest are stapled together. Broadly, stapling is an arrangement under which different securities are contractually bound together. This has the effect that the interests stapled together cannot be traded separately as they are treated as one security [Schedule 3, item 6, paragraph 139GCD(1)(c)] ; and

•

a security that is listed for quotation in the official list of the Australian Securities Exchange as a stapled security. In order to be listed for quotation as a stapled security on the official list of the Australian Securities Exchange, a stapled security must satisfy the listing rules for that exchange [Schedule 3, item 6, paragraph 139GCD(1)(d)] .

3.13 These amendments are limited to stapled securities listed on the Australian Securities Exchange. They do not extend to stapled securities listed on other stock exchanges because they do not have the same requirements which need to be satisfied before a stapled security can be listed. The listing rules for the Australian Securities Exchange ensure, amongst other things, that the components of a stapled security cannot be dealt with separately.

3.14 A 'stapled entity' is a company or unit trust that has its shares or units included in the stapled security. [Schedule 3, item 6, subsection 139GCD(2)]

3.15 For the purposes of Division 13A, a reference to a company is a reference to all of the entities (the stapled entities) involved in a stapling arrangement as though they are one notional company. [Schedule 3, item 2, subsection 139DSB(2)]

3.16 This means that an employee of any of the stapled entities is considered to be employed by the notional company. It also means that the notional company can be a holding company of another company if sufficient interests are owned by the stapled entities.

Example 3.1

Stapled Security X comprises an ordinary share in Company A, and a unit in Trust B. Both Company A and Trust B are stapled entities. Company A and Trust B are a notional company for the purposes of Division 13A.

Company A has a 40 per cent ownership interest in Company C. Trust B has a 20 per cent ownership interest in Company C. Company C is not a stapled entity.

Neither Company A nor Trust B is a holding company of Company C. However, the notional company has a 60 per cent (40 per cent and 20 per cent) ownership interest in Company C. Therefore, the notional company is a holding company of Company C.

Qualifying conditions

3.17 In order for a stapled security, or a right to acquire a stapled security to be a qualifying share or qualifying right, a stapled security must meet the qualifying conditions in section 139CD of Division 13A, subject to the following modifications.

3.18 The first modification relates to the requirement in subsection 139CD(5) that at least 75 per cent of the permanent employees of the employer had been entitled to participate in an ESS of the employer. The modification means that the 75 per cent requirement is only applied to the stapled entity that is the employer of the taxpayer, rather than to all of the stapled entities or to the notional company. [Schedule 3, item 2, subsection 139DSE(1)]

3.19 The stapled entities are treated together and can be a notional holding company of an employer, where that employer is not a stapled entity. [Schedule 3, item 2, subsection 139DSE(2)]

Example 3.2

Continuing Example 3.1, 80 per cent of the employees of Company A are entitled to participate in an ESS. Forty per cent of the employees of the trustee of Trust B are entitled to participate in an ESS. Company A will satisfy the requirement in subsection 139CD(5). Trust B will not.

Ninety per cent of the employees of Company C are entitled to participate in an ESS that provides employees with Stapled Security X. The 75 per cent requirement is fulfilled for Company C, and the notional holding company arrangement means that Stapled Security X is treated as a security in the holding company of the employer (Company C).

3.20 A modification related to the first modification is that for the purposes of working out when a taxpayer ceases to be employed, each stapled entity is taken to be part of the original employer. Therefore employment does not cease merely because an employee transfers employment between stapled entities. [Schedule 3, item 2, subsection 139DSE(3)]

Example 3.3

Continuing Example 3.2, assume an employee is employed by Company A and participates in Company A's ESS and receives Stapled Security X. The employee then leaves Company A for Trust B, and continues to participate in their employer's ESS. Later, the employee leaves Trust B to work for Company Z. The employee only ceases employment when they move to Company Z. The employee did not cease employment when they moved from Company A to Trust B.

3.21 The second modification relates to the requirement in subsection 139CD(6) that a taxpayer cannot legally or beneficially hold more than 5 per cent of the interests in the company. The modification means that a taxpayer satisfies this requirement if they do not hold more than 5 per cent of the shares in any company that is a stapled entity, and more than 5 per cent of the units in any unit trust that is a stapled entity of the stapled security. [Schedule 3, item 2, section 139DSF ]

Example 3.4

Continuing Example 3.3, assume the employee holds 4 per cent of the shares in Company A and 4 per cent of the units in Trust B. The employee is taken to have satisfied the 5 per cent requirement. It does not matter if the employee holds more than 5 per cent of the shares in Company C as it is not a stapled entity.

3.22 The third modification relates to the requirement in subsection 139CD(7) that a taxpayer cannot control more than 5 per cent of the voting rights in the company. The modification means that a taxpayer satisfies the requirement if the taxpayer is not in a position to control the casting of more than 5 per cent of the maximum number of votes that might be cast at a general meeting of each company that is a stapled entity. The requirement is only imposed on the employee's interest in stapled entities that are companies with ordinary shares. [Schedule 3, item 2, section 139DSG ]

Example 3.5

Continuing Example 3.4, assume that the employee's shareholding entitles them to 4 per cent of the voting rights in Company A. The employee is taken to have satisfied the voting rights requirement. The employee could hold more than 5 per cent of the voting rights in Company C as it is not a stapled entity.

Application of ESS provisions to a qualifying stapled security

3.23 If a stapled security or right to acquire a stapled security meets all of the basic conditions and all of the qualifying conditions, it is treated as a qualifying share or qualifying right for the purposes of Division 13A. Any discount on the acquisition of the stapled security or right is included in assessable income, subject to the two concessions available under Division 13A.

3.24 It is not necessary to amend the definition of 'qualifying share' because the definition refers to section 139CD of Division 13A, which includes stapled securities because of these amendments.

3.25 The definitions of 'employee share scheme' and 'qualifying right' are amended to include a right to acquire a stapled security. [Schedule 3, items 35 and 36, definitions of ' employee share scheme' and ' qualifying right' in subsection 995-1(1)]

3.26 If a stapled security is treated as a qualifying share, the provisions will not apply to the separate components of the stapled security. In other words, Division 13A cannot apply to both a stapled security and to a share that is a component of the stapled security. [Schedule 3, item 2, subsection 139DSD(1)]

Deduction for providing qualifying stapled securities or rights

3.27 If a stapled security is provided by one of the stapled entities and the conditions in subsection 139DC(1) are satisfied, the entity may be entitled to the current deduction under section 139DC, which is capped at $1,000.

3.28 If a stapled security is jointly provided by two or more of the stapled entities, each of the taxpayers (ie, the stapled entities) may be entitled to the deduction. [Schedule 3, item 2, subsection 139DSI(1)]

3.29 The amount of the deduction must be worked out under subsection 139DC(2) in respect of the stapled security, and must be apportioned between the taxpayers on a reasonable basis. One reasonable basis would be to have regard to the portion of the value of the stapled security that each taxpayer provided. [Schedule 3, item 2, subsection 139DSI(2)]

Example 3.6

An employee of a company is issued a stapled security which consists of an ordinary share in their employer valued at $1, and a unit in a trust valued at $4. In working out the deduction available to each taxpayer (ie, the stapled entities), it would be reasonable for the company to receive a deduction of $1, and for the trust to receive a deduction of $4, on the basis that this is the portion that each taxpayer provided.

What happens if the conditions are not met?

3.30 A stapled security or right to acquire a stapled security that is not qualifying (and thus cannot access the ESS concessions), will get the same treatment that it would previously have received. The securities in the stapled security and rights to acquire the stapled security will be treated separately either under Division 13A (eg, shares) or FBT (eg, units in a unit trust, rights to acquire non-qualifying stapled securities). [Schedule 3, item 2, subsection 139DSD(2)]

3.31 This is achieved by excluding an amount from assessable income, rather than excluding the stapled securities from Division 13A, to avoid a circular definition - that a stapled security is only acquired under an ESS if it is qualifying, and to be qualifying, it must be acquired under an ESS. [Schedule 3, item 2, section 139DSC ]

Example 3.7

Assume an employee of a company is issued a stapled security which consists of an ordinary share in the company which is stapled to a unit in a trust. The ESS is offered to 50 per cent of the employees of the company. As less than 75 per cent of the employees of the company are entitled to participate in the ESS, the security is not a qualifying stapled security. The ordinary share component of the security will be subject to Division 13A. The unit component of the security will be subject to FBT.

Taxing points for tax deferred stapled securities or rights

3.32 A taxing point for tax deferred stapled securities or rights to acquire stapled securities will occur when any of the basic conditions for a stapled security or the qualifying conditions stop being met.

3.33 A cessation time for a stapled security or a right to acquire a stapled security is the time when:

•

one of the stapled entities which makes up the stapled security is no longer stapled to the other stapled entities [Schedule 3, item 2, paragraph 139DSH(a)] ; or

•

the stapled security is no longer listed for quotation as a stapled security on the official list of the Australian Securities Exchange [Schedule 3, item 2, paragraph 139DSH(b)] ,

if that time is earlier than the cessation times outlined in section 139CA for a stapled security, or for a right to acquire a stapled security - the cessation times outlined in section 139CB [Schedule 3, item 2, paragraphs 139DSH(c) and (d)] .

3.34 A cessation time will usually not occur where a stapled security is subject to a trading halt or suspension. In such instances, the stapled security will still be considered to be listed for quotation on the official list of the Australian Securities Exchange.

3.35 Where a cessation time occurs because of a restructure, the restructure relief provisions in Subdivision DA of Division 13A may apply (see paragraph 3.38).

3.36 Some references to 'a company' or 'the company' are replaced with references to 'an employer' or 'the employer' to allow the correct operation of Subdivision DB as it applies to Division 13A. [Schedule 3, items 3 to 5, subsections 139GB(1) and (2)]

3.37 The definition of 'cessation time' is amended to refer to these additional cessation times in relation to a stapled security or right to acquire a stapled security. [Schedule 3, item 34, definition of ' cessation time' in subsection 995-1(1)]

Relief for restructures and 100 per cent takeovers

3.38 The existing restructure relief in Subdivision DA of Division 13A can apply to stapled securities and rights to acquire stapled securities. It can apply to the replacement of:

•

a share with a stapled security;

•

a stapled security with a different stapled security; and

•

a stapled security with a share.

3.39 Whether an asset is a share or a stapled security is not relevant in determining whether it is matching. The number of components in a stapled security is not relevant in determining whether it is matching.

Definitions

3.40 The index of definitions in Division 13A is updated to reflect the inclusion of definitions of 'stapled entity' and 'stapled security'. [Schedule 3, item 7, section 139GH ]

Application and transitional provisions

3.41 These amendments will apply retrospectively to acquisitions of stapled securities, and rights to acquire stapled securities, on or after 1 July 2006. These amendments were announced on 9 May 2006 as part of the 2006-07 Budget and are beneficial to taxpayers. Acquisition has the same meaning as given in Division 13A. [Schedule 3, item 39 ]

Consequential amendments

3.42 Several consequential amendments are made to various other taxation laws in order to allow a stapled security or a right to acquire a stapled security to be broadly treated the same as a qualifying share or a qualifying right.

CGT treatment of ESS stapled securities

3.43 Division 13A treats a stapled security as though it is a single share. However the CGT provisions treat each CGT asset separately and a stapled security is made up of two or more CGT assets. Therefore, it is necessary to modify the way that the CGT provisions apply to a stapled security acquired under an ESS, or that is a replacement under the restructure relief. [Schedule 3, item 21, subsection 130-97(1)]

3.44 Any relevant CGT provisions that refer to ESS shares and rights apply to each asset in a stapled security, and rights to acquire stapled securities, as though those assets are acquired under an ESS and are qualifying shares and rights. [Schedule 3, item 21, subsection 130-97(2)]

3.45 Any relevant CGT provisions that refer to an election being made under section 139E (an election to be taxed upfront on a qualifying share or right) apply as though the election was made in relation to each asset that makes up the stapled security. [Schedule 3, item 21, subsection 130-97(3)]

3.46 Any relevant CGT provisions that refer to a cessation time apply to each asset in a stapled security as though the cessation time for the stapled security was a cessation time for each asset. [Schedule 3, item 21, subsection 130-97(4)]

3.47 Any relevant CGT provisions that refer to the market value of an ESS share that apply to a component of a stapled security are a reference to the amount of the market value of the stapled security that are reasonably attributable to the component. [Schedule 3, item 21, subsections 130-97(5) and (6)]

CGT trust relief

3.48 A capital gain or loss that is made when a beneficiary becomes absolutely entitled to a stapled security, or right to acquire a stapled security, that has been held in a employee share trust can be disregarded if it meets the existing conditions in section 130-90. This can also apply to stapled securities that are replacements under the restructure relief provisions in Subdivision DA. [Schedule 3, item 20, subsections 130-90(6) and (7)]

Goods and services tax

3.49 Imported services used to make input taxed supplies are generally subject to a goods and services tax (GST) reverse charge under Division 84 of the GST Act. A reverse charge means that the Australian recipient of the supply, rather than the overseas supplier, is liable for the GST on the imported service. However, under section 84-14 of the GST Act the reverse charge does not apply to the supply of an ESS:

•

if it is subject to Division 13A of the ITAA 1936; and

•

it is made by an overseas enterprise to an Australian branch or by an overseas entity to a subsidiary of the entity.

3.50 Consistent with the intention of extending ESS concessions to certain stapled securities, amendments are made to the reverse charge provisions to also exclude ESS under which qualifying stapled securities and rights to acquire qualifying stapled securities are issued. [Schedule 3, items 8 and 9, paragraphs 84-14(a) and (b) of the GST Act ]

3.51 An amendment is also made to the definition of an employee share scheme to clarify that it includes stapled securities and rights to such securities included by these amendments. [Schedule 3, item 10, definition of ' employee share scheme', section 195-1 of the GST Act ]

Fringe benefits tax

3.52 A stapled security or right to acquire a stapled security that has a discount included in assessable income or can access the concessions under Division 13A is excluded from the definition of 'fringe benefit'. [Schedule 3, item 12, subsection 136(1 ), paragraph (haa) of the definition of ' fringe benefit' of the GST Act ]

3.53 An amendment is made to the existing exemption for ESS shares and rights to clarify that a right is a right to acquire a share. [Schedule 3, item 11, subsection 136(1 ), paragraph (ha) of the definition of ' fringe benefit' of the GST Act ]

3.54 The acquisition by a trust of money or other property is excluded from the definition of fringe benefit where the sole activities of the trust are obtaining stapled securities or rights that are treated as qualifying shares or qualifying rights, where those shares or rights are provided to:

•

employees of a stapled entity that is part of the stapled security, or to associates of those employees [Schedule 3, item 13, subsection 136(1 ), subparagraph (hc)(i) of the definition of ' fringe benefit' of the GST Act ];

•

persons who are engaged in foreign service for a stapled entity that is part of the stapled security, or associates of those persons [Schedule 3, item 13, subsection 136(1 ), subparagraph (hc)(ii) of the definition of ' fringe benefit' of the GST Act ]; or

•

if the stapled entities, taken together as one notional company, is a holding company of another company, then to the employees or associates of employees of that other company [Schedule 3, item 13, subsection 136(1 ), subparagraph (hc)(iii) of the definition of ' fringe benefit' of the GST Act ]; or

•

if the stapled entities, taken together as one notional company, is a holding company of another company, then to persons who are engaged in foreign service for that company, or associates of those persons [Schedule 3, item 13, subsection 136(1 ), subparagraph (hc)(iv) of the definition of ' fringe benefit' of the GST Act ].

Deemed dividend provisions

3.55 A loan to a shareholder or an associate of a shareholder of a private company, that is solely for the purpose of acquiring a stapled security or right to acquire a stapled security that is treated as a qualifying share or a qualifying right, is not taken to be a dividend. [Schedule 3, item 15, subsection 109NB(1)]

3.56 An amendment is made to the relevant simplified outline to reflect this change. [Schedule 3, item 14, section 109H ]

Foreign investment fund losses

3.57 A new subsection is inserted to ensure that provisions relating to the reduction of foreign investment fund income because of ESS shares or rights, also apply in relation to a stapled security or right to acquire a stapled security that is treated as a qualifying share or qualifying right within Division 13A, the same way as they apply to a share or right. [Schedule 3, item 16, subsection 530A(3)]

3.58 Related to paragraph 3.57, the cessation time for a stapled security or right to acquire a stapled security are the cessation times listed for stapled securities or rights to acquire stapled securities in Division 13A. [Schedule 3, item 16, subsection 530A(4)]

Discount capital gains

3.59 An amendment is made to ensure that a replacement CGT asset (a component of a stapled security or a share) is treated for the purposes of item 8 in the table in subsection 115-30(1), as if it were a continuation of each CGT asset that was, or was a part of, the original asset. [Schedule 3, items 17 and 18, subsections 115-30(1A) and (1B)]

3.60 This ensures that for the purposes of the 50 per cent CGT discount (which requires an asset to be held for 12 months before the concession can be accessed), a CGT asset that forms part of a stapled security that is treated as a continuation of an old CGT asset, is treated as having been acquired at the time a beneficial interest in the old CGT asset was first acquired. [Schedule 3, items 17 and 18, subsections 115-30(1A) and (1B)]

CGT demerger relief

3.61 There is a requirement in the CGT demerger relief provisions that the same percentage interests be owned before and after the demerger. There is a limited exception for ESS holdings. This exemption is extended to ownership interests in a trust if the ownership interest forms part of a stapled security that is treated as a qualifying share. [Schedule 3, item 19, paragraph 125-75(3)(a)]

Franked distributions

3.62 For the purposes of the franking provisions, a share in a company that is acquired as part of a stapled security that is treated as a qualifying share satisfies the definition of an 'eligible employee share scheme'. [Schedule 3, items 22 and 23, section 208-215 ]

Consolidation

3.63 The special rule in the consolidation regime (which applies to ignore certain employee shares) is changed to ensure an entity can be part of a consolidatable group if it is only the presence of an ESS membership interest in an ESS entity that is preventing it from being part of that group. Without this rule, it is likely that the benefits of being in a consolidated group will be denied to an entity whose equity is effectively wholly-owned by a head company of a consolidatable group. [Schedule 3, item 24, section 703-35 ]

3.64 An ESS membership interest in an ESS entity can include a stapled entity provided the stapled security is treated as a qualifying share. [Schedule 3, item 26, subsection 703-35(7)]

3.65 A reference to 'the company' is replaced with a reference to 'a company' to allow the correct operation of these provisions. [Schedule 3, item 25, subsection 703-35(5)]

3.66 For the purposes of the multiple entry consolidated group provisions, in determining whether an entity is a wholly-owned subsidiary, certain employee shares (including stapled securities) are allowed to be held in a company without affecting the wholly-owned status of the company. [Schedule 3, item 28, subsection 719-30(2)]

3.67 A membership interest in an ESS entity can be part of a stapled security provided it is treated as a qualifying share. [Schedule 3, item 29, subsection 719-30(5)]

3.68 A reference to 'shares in a company' is replaced with a reference to 'membership interests in an entity' to allow the correct operation of these provisions. [Schedule 3, item 27, subsection 719-30(1)]

International ESS

3.69 A number of changes are made to note the CGT changes arising from these provisions. [Schedule 3, items 30 to 33 ]

Non-cash benefits

3.70 The TAA 1953 requires providers of non-cash benefits to pay an amount to the Commissioner of Taxation if the payment would have been subject to withholding if it had been cash. There are exceptions to this for certain benefits, including ESS shares and rights. The exceptions are extended to cover stapled securities and rights to acquire stapled securities. [Schedule 3, item 37, subsection 14-5(3)]

3.71 A new paragraph is inserted to ensure that an employer is not subject to withholding on the provision of a benefit that constitutes the acquisition by an employee of a stapled security or right to acquire a stapled security that is treated as a qualifying share or qualifying right. [Schedule 3, item 38, paragraph 14-5(3)(e)]

Index

Schedule 1: Project Wickenby taskforce

Schedule 2: Disclosure of information relating to superannuation guarantee complaints

Schedule 3: Employee share schemes and stapled securities