House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Revenue and Financial Services Minister for Women Minister Assisting the Prime Minister for the Public Service the Hon Kelly O'Dwyer MP)

Glossary

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

General outline and financial impact

Regulatory reform

Schedule 1 to this Bill makes a number of regulatory improvements to Treasury portfolio laws. The regulatory improvements include:

•

amending the superannuation laws to enable the Commissioner to pay certain superannuation amounts directly to individuals with a terminal medical condition;

•

amending the Corporations Act 2001 to modify the notification and reporting obligations applying to certain corporations that have property in receivership or property in respect of which a controller is acting; and

•

repealing several inoperative Acts as well as amending the taxation law to remove a number of inoperative or spent provisions.

Date of effect: Generally, these measures commence on Royal Assent or the beginning of the first quarter following Royal Assent.

Proposal announced: These measures were previously introduced in Treasury Legislation Amendment (Repeal Day 2015) Bill 2015 which lapsed on the calling of the 2016 Election. Further, the changes to the superannuation laws were announced in the 2015-16 Budget as part of the lost and unclaimed superannuation reform package.

Financial impact: Nil.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 1, paragraphs 1.90 to 1.93.

Compliance cost impact: These measures will reduce the regulatory burden. Specifically,

•

the estimated reduction in compliance costs from implementing all six measures in the lost and unclaimed superannuation reform package, including the measure in Schedule 1, is $0.97 million per annum;

•

modifying the notification and reporting obligations applying to certain corporations that have property in receivership will reduce regulatory burden by $1.8 million; and

•

repealing inoperative Acts and provisions of the taxation law will reduce compliance costs for affected taxpayers by reducing the overall size and complexity of the tax law. The overall magnitude of the compliance save is unquantifiable, but expected to be small.

Extending tax relief for merging superannuation funds

Schedule 2 to this Bill amends the ITAA 1997, the SLAA 2012 and the TLAA 2010 to extend the tax relief for merging superannuation funds until 1 July 2020.

Date of effect: This measure is available for mergers that occur on or after 1 October 2011 and before 2 July 2020.

Proposal announced: This measure was announced on 9 May 2017 as part of the 2017-18 Budget.

Financial impact: This measure has the following revenue implications:

* Unquantifiable

- Nil

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 2, paragraphs 2.19 to 2.22.

Compliance cost impact: This measure is expected to have a minor regulatory impact.

SuperStream gateway network governance funding

Schedule 3 to this Bill amends the APRA Act to enable the Government to recover the ongoing cost of the governance of the superannuation transaction network from the superannuation supervisory levy.

Date of effect: 1 July 2018

Proposal announced: 2016-17 MYEFO

Financial impact:

- Nil

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights -paragraphs 1.21 to 1.24

Compliance cost impact: Nil

Transfer of early release function

Schedule 4 to this Bill transfers the regulator role for early release of superannuation benefits on compassionate grounds from the Chief Executive Medicare (Department of Human Services) to the Commissioner of Taxation (Australian Taxation Office).

Date of effect: A single day to be fixed by Proclamation.

However, if the provisions do not commence within the period of 6 months beginning on the day this Act receives the Royal Assent, they commence on the day after the end of that period.

Applications for the early release of superannuation benefits on compassionate grounds made on or after the commencement of this Schedule must be made to the Commissioner of Taxation (Australian Taxation Office).

Financial impact: Nil.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - paragraphs 4.26 to 4.29.

Compliance cost impact: Nil.

Payment of GST on taxable supplies of certain real property

Schedule 5 to this Bill amends the TAA 1953, ITAA 1997 and the GST Act to require purchasers of new residential premises and new subdivisions of potential residential land to make a payment of part of the purchase price to the ATO.

Date of effect: This measure applies to certain supplies of real property for which any consideration is first provided on or after 1 July 2018.

Proposal announced: This measure was announced by the Treasurer on 9 May 2017 in the 2017-18 Budget. The transitional arrangements included in Schedule 5 of the Bill following industry consultation have not previously been announced.

Financial impact: This measure is estimated to result in an increase in GST revenue of $590 million over the forward estimates period. All GST revenue is distributed to the States and Territories.

- Nil

Note that the financial impact above includes the impact of the transitional arrangements that have now been included in Schedule 5 to this Bill and accordingly differs from the financial impact announced in the 2017-18 Budget.

Human rights implications: This measure does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 5, paragraphs 5.84 to 5.104.

Compliance cost impact: The measure imposes some transitional costs for property developers who may need to make changes to accommodate the measure in their conveyancing processes and systems to account for the changes. Cost impacts on purchasers via conveyancing services are expected to be minor, given this change leverages the existing disbursement process and the use of standard contracts.

Summary of regulation impact statement

Regulation impact on business

Impact: Minor transitional costs on business.

Main points:

•

The measure may require conveyancers and property developers to implement changes to their processes and systems. As most are familiar with GST processing, the impact of this measure was considered to be low.

•

The two-year transitional relief minimises transitional costs on existing contracts, service providers and property developers.

•

There may be minor additional costs for service providers in the short term that will be required to apply existing and new arrangements for a period of two years, but this is preferable to the costs imposed by changing existing contracts to accommodate the measure.

•

Some conveyancers may pass on the additional compliance activity by increasing fees payable by purchasers. However, the regulatory impact of the change is considered minor and occurs at a time when a range of disbursements are occurring as part of the transfer of property.

Chapter 1 - Regulatory reform

Outline of chapter

1.1 Schedule 1 to this Bill makes a number of regulatory improvements to Treasury portfolio laws. The regulatory improvements include:

•

amending the superannuation laws to enable the Commissioner to pay certain superannuation amounts directly to individuals with a terminal medical condition;

•

amending the Corporations Act 2001 to modify the notification and reporting obligations applying to certain corporations that have property in receivership or property in respect of which a controller is acting; and

•

repealing several inoperative Acts as well as amending the taxation law to remove a number of inoperative or spent provisions.

1.2 Under the changes to the Corporations Act 2001, responsible entities of managed investment schemes, licenced trustee companies or custodians will now:

•

notify of the appointment of a receiver only on the public documents and negotiable instruments relating to the registered scheme or trust that is in receivership (rather than all public documents and negotiable instruments of the corporation); and

•

report to the controller only on the affairs of the registered scheme or trust in respect of which the controller is acting (rather than all the affairs of the corporation).

Context of amendments

Superannuation - terminal medical conditions

1.3 In the 2015-16 Budget, the Government announced a package of measures to reduce red tape for superannuation funds and members by removing redundant reporting obligations and by streamlining lost and unclaimed superannuation administrative arrangements.

1.4 There are legislative impediments to the Commissioner directly paying some lost member balances and other superannuation amounts to individuals with a terminal medical condition. In many circumstances these amounts must first be transferred to an account with a complying superannuation plan before being paid to the individual. This creates unnecessary red tape and delays for those needing immediate access to their superannuation benefits.

Modify 'in receivership' rules

Notification obligations

1.5 Generally, when a receiver is appointed to property of a corporation, that corporation must notify of the receivership on all its public documents and negotiable instruments (the notification obligation). The same obligation applies when a controller is acting in relation to property of a corporation.

1.6 The notification obligations impose unnecessary compliance costs and may cause investor confusion and damage business reputations for certain corporations that are in the business of holding property on trust. These corporations are:

•

responsible entities of registered schemes holding scheme property;

•

licenced trustee companies that hold property on trust; and

•

corporations holding an AFSL authorising the provision of custodial and depository services that hold property on trust ('licenced custodians').

1.7 As these corporations hold property on trust (including bare trusts), liability from receivership is confined to the assets of the particular registered scheme or trust, rather than all assets of the corporation. It is therefore appropriate that the notification obligation be confined to the registered scheme or trust containing the assets under receivership (or assets in respect of which the controller is acting).

1.8 Restricting the notification obligations to the public documents and negotiable instruments relating to the affected registered scheme or trust will reduce unnecessary compliance costs whilst ensuring persons dealing with the corporation are informed of the receivership as required. The modified notification obligation will also reduce investor confusion as only documents and instruments relating to the affected scheme or trust will contain notification of the receivership or that a controller is acting.

1.9 These amendments also specifically address the situation where the scheme property is held by a corporation other than the responsible entity, which is common business practice. Part 5 of Schedule 1 requires the responsible entity of the registered scheme that has property in receivership to notify of the receivership on all its public documents and negotiable instruments that relate to the registered scheme. This is to ensure that persons dealing with the responsible entity are informed of the receivership.

1.10 The policy intent is not to modify notification obligations for corporations generally. While there may be other corporations that hold property on trust, it would be less likely that such corporations would have their other business operations unaffected by the receivership of trust assets. The other policy reason for not extending the modified notification obligations to corporations generally is to safeguard against the risk that a corporation will claim that the relevant assets held under receivership are merely held in trust when this is not the case to avoid having to notify of the receivership on all their public documents or negotiable instruments.

Reporting obligations

1.11 Where a controller is acting in relation to property of a corporation, that corporation's 'reporting officers' must report to the controller on all the affairs of the corporation (reporting obligation) in the prescribed form.

1.12 The purpose of the reporting obligation is to ensure that a controller receives required information on the affairs of the corporation. However, the reporting obligation results in unnecessary compliance costs, without resulting in additional meaningful information to the controller in the case of:

•

responsible entities of registered schemes;

•

licenced trustee companies; and

•

licenced custodians.

1.13 This is because these corporations, in the absence of the changes made by Schedule 1, would be required to report to the controller in respect of all their affairs, including in respect of registered schemes and trusts, or the corporation's own affairs, notwithstanding the affairs are not related to the assets to which the controller was appointed.

1.14 Restricting the reporting obligation for such corporations to affairs relating to the particular registered scheme or trust containing the property to which the controller has been appointed addresses this problem whilst ensuring the necessary information flows to the controller.

1.15 A separate problem arises in the case where scheme property is held by a corporation other than the responsible entity of the registered scheme (which is common). The obligation to report to the controller falls on the corporation holding the scheme property (the custodian) rather than the responsible entity, even though the latter has better access to the information sought by the controller. The corporation holding the scheme property generally needs to obtain information from the responsible entity to comply with their reporting obligation, and this increases their compliance costs. These amendments provide that where a licenced custodian holds scheme property, the obligation to report to a controller on the affairs of the particular registered scheme falls solely on the responsible entity.

Repeal of inoperative acts and provisions of the taxation law

1.16 There are various reasons why Acts and provisions within an Act can become spent or cease to be operative.

1.17 Some Acts or provisions in the law are intended to apply only for a limited period. Once this period expires, the provisions are spent and no longer have any effect.

1.18 In other cases, while the Act or provision is intended to apply on an ongoing basis, changes in external circumstances, such as to the way entities behave or other provisions of the law, can mean that in practice the provision no longer applies to anything and has become inoperative.

1.19 While these spent or inoperative Acts and provisions have no application to any entity, they remain on the statute book until repeal by Parliament. Retaining these provisions increases the volume of Commonwealth legislation, without providing any benefit.

Summary of new law

Superannuation - terminal medical conditions

1.20 Part 4 of Schedule 1 amends the Superannuation (Unclaimed Money and Lost Members) Act 1999, the Small Superannuation Accounts Act 1995 and the Superannuation Guarantee (Administration) Act 1992 to enable the Commissioner to pay unclaimed money of lost members and other superannuation amounts directly to persons with a terminal medical condition.

Modify 'in receivership' rules

1.21 Part 5 of Schedule 1 amends the Corporations Act 2001:

•

in the case where scheme property of a responsible entity of a registered scheme, or property held on trust by a licenced trustee company or licenced custodian is in receivership, to require the corporation to notify of the receivership only on the public documents and negotiable instrument related to the particular registered scheme or trust;

•

in the case where a controller is acting in relation to scheme property of a registered scheme, or property held on trust by a licenced trustee company or a licenced custodian, to require the corporation's reporting officers to report to the controller only on the affairs of the particular registered scheme or trust; and

•

in the case where a controller is appointed to scheme property of a registered scheme held by a licenced custodian, to require the controller to only serve a notice on the responsible entity of the registered scheme and require a director or secretary of the responsible entity to report to the controller on the affairs of the scheme.

Repeal of inoperative acts and provisions of the taxation law

1.22 Parts 1, 2, 3 and 6 of Schedule 1 to this Bill repeal several inoperative acts in the Treasury portfolio as well as amending the taxation law to remove a number of inoperative or spent provisions.

Comparison of key features of new law and current law

Detailed explanation of new law

Superannuation - terminal medical conditions

1.23 Amounts in the superannuation system are generally able to be released, tax-free, to individuals with a terminal medical condition.

1.24 The Superannuation (Unclaimed Money and Lost Members) Act 1999 requires superannuation providers to report and transfer unclaimed money to the Commissioner on a twice yearly basis. Individuals are able to claim back unclaimed superannuation amounts from the Commissioner at any time with interest. These unclaimed money amounts include certain lost member accounts, being small lost accounts and inactive accounts of unidentifiable members.

1.25 Part 4A of the Superannuation (Unclaimed Money and Lost Members) Act 1999 only permits the Commissioner to pay claimed lost member accounts directly to an individual, if the individual has reached a certain 'eligibility' age; or the amount is less than $200; and the individual has not died. In all other circumstances, including where an individual has a terminal medical condition, the claimed amount must be first transferred into an account with a complying superannuation plan, before being able to be released from the superannuation system. This creates unnecessary delays and paperwork for the terminally ill wishing to access their superannuation benefits.

1.26 Similarly, the Commissioner also administers small accounts under the Small Superannuation Accounts Act 1995 and shortfall superannuation guarantee amounts under the Superannuation Guarantee (Administration) Act 1992. Section 65 of the Small Superannuation Accounts Act 1995 enables direct withdrawal of account balances in certain circumstances, including on retirement on the ground of disability. Similarly, section 66 of the Superannuation Guarantee (Administration) Act 1992 requires the Commissioner to pay an amount of shortfall component directly to a former employee that has retired due to permanent incapacity or invalidity. Accounts under the Small Superannuation Accounts Act 1995 and shortfall amounts under the Superannuation Guarantee (Administration) Act 1992 can also be transferred to a complying superannuation plan. However, there is no specific provision in either the Small Superannuation Accounts Act 1995 or the Superannuation Guarantee (Administration) Act 1992 to enable the Commissioner to pay these amounts directly to someone with a terminal medical condition.

1.27 Part 4 of Schedule 1 will amend the Superannuation (Unclaimed Money and Lost Members) Act 1999 to enable the Commissioner to pay amounts held in respect of lost member accounts directly to individuals with a terminal medical condition. The Commissioner will also be required to make direct payments of account balances under the Small Superannuation Accounts Act 1995 and shortfall amounts under the Superannuation Guarantee (Administration) Act 1992, on request, to individuals with a terminal medical condition. [Schedule 1, item 24, section 14 of the Small Superannuation Accounts Act 1995; Schedule 1, items 25 and 26, section 16 of the Small Superannuation Accounts Act 1995; Schedule 1, items 27 and 28, sections 62 and 65A of the Small Superannuation Accounts Act 1995; Schedule 1, items 29 and 30, subsection 65(1) and section 66A of the Superannuation Guarantee (Administration) Act 1992; Schedule 1, items 31 and32, paragraph 24G(2)(d) and subsection 24G(2A) of the Superannuation (Unclaimed Money and Lost Members) Act 1999]

1.28 A terminal medical condition exists in relation to an individual if two registered medical practitioners, at least one of whom is a specialist; have certified that a person suffers from an illness or injury that is likely to result in their death within the certification period of 24 months or less. A payment of an amount, under the Small Superannuation Accounts Act 1995 or Superannuation Guarantee (Administration) Act 1992, or a lost member amount under subsection 24G(2) of the Superannuation (Unclaimed Money and Lost Members) Act 1999, by the Commissioner to an individual with a terminal medical condition will be a superannuation benefit. These types of superannuation benefits under the ITAA 1997 are tax-free in the hands of the individual concerned. [Schedule 1, items 21 to 23, items 4 and 7 of the table in subsection 307-5(1) of the Income Tax Assessment Act 1997]

Modify 'in receivership' rules

Modified notification obligations

1.29 Part 5 of Schedule 1 modifies the notification obligations for the following corporations:

•

a responsible entity of a registered scheme where scheme property is in receivership or a controller is acting in relation to such property;

•

a licenced trustee company, where property held on trust is in receivership or a controller is acting in relation to such property; and

•

a corporation holding an AFSL that authorises the provision of custodial or depository services, where property held on trust is in receivership or a controller is acting in relation to such property.

1.30 These corporations must include a statement that a receiver (or receiver and manager) has been appointed or a controller is acting only on the public documents and negotiable instruments relating to the particular registered scheme or trust under receivership or in respect of which the controller is acting. [Schedule 1, item 38, subsection 428(2A) of the Corporations Act 2001]

1.31 The corporation may specify, in the public document or negotiable instrument, the relevant affected scheme or trust to provide further clarity regarding the assets in respect of which the receiver (or receiver and manager) or controller has been appointed. [Schedule 1, item 38, subsection 428(2A) of the Corporations Act 2001]

1.32 The modified notification obligations apply only to a licenced custodian; that is, a corporation holding an AFSL authorising the provision of custodial or depository services, including where the licenced custodian holds the property on bare trust (where the beneficiary is absolutely entitled to the trust property and can call for immediate payment). [Schedule 1, item 38, subsection 428(2A) of the Corporations Act 2001]

1.33 While the property must be held by a corporation that holds an AFSL authorising the provision of custodial or depository services, it is not necessary that the property be held in connection with the provision of custodial or depository services. This is to ensure that the modified notification obligation applies to licenced custodians holding scheme property of a registered scheme. As paragraph 766E(3)(b) of the Corporations Act 2001 provides that 'holding the assets of a registered scheme' does not constitute providing a custodial or depository service, not requiring the property to be held in connection with the provision of custodial and depository services ensures that a licenced custodian holding scheme property of a registered scheme under receivership will only need to notify of the receivership on public documents and negotiable instruments relating to the scheme, which is the policy intent. [Schedule 1, item 38, subsection 428(2A) of the Corporations Act 2001]

Scheme property not held by a responsible entity

1.34 Where a receiver is appointed to scheme property of a registered scheme that is not property of the responsible entity of the registered scheme, the responsible entity of the registered scheme must notify of the receivership on every public document or negotiable instrument that relates to the registered scheme. [Schedule 1, item 38, subsection 428(2B) of the Corporations Act 2001]

1.35 It is common business practice for scheme property of a registered scheme to be held by a person other than the responsible entity of the scheme. Typically, the scheme property is held by a custodian agent (or sub-custodian) of the responsible entity on trust for the responsible entity who holds the beneficial interest on trust for the members of the registered scheme. [Schedule 1, item 38, subsection 428(2B) of the Corporations Act 2001]

1.36 In the absence of this provision, the responsible entity would not have been required to notify of the receivership on its public documents and negotiable instruments and persons dealing solely with the responsible entity would not have been informed of the receivership. Requiring the responsible entity to notify of the receivership ensures that persons that only have dealings with the responsible entity in relation to scheme property under receivership will be informed of the receivership. [Schedule 1, item 38, subsection 428(2B) of the Corporations Act 2001]

1.37 For the same reason, where a controller is acting in relation to scheme property that is not held by the responsible entity of the registered scheme, the responsible entity must now notify that a controller is acting on all public documents and negotiable instruments relating to the particular registered scheme. [Schedule 1, item 38, subsection 428(2C) of the Corporations Act 2001]

1.38 The notification obligations imposed on the responsible entity are in addition to the notification obligations applying to the corporation holding the property. For example, if scheme property of a particular registered scheme under receivership were held by a licenced custodian (that is, a corporation holding an AFSL authorising the provision of custodial or depository services), the custodian would be required to notify of the receivership only on those public documents and negotiable instruments relating to the registered scheme. [Schedule 1, item 38, subparagraph 428(2A)(b)(ii) of the Corporations Act 2001] On the other hand, if the scheme property were held by another corporation (for example, an unlicensed custodian), the unlicensed custodian would be required to notify of the receivership on all its public documents and negotiable instruments, under subsection 428(1) of the Corporations Act 2001.

1.39 Failure to comply with the notification obligations in this Schedule is a strict liability offence [Schedule 1, item 39, subsection 428(3) of the Corporations Act 2001], carrying a maximum penalty of 15 penalty units. [Schedule 1, item 50, item 120 in the table in Schedule 3 to the Corporations Act 2001]

1.40 The offence previously carried a maximum penalty of 10 penalty units or imprisonment for 3 months, or both. The offence remains a strict liability offence but the penalty has been changed to ensure it is consistent with the Attorney-General's Department Guide to Framing Criminal Offences. [Schedule 1, items 39 and 50, subsection 428(3)of, and item 120 in the table in Schedule 3 to, the Corporations Act 2001]

1.41 Strict liability, and the level of penalty, is appropriate, for the following reasons:

•

notification of receivership or that a controller is acting is critical information that must be communicated to persons dealing with an insolvent entity, and the use of strict liability is necessary to protect the integrity of the regime;

•

the requirement is clear and easy to understand, and the offence depends entirely on the action or non-action of the person who is liable for the offence;

•

the offence no longer carries a term of imprisonment, making it consistent with section 2.2.6 of the Guide to Framing Criminal Offences which states that imprisonment should not be used for strict liability offences; and

•

following the removal of the possible 3 month term of imprisonment, the offence now attracts a maximum penalty of 15 penalty units, consistent with the fine/imprisonment ratio of 5 penalty units for each month's imprisonment, which the Guide to Framing Criminal Offences indicates should be followed unless there are cogent reasons to depart from it (section 3.1.3).

[Schedule 1, items 39 and 50, subsection 428(3)of, and item 120 in the table in Schedule 3 to, the Corporations Act 2001]

Modified reporting requirements

1.42 Subsection 429(2) of the Corporations Act 2001 requires the reporting officer of a corporation that has property to which a controller has been appointed, to report to the controller on all the corporation's affairs.

1.43 Part 5 of Schedule 1 modifies this reporting obligation for the following corporations that have property to which a controller has been appointed:

•

a responsible entity of a registered scheme, in the case of scheme property;

•

a licenced trustee company that holds the property on trust; and

•

a corporation that holds an AFSL authorising the provision of custodial or depository services that holds the property on trust.

1.44 The modified reporting obligation means the reporting officers of these corporations must report to the controller only on the affairs of the corporation to the extent they relate to the particular registered scheme or trust containing property in respect of which the controller is acting. [Schedule 1, item 45, subsection 429A(1) of the Corporations Act 2001; Schedule 1, item 38, subsection 429(2A) of the Corporations Act 2001]

1.45 Requiring these corporations to report only on the affairs relating to the particular affected registered scheme or trust will reduce unnecessary compliance and reporting burdens, whilst ensuring the controller (and ASIC) receive the required information regarding the property in respect of which the controller has been appointed.

1.46 When property is held by a custodian, the modified reporting obligations will only apply to licenced custodial arrangements (where the custodian holds an AFSL authorising the provision of custodial or depository services). [Schedule 1, item 40, subparagraph 429(2A)(a)(ii) of the Corporations Act 2001] Where the custodian is unlicensed, the custodian must continue to report to the controller on all its affairs (including in relation to other trusts to which the controller has not been appointed), as required under subsection 429(2) of the Corporations Act 2001.

Scheme property not held by a responsible entity

1.47 Where a person becomes a controller of scheme property of a registered scheme that is held by a licenced custodian and not the responsible entity of the registered scheme, the controller must not serve a notice on the licenced custodian. [Schedule 1, item 45, subsection 429A(2) of the Corporations Act 2001]

1.48 Instead, the controller must, as soon as practicable, serve a notice on the responsible entity of the affected registered scheme. [Schedule 1, item 45, paragraph 429A(3)(e) of the Corporations Act 2001] A director or secretary of the responsible entity must report to the controller, in the prescribed form, on the affairs of the relevant registered scheme as at the control day, within 14 days (or any further period allowed, as explained in paragraph 1.53). [Schedule 1, item 45, paragraph 429A(3)(f) of the Corporations Act 2001].

1.49 Requiring the controller to issue a notice to the responsible entity recognises that the responsible entity is in a much better position to provide a report to the controller on the affairs of the relevant scheme. [Schedule 1, item 45, subsection 429A(3) of the Corporations Act 2001]

1.50 The corporation holding the scheme property continues to have an obligation to report to the controller where the corporation holding the scheme property is:

•

a licenced trustee company, but only in respect of the affairs of the particular scheme; or

•

another corporation (for example, an unlicensed custodian or sub custodian), in respect of all the affairs of the custodian (paragraph 429(2)(b) of the Corporations Act 2001). In the case of an unlicensed custodian, the custodian may not have many affairs that do not relate to the scheme which is one reason the policy intent is not to limit the reporting obligations of unlicensed custodians (and sub-custodians).

[Schedule 1, item 40, subsection 429(2A) of the Corporations Act 2001]

1.51 The requirement in subparagraph 429(2)(c)(i) of the Corporations Act 2001 - that the controller must lodge a copy of the report with ASIC within one month of receiving it from the reporting officers, including either a notice setting out any comments the controller sees fit to make or a notice indicating the controller did not see fit to make any comments - applies to the report from the responsible entity [Schedule 1, item 45, paragraph 429A(3)(g) of the Corporations Act 2001]. The amendments provide the controller will have qualified privilege in relation to comments made [Schedule 1, item 36, paragraph 426(b) of the Corporations Act 2001], consistent with the position relating to other reports received by the controller.

1.52 The controller must send a copy of the report, as lodged, to the responsible entity, as well as to the corporation that holds the scheme property, unless the scheme property is held by a licenced custodian. [Schedule 1, item 45, paragraph 429A(3)(h) of the Corporations Act 2001]

1.53 Subsections 429(3) to (5) of the Corporations Act 2001 set out the process by which a reporting officer of a corporation that has been served a notice by a controller to report on the affairs of the corporation may apply for an extension of time by which to report. The amendments replicate those rules for a reporting officer of a responsible entity that has been served a notice to report by a controller. [Schedule 1, item 45, paragraph 429A(3)(g) of the Corporations Act 2001] This means that:

•

a director or secretary of the responsible entity may apply to the controller or the Court for an extension of time by which to report to the controller;

•

if the application is made to the controller, the controller may agree to the extension if they believe there are special reasons for doing so and must give notice in writing of the extension and lodge that notice as soon as practicable after it is granted; or

•

if the application is made to the Court, the Court may make an order extending the period for reporting to the controller and a director or secretary of the responsible entity must, as soon as practicable, lodge a copy of that order with ASIC.

1.54 Consistent with the existing rules, Schedule 1 addresses the appointment of an additional or replacement controller to scheme property not held by a responsible entity. Where this occurs, the amendments provide the controller is not required to issue a notice to the responsible entity where that person became a controller to act either with an existing controller or in place of a controller who has died or ceased to be controller. [Schedule 1, item 41, subsection 429(6) of the Corporations Act 2001] Not requiring the new controller to issue the notice is appropriate given the requirement to issue the notice would already have been fulfilled by the incumbent controller.

1.55 If, however, the replacement controller is appointed due to the death or cessation of a previous controller and the previous controller did not issue the required notice prior to their death or cessation, the amendments provide the replacement controller must issue the required notice to the responsible entity. [Schedule 1, items 42 and 43, subsection 429(6A) of the Corporations Act 2001]

1.56 Subsection 429(7) of the Corporations Act 2001 provides that where a corporation is being wound up and the same person acts as both controller and liquidator, the rules for reporting to a controller, broadly, continue to apply. These amendments extend the operation of this subsection to also cover cases where the property to which the controller has been appointed is scheme property. [Schedule 1, item 44, subsection 429(7) of the Corporations Act 2001]

Consequential amendments

1.57 These amendments move two definitions from section 761A of the Corporations Act 2001 to section 9 of that Act:

•

'custodial or depository services', which cross-references to the definition in section 766E of the Corporations Act 2001; and

•

'licenced trustee company', which cross-references to the definition in Chapter 5D of the Corporations Act 2001.

[Schedule 1, item 33, section 9 of the Corporations Act 2001; Schedule 1, item 47, section 761A of the Corporations Act 2001]

1.58 These changes are necessary as the terms 'custodial or depository services' and 'licenced trustee company' no longer operate exclusively in Chapters 7 and 5D respectively and it is, therefore, appropriate that definitions of these terms be in section 9. [Schedule 1, item 33, section 9 of the Corporations Act 2001; Schedule 1, item 47, section 761A of the Corporations Act 2001]

1.59 Minor amendments have been made to the references to 'custodial or depository services' in paragraph 601RAC(3)(b) of the Corporations Act 2001 and section 766E of that Act as this term is no longer exclusively used in Chapter 7. [Schedule 1, item 46, paragraph 601RAC(3)(b) of the Corporations Act 2001; Schedule 1, item 48, subsection 766E(1) of the Corporations Act 2001; Schedule 1, item 49, paragraph 766E(2)(a) of the Corporations Act 2001]

1.60 Likewise, minor amendments have been made to the references in paragraphs 53(b) of the Corporations Act 2001 and paragraph 283(1)(aa) of that Act to 'licenced trustee company' as this term is no longer exclusively used in Chapter 5D. [Schedule 1, items 34 and 35, paragraphs 53(b) and 283AC(1)(aa) of the Corporations Act 2001]

1.61 A new heading - 'Property of corporation' has been included to improve the readability of section 428 of the Corporations Act 2001. [Schedule 1, item 37, subsection 428(1) of the Corporations Act 2001]

Repeal of inoperative acts and provisions of the taxation law

Repeal of the Commonwealth Borrowing Levy

1.62 Part 1 of Schedule 1 repeals the Commonwealth Borrowing Levy Act 1987 and the Commonwealth Borrowing Levy Collection Act 1987. [Schedule 1, items 1 and 2, the whole of the Commonwealth Borrowing Levy Act 1987 and the Commonwealth Borrowing Levy Collection Act 1987]

1.63 These Acts imposed and provided for the collection of the Commonwealth Borrowing Levy - a tax on borrowings by certain commonwealth-controlled entities. Since changes to the governance framework for Commonwealth-controlled entities in 1997, the rate of the levy has been set at zero by the Commonwealth Borrowing Levy Regulations. As a result, no tax is payable as a result of the levy.

1.64 Additionally, the levy only ever applied to a small group of entities listed in the Schedule to the Commonwealth Borrowing Levy Act 1987, most of which have now either ceased to exist, or been privatised and exempted from the levy.

1.65 Given this, neither the Commonwealth Borrowing Levy Act 1987 nor the Commonwealth Borrowing Levy Collection Act 1987 have any ongoing operative effect.

1.66 The repeal of these Acts will also result in the Commonwealth Borrowing Levy Regulations lapsing as a result of the repeal of the provision enabling the regulations to be made.

Repeal of the concession for equity investments by lenders in small and medium enterprises

1.67 Part 2 of Schedule 1 repeals Division 11B of the ITAA 1936. [Schedule 1, item 10, Division 11B of the ITAA 1936]

1.68 Division 11B broadly allows entities that acquire at least 10 per cent of the ordinary shares of an enterprise in the course of a business of lending money, to treat any profit or loss from the disposal of those shares as being a capital gain rather than ordinary income.

1.69 The intention of this provision was to improve access to finance by small and medium enterprises by providing a tax incentive for banks and other entities to lend to and invest in these businesses. It did so by treating the gains or losses that financial institutions made from the disposal of an eligible equity interest in the small or medium enterprise as capital gains or losses that were subject to capital gains tax rather than ordinary income or general deductions, allowing the lending entity to apply indexation to reduce the value of any gain that arose (see paragraph 5.4 to 5.15 of the Explanatory Memorandum to the Taxation Laws Amendment (No.3) Bill 1996).

1.70 Subsequently, changes were made to the taxation law to freeze indexation for all existing capital gains tax assets from 11:45 am on 21 September 1999 and remove access to indexation for all assets subsequently acquired by taxpayers.

1.71 As a result of the removal of indexation, the 'concession' in Division 11B no longer provides any benefit to financial institutions. There is no evidence that any entities are currently accessing the provisions, leaving them, in practice, inoperative.

Repeal of Papua and New Guinea Loan (International Bank) Act 1970

1.72 Part 6 of Schedule 1 repeals the Papua and New Guinea Loan (International Bank) Act 1970. The Act approved a Commonwealth guarantee of US$4.5 million on a loan made to Papua New Guinea by the International Bank for Reconstruction and Development, and came into effect on 31 December 1973. [Schedule 1, item 51, the whole of the Papua and New Guinea Loan (International Bank) Act 1970]

1.73 The Papua and New Guinea Loan (International Bank) Act 1970 prescribes the terms of the guarantee agreement between the Australian Government and the International Bank for Reconstruction and Development, as well as the terms of the loan agreement between Papua New Guinea and the International Bank for Reconstruction and Development (both signed on 24 June 1970). Under the loan amortisation schedule, the longest dated loan covered under the loan agreement was scheduled to mature on 15 June 1994. The International Bank for Reconstruction and Development has confirmed that the loan has been repaid in full.

Repeal of the Statistical Bureau (Tasmania) Act 1924

1.74 Part 6 of Schedule 1 repeals the Statistical Bureau (Tasmania) Act 1924. The Act approved an agreement made between the Commonwealth and Tasmania to facilitate the integration of the statistical office of Tasmania into the Australian Government, and for the Commonwealth to compile and issue statistics specifically for Tasmania. This Act is now redundant due to the completion of the integration. [Schedule 1, item 52, the whole of the Statistical Bureau (Tasmania) Act 1924]

Repeal of Statistics (Arrangements With States) Act 1956

1.75 Part 6 of Schedule 1 repeals the Statistics (Arrangement with States) Act 1956. The enabling provisions of this Act are duplicated in other legislation, mainly section 6 of the Australian Bureau of Statistics Act 1975 and section 6 of the Census and Statistics Act 1905. As a result, this Act is considered redundant. [Schedule 1, item 53, the whole of the Statistics (Arrangement with States) Act 1956]

Termination payments tax

1.76 Part 6 of Schedule 1 repeals the Termination Payments Tax (Assessment and Collection) Act 1997 and the Termination Payments Tax Imposition Act 1997. The Acts were enacted in 1997 when the termination payments tax was introduced and formed part of a package of legislation designed to give a legislative framework for the introduction of a superannuation contributions surcharge for high income earners. [Schedule 1, items 54 and 55, the whole of the Termination Payments Tax (Assessment and Collection) Act 1997 and Termination Payments Tax Imposition Act 1997]

1.77 The termination payment tax applied to termination payments made after 7:30pm, by legal time in the Australian Capital Territory, on 20 August 1996 and before 1 July 2005.

1.78 A termination payment is generally the taxable component of certain types of employment termination payments.

1.79 It has almost been 10 years since the last termination payment was made that was subject to the tax. Relevant assessments have been issued and the general amendment period has expired for almost all taxpayers. The termination payments tax Acts have become inoperative and are therefore being repealed.

1.80 The repeal of these Acts will also result in supporting regulations lapsing as a result of the repeal of the provisions enabling the regulations to be made.

Consequential amendments

1.81 Schedule 1 includes a number of consequential amendments to remove references to the repealed provisions and Acts in the taxation law and other Commonwealth legislation. [Schedule 1, items 3 to 8, 11 to 18 and 20, Part 7 of the AeroSpace Technologies of Australia Limited Sale Act 1994, section 52 of the CSL Sale Act 1993, Schedule 3 to the Medibank Private Sale Act 2006, section 54 to the Moomba-Sydney Pipeline System Sale Act 1994, section 28 to the Qantas Sale Act 1992, section 42 of the Snowy Mountains Engineering Corporation Limited Sale Act 1993, subsection 272-90(10) in Schedule 2F to the ITAA 1936, the items headed 'small-medium enterprises (SME)' and 'shares' in the table in section 10-5, the items headed 'small-medium enterprises (SME)' and 'shares' in the table in section 12-5, item 7 in section 109-60, items 9 of the table in section 112-97, items 1 and 2 in subsection 713-140(5) in the Income Tax Assessment Act 1997, and the whole of the Housing Loans Insurance Corporation (Transfer of Assets and Abolition) Act 1996]

1.82 Schedule 1 also includes a number of consequential amendments to remove references to the termination payments tax in the taxation law and other Commonwealth legislation. [Schedule 1, items 56 to 74, paragraph 24(3)(c) of the Long Service Leave (Commonwealth Employees) Act 1976, paragraph 202(l) and subsection 202DH(1) and 202DJ(1) of the ITAA 1936, sections 12-5, 26-65 and 995-1 of the ITAA 1997, section 16 and subsections 136(1) and 147A(2) and (3) of the Retirement Savings Accounts Act 1997, sections 299W of the Superannuation Industry (Supervision) Act 1993, subsection 8AAB(4) and 250-10(2) in Schedule 1 to the TAA 1953 and Part IID of the Taxation (Interest on Overpayments and Early Payments) Act 1983]

Application and transitional provisions

Superannuation - terminal medical conditions

1.83 The amendments in Part 4 of Schedule 1 will commence at the beginning of the first quarter following Royal Assent. [Schedule 1, clause 2, item 1 in the table]

Modify 'in receivership' rules

1.84 The amendments apply from the date of Royal Assent. [Schedule 1, clause 2, item 6 in the table]

Repeal of inoperative acts and provisions of the taxation law

Application dates

1.85 The amendments relating to the Commonwealth Borrowing Levy apply from the day after the Bill receives Royal Assent. The amendments cannot make any entity liable to pay Commonwealth Borrowing Levy that would not have already had such a liability without these amendments. [Item 2 in the table in Clause 2; Schedule 1, item 9]

1.86 The amendments relating to equity investment in small and medium enterprises in relation to income tax assessments for 2017-18 and later income years. [Schedule 1, subitem 19]

1.87 However, to ensure the measure can have no effect on arrangements entered into prior to the repeal, the amendments will not apply in respect of threshold interests acquired on or before the day Part 2 of Schedule 1 commences. [Schedule 1, subitem 19(2)]

1.88 The remaining repeals generally commence on Royal Assent. However, some consequential amendments commence at the beginning of the first quarter following Royal Assent. [Items 7 and 8 in the table in Clause 2]

Transitional rules

1.89 Schedule 1 also includes general savings provisions. These provisions, which are standard when there are repeals of tax legislation that has become inoperative, preserve the rights and obligations of taxpayers and the Commissioner in relation to past years. This ensures that the repeal can have no effect on liabilities and entitlements in prior income years, even where these liabilities or entitlements are not identified until after the repeal commences. [Schedule 1, items 75 to 79] Statement of Compatibility with Human Rights

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

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

Regulatory reform

1.90 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

1.91 Schedule 1 to this Bill makes a number of regulatory improvements to Treasury portfolio laws. The regulatory improvements include:

•

amending the superannuation laws to enable the Commissioner to pay certain superannuation amounts directly to individuals with a terminal medical condition;

•

amending the Corporations Act 2001 to modify the notification and reporting obligations applying to certain corporations that have property in receivership or property in respect of which a controller is acting; and

•

repealing several inoperative Acts as well as amending the taxation law to remove a number of inoperative or spent provisions.

Human rights implications

1.92 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

1.93 This Schedule is compatible with human rights as it does not raise any human rights issues.

Chapter 2 - Extending tax relief for merging superannuation funds

Outline of chapter

2.1 Schedule 2 to this Bill amends the ITAA 1997, the SLAA 2012 and the TLAA 2010 to extend tax relief for merging superannuation funds until 1 July 2020.

2.2 All references in this chapter are to the ITAA 1997 unless otherwise specified.

Context of amendments

2.3 CGT is the primary code for calculating gains or losses of complying superannuation funds. There are certain gains and losses that are treated on revenue account, such as those from a debenture stock or bond (see section 295-85).

2.4 The transfer of assets from one superannuation fund to another, under a merger between the two funds, will typically trigger a CGT event. Therefore, the asset transfer will lead to the realisation of capital gains and/or capital losses for the transferring fund. Following this asset transfer and the transfer of members' accounts to the receiving fund, the transferring fund will typically be wound up.

2.5 Capital losses are extinguished on the ending of an entity. As capital losses can be used to offset present and future capital gains, they carry some value - at most the value of the tax liability that would otherwise be payable on the reduced capital gains. This value is extinguished on the winding up of the transferring superannuation fund.

2.6 Similarly, revenue losses, such as foreign exchange losses, are also extinguished on the ending of an entity. Revenue losses also have a value as they can be offset against current year income, or carried forward where the entity continues to exist. However, where there is a merger and the transferring entity ceases to exist, the value of the revenue losses is also extinguished.

2.7 Valuations of members' superannuation interests may include the tax benefits of unrealised net capital losses or revenue losses. In the absence of optional loss relief and asset roll-over a merger may lead to a reduction in the value of members' superannuation interests. This can act as an obstacle to the superannuation fund merging with another fund because the trustee has to take this reduction into account when considering such a merger. The trustee may decide to abandon any merger plans where there is a significant negative impact on members' benefits. The optional loss relief and asset roll-over removes the impediment to eligible funds merging that would otherwise arise from the extinguishment of the losses.

2.8 This loss relief encompasses transfers to and from pooled superannuation trusts and life insurance companies as well as superannuation funds and approved deposit funds. Providing the loss relief to superannuation fund mergers involving these kinds of entities recognises the commercial reality that a significant amount of superannuation is invested indirectly through pooled superannuation trusts and life insurance companies.

2.9 The loss relief and asset roll-over in Division 310 was introduced as a temporary concession to assist the superannuation industry to cope with the severe economic and financial market conditions in late 2008. The temporary loss relief and asset roll-over was granted for transfer events happening on or after 24 December 2008 and before 1 October 2011.

2.10 The tax relief was first extended to 30 September 2011 to further encourage consolidation in the superannuation industry. The relief was then further extended to apply to mergers from 1 October 2011 to 1 July 2017 to facilitate the implementation of the MySuper reforms. The extension of the relief was designed to ensure there were no barriers for the superannuation industry to respond to the MySuper changes.

2.11 Tax considerations are a major impediment to mergers as trustees of superannuation funds must consider the adverse tax impacts on members' accounts. Although a merger may be in the long-term interest of members, the effect on members' account balances may preclude this from happening.

2.12 In the 2017-18 Budget, the Government decided to extend the temporary taxation relief in the form of loss relief and asset roll-over for mergers of superannuation funds as this will ensure members' balances are not adversely impacted by mergers.

Summary of new law

2.13 Schedule 2 to this Bill amends the ITAA 1997, the SLAA 2012 and the TLAA 2010 to extend the tax relief for merging superannuation funds available under Division 310 until 1 July 2020.

2.14 The tax relief which includes loss relief and asset roll-over removes income tax impediments to mergers between complying superannuation funds by permitting the roll-over of both revenue gains or losses and capital gains or losses.

Comparison of key features of new law and current law

Detailed explanation of new law

2.15 To extend Division 310, the application provisions for the loss relief and asset roll-over in the SLAA 2012 and the TLAA 2010 are amended to allow the provisions to apply until 1 July 2020. [Schedule 2, items 3 and 5, item 19 of Schedule 1 to the SLAA 2012 and subitem 11(1) of Schedule 2 to the TLAA 2010]

2.16 These amendments will operate for a limited time and will then be automatically repealed. The automatic repeal and savings provisions have been updated to reflect a repeal date of 1 July 2022. The repeal will occur two years after the end date of the legislation. [Schedule 2, item 4, table item 4 in subsection 2(1) of the TLAA 2010]

2.17 Updates have been made to provisions of the ITAA 1997 as a result of the extension of Division 310 and automatic repeal. [Schedule 2, items 1 and 2, notes 1 and 2 to section 310-1]

Application and transitional provisions

2.18 The amendments apply in relation to all transfer events that happen during the period starting on 1 October 2011 and ending at the end of 1 July 2020. [Schedule 2, item 6]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

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

Merging superannuation funds

2.19 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

2.20 This Schedule amends the ITAA 1997, the SLAA 2012 and the TLAA 2010 to extend the taxation relief to merging superannuation funds which includes the provision of loss relief and an asset roll-over.

Human rights implications

2.21 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

2.22 This Schedule is compatible with human rights as it does not raise any human rights issues.

Chapter 3 - SuperStream gateway network governance funding

Outline of chapter

3.1 Schedule 3 to the Bill amends the APRA Act to enable the Government to recover the ongoing cost of the governance of the superannuation transaction network from the superannuation supervisory levy.

Context of amendments

3.1 The 'SuperStream' measures were enacted as part of the 'Stronger Super' reforms. These reforms were implemented in response to the 2010 'Super System Review', chaired by Jeremy Cooper.

3.2 These measures involved the development of a mandated set of rules for the electronic payment of superannuation rollovers and contributions, and for corresponding data messages for each transaction they represent. These rules are contained in section 34K of the SIS Act (for payments and information in respect of superannuation funds) and in section 45B of the RSA Act (for payments and information in respect of retirement savings accounts).

3.3 The network that is used to transmit these payments and the related messages is commonly referred to as the 'superannuation transaction network'. The network is operated by gateway operators who are subject to a mutually binding memorandum of understanding.

3.4 As at 30 June 2017, gateway operators of the superannuation transaction network facilitate connections among approximately 800,000 employers, 200 APRA-regulated funds and over 350,000 self-managed superannuation funds.

3.5 The ATO has worked closely with key industry stakeholders to move the governance of the network from a set of interim, government sponsored arrangements towards an enduring and sustainable model that is run and funded by industry. To this end, industry stakeholders have established the 'Gateway Network Governance Body' - the industry body that provides oversight of the governance of the gateway operators.

3.6 The cost of implementing the SuperStream measures, including the establishment of the Gateway Network Governance Body, has been recovered from APRA-regulated superannuation funds through the superannuation supervisory levy.

3.7 The total amount of levy payable by APRA regulated superannuation funds is governed by the Superannuation Supervisory Levy Imposition Act 1998. This Act allows the Treasurer to determine, by legislative instrument, the amount of levy that is payable for each financial year.

3.8 Subsection 50(1) of the APRA Act currently allows the Treasurer to determine, by legislative instrument, the amount of levy money that the Commonwealth is to retain in respect of the levy (or each class of levy). The Treasurer can only determine amounts for the purposes of covering certain costs. These costs include the 'implementation' of the SuperStream measures until 30 June 2018.

3.9 Although the majority of activities taken to implement the SuperStream measures will have been completed by this time, the governance of the superannuation transaction network through the Gateway Network Governance Body will have an ongoing cost.

3.10 To meet this ongoing cost, industry representatives have advocated for an industry-funded model that relies on the existing levy framework.

Summary of new law

3.11 The amendments in Schedule 3 to the Bill ensure that the Commonwealth can recover the ongoing cost of the governance of the superannuation transaction network from the superannuation supervisory levy.

Comparison of key features of new law and current law

Detailed explanation of new law

3.12 The amendments in Schedule 3 to the Bill enable the Treasurer to take into account the ongoing cost of governing and maintaining the superannuation transaction network in determining the share of levy money that is payable to the Commonwealth. [Schedule 3, item 1, subparagraph 50(1)(a)(iii)]

3.13 The Treasurer can also take these costs into account in making a determination in respect of each class of levy for a financial year. [Schedule 3, item 2, subparagraph 50(1)(b)(iii)]

3.14 The amendments replace the existing provisions that enable the Commonwealth recover the costs of implementing the SuperStream measures until 30 June 2018.

3.15 Recovering the ongoing costs of governing and maintaining the superannuation transaction network offsets the payments that the Commonwealth makes from Consolidated Revenue, through the ATO, to the Gateway Network Governance Body for undertaking its governance function. As the costs are recovered from the levy that is paid by industry, the Gateway Network Governance Body is effectively funded by industry (the preferred funding model that has been advocated for by industry).

3.16 For the purposes of working out the costs that can be taken into account in making a determination, the 'superannuation transaction network' is defined as the network that is used to send and receive payments and information that are required to be dealt with in accordance with the payment regulations and standards in the SIS Act and RSA Act. [Schedule 3, item 3, subsection 50(3)]

3.17 The payments and information and the payment regulations and standards that are relevant to this definition are set out in section 34K of the SIS Act and section 45B of the RSA Act.

3.18 The amendments in Schedule 3 also make consequential amendments to remove the more general references to the 'SuperStream measures' that were relevant to the cost recovery rule for implementing those measures. [Schedule 3, item 4, subsection 50(6)]

Application provisions

3.19 The amendments apply in relation to financial years starting on and after 1 July 2018. [Schedule 3, item 5]

3.20 This ensures that the Commonwealth can recover the ongoing cost of governing and maintaining the superannuation transaction network, through its funding of the Gateway Network Governance Body, from the time that the cost recovery arrangements for implementing the SuperStream measures expire.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

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

SuperStream gateway network governance funding

3.21 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

3.22 The amendments in Schedule 3 to the Bill ensure that the Commonwealth can recover the cost of funding the Gateway Network Governance Body from the superannuation supervisory levy.

Human rights implications

3.23 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

3.24 This Schedule is compatible with human rights as it does not raise any human rights issues.

Chapter 4 - Transfer of early release function

Outline of chapter

4.1 Schedule 4 to the Bill transfers the regulator role for early release of superannuation benefits on compassionate grounds from the Chief Executive Medicare (Department of Human Services) to the Commissioner (Australian Taxation Office).

Context of amendments

4.2 Superannuation benefits are generally required to be 'preserved' in the superannuation system until retirement on or after preservation age (between 55 and 60, depending on year of birth).

4.3 One of the ways in which superannuation benefits may be released before preservation age is where early access is justified on compassionate grounds. Benefits may be released on compassionate grounds only in limited circumstances. These are listed in the SIS Regs.

4.4 The Department of Human Services currently administers the early release of superannuation benefits on compassionate grounds. However, the Department of Human Services does not administer any other program within the superannuation system and the program is not aligned with its core service delivery arrangements.

4.5 The Australian Taxation Office administers several of the programs relating to the release of superannuation benefits. It is responsible for most individuals' interactions with the superannuation system and has an ongoing relationship with the superannuation industry.

4.6 The transfer of the regulator role to the Australian Taxation Office is intended to build on this existing relationship and to streamline the processes for the early release of superannuation benefits for both individuals and superannuation funds.

Operation of existing law

Administrative responsibilities

Superannuation funds

4.7 The framework for general administration of the SIS Act is set out in section 6 of that Act, which provides that APRA has general administration of certain provisions, unless they are otherwise conferred on ASIC, the Commissioner or the Chief Executive Medicare.

4.8 The agency that administers a provision is the regulator of that provision for the purposes of the SIS Act and the SIS Regs. The Regulator therefore means APRA, ASIC, the Commissioner or the Chief Executive Medicare in certain circumstances (section 10 of the SIS Act).

4.9 Currently, the Chief Executive Medicare is the regulator for early release of superannuation benefits on compassionate grounds (paragraph 6(1)(ba) of the SIS Act) who has the responsibility of determining in writing when a person qualifies for early release of superannuation benefits on compassionate grounds.

Retirement Savings Accounts

4.10 Paragraph 3(1)(b) of the RSA Act similarly provides APRA has general administration of that Act, to the extent it is not conferred on another regulator. Paragraph 3(1)(ba) provides the Chief Executive Medicare is the Regulator for the purposes of determining the amount of benefits in an RSA that may be released early on compassionate grounds.

Early release of superannuation benefits on compassionate grounds

4.11 Superannuation benefits are generally required to be 'preserved' in the superannuation system until retirement on or after preservation age (between 55 and 60, depending on year of birth). Subject to the governing rules of the fund, early release of 'preserved' benefits is permitted in certain restricted circumstances.

4.12 For example, amounts may be released to people from their superannuation account on compassionate grounds.

4.13 Currently, the regulator for determining the amount and grounds for release of limited retirement savings on compassionate grounds is the Chief Executive Medicare within the Department of Human Services (paragraph 6(1)(ba) of the SIS Act; paragraph 3(1)(ba) of the RSA Act.

4.14 The detailed rules for the early release of superannuation benefits are set out in the SIS Regs and the RSA Regs (collectively, the Regulations). It is expected that Regulations will be made to accompany the measure that will improve the efficiency and integrity of the release of superannuation benefits on compassionate grounds. These changes will be subject to public consultation.

Summary of new law

4.15 Schedule 4 to the Bill transfers the regulator role for early release of superannuation benefits on compassionate grounds from the Chief Executive Medicare (Department of Human Services) to the Commissioner (Australian Taxation Office).

4.16 This means that people will need to apply to the Commissioner rather than to the Chief Executive Medicare for release of superannuation benefits on compassionate grounds and the Commissioner will be responsible for making determinations about early release of superannuation benefits on compassionate grounds.

Comparison of key features of new law and current law

Detailed explanation of new law

4.17 Schedule 4 to the Bill transfers the regulator role for early release of superannuation benefits on compassionate grounds from the Chief Executive Medicare (Department of Human Services) to the Commissioner (Australian Taxation Office).

4.18 This means that people will need to apply to the Commissioner rather than to the Department of Human Services for release of superannuation benefits on compassionate grounds and the Commissioner will be responsible for making determinations about early release of superannuation on compassionate grounds.

4.19 The regulator role for early release of superannuation on compassionate grounds is removed from the Chief Executive Medicare. [Schedule 4, items 1 and 2, paragraphs 3(1)(b) and (ba) of the RSA Act; items 11, 12 and 13; subparagraph 6(1)(b)(i), paragraph 6(1)(ba) and paragraph 6(1)(f)(ia) of the SIS Act]

4.20 The functions being transferred to the Commissioner will be grouped together in the law so that they are clearly separate from APRA's functions. [Schedule 4, items 3 and 4, paragraph 3(1)(g) and the note to subsection 3(1) of the RSA Act; items 14 and 15; subparagraph 6(1)(g)(iii) and the note to subsection 6(1) of the SIS Act 1993;]

4.21 The Chief Executive Medicare will no longer have any functions under the SIS Act or the RSA Act. Accordingly, the definitions of Chief Executive Medicare in those Acts are no longer required. [Schedule 4, items 5 and 6, section 16; item 10, section 198 of the RSA Act; items 16, 17 and 18, subsection 10(1); item 22, section 351 of the SIS Act]

4.22 The Chief Executive Medicare was not permitted to intervene in any proceedings under the SIS Act or the RSA Act. As the Commissioner is able to intervene in proceedings under the Acts, the exclusion of the Chief Executive Medicare from intervening is repealed. [Schedule 4, item 7, subsection 168(4) of the RSA Act; item 19, subsection 320(4) of the SIS Act]

4.23 The Chief Executive Medicare was not permitted to grant exemptions from, and make modifications of, provisions of the Acts and the regulations. As the Commissioner is not excluded from having those powers, the provisions are no longer needed. [Schedule 4, items 8 and 9, section 173 of the RSA Act; items 20 and 21, section 327 of the SIS Act]

Application and transitional provisions

4.24 The amendments to the SIS Act and RSA Act commence from the earlier of the date fixed by proclamation or six months and one day after the Act receives Royal Assent. [Commencement information item 2; item 2 in the table in Commencement information in subitem 2(1); Schedule 4, item 23]

4.25 Applications for the early release of superannuation benefits on compassionate grounds made on or after the commencement of this Schedule must be made to the Commissioner (Australian Taxation Office).

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

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

Transfer of early release function

4.26 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

4.27 Schedule 4 to the Bill transfers the regulator role for early release of superannuation on compassionate grounds from the Chief Executive Medicare (Department of Human Services) to the Commissioner of Taxation (Australian Taxation Office). It is expected that Regulations will be made to accompany the measure that will improve the efficiency and integrity of the release of superannuation benefits on compassionate grounds.

Human rights implications

4.28 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

4.29 This Schedule is compatible with human rights as it does not raise any human rights issues.

Chapter 5 - Payment of GST on taxable supplies of certain real property

Outline of chapter

5.1 Schedule 5 to the Bill amends the TAA 1953, ITAA 1997 and the GST Act to require purchasers of new residential premises and subdivisions of potential residential land to make a payment of part of the purchase price to the ATO.

Context of amendments

5.2 The Government announced in the 2017-18 Budget that from 1 July 2018 purchasers of new residential premises or new residential subdivisions would need to remit the GST on the purchase price directly to the ATO as part of the settlement process.

5.3 Currently, supplies of new residential premises are generally subject to GST and the supplier remits the GST to the ATO in their next BAS. This can be up to three months after settlement.

5.4 One of the main forms of non-compliance with these obligations involves developers selling properties for a purchase price that reflects their GST obligations but dissolving their business before their next BAS lodgment to avoid remitting the GST (this is known as a form of 'phoenixing').

5.5 The ATO uses a range of strategies to tackle non-compliance with the GST law in the property development industry. The strategies are labour intensive, and costly to undertake and sustain.

5.6 Phoenixing to avoid paying GST has grown significantly over the last decade. As of November 2017 the ATO has identified 3,731 individuals that have actively engaged in this activity over the last 5 years. These individuals controlled over 12,000 insolvent entities responsible for $1.8 billion in debt that has been written off. The insolvent entities also claimed $1.2 billion in input tax credits between 2013 and 2017.

5.7 The ATO's compliance activities in collecting correct amounts of GST that are due and payable on property transactions are hindered by the delay that occurs between when the GST is paid to the supplier and when their liability arises. By effectively making purchasers pay GST when consideration for the property is provided, this measure removes the delay in the payment of GST which is the main enabler of current evasion activity in this area.

Summary of new law

5.8 Where an entity (the supplier) makes a taxable supply of new residential premises or a subdivision of potential residential land by way of sale or long term lease, the recipient of the supply (the purchaser) is required to make a payment of part of the consideration to the ATO directly, prior to or at the time consideration is first provided for the supply (other than as a deposit).

Comparison of key features of new law and current law

Detailed explanation of new law

Application of the measure to certain new residential premises and subdivisions of potential residential land

5.9 Generally, the amendments made by Schedule 5 require the purchaser to withhold an amount if it is the recipient of a taxable supply of:

•

new residential premises, other than those created through a substantial renovation and commercial residential premises; or

•

subdivisions of potential residential land;

by way of sale or long term lease. [Schedule 5, item 1, subsections 14-250(1) and (2)]

5.10 The term 'new residential premises' is defined in section 40-75 of the GST Act. Generally, premises will be new residential premises where they have not previously been sold as residential premises, have been created through substantial renovations of a building, or have been built to replace demolished premises on the same land.

5.11 Where the new residential premises were not created through 'substantial renovations' (within the meaning of the GST Act), and are not also 'commercial residential premises', a withholding obligation applies to supplies of the property by way of sale or long term lease. The exclusion of substantial renovations ensures that a purchaser does not have to determine whether renovations are 'substantial renovations' of the property, which may be difficult to assess at the time of purchase. Similarly, commercial residential premises are excluded to make it clear that a withholding obligation does not apply in relation to residential premises that are both 'new residential premises', and 'commercial residential premises'. [Schedule 5, item 1, subsection 14-250(2)]

5.12 A withholding obligation also applies to taxable supplies of potential residential land included in property subdivision plans by way of sale or long term lease, where the subdivision does not contain any buildings that are used for a commercial purpose. The term 'potential residential land' is defined in section 195-1 of the GST Act, and means land that is permissible to use for residential purposes, but that does not contain any buildings that are residential premises. This includes land that has been zoned for use for residential premises under a law of a State or Territory but that does not currently contain any residential premises. The withholding obligation applies each time the land is supplied, rather than just on the first supply. [Schedule 5, item 1, paragraph 14-250(2)(b)]

5.13 However, a withholding obligation does not apply if the recipient of the taxable supply is registered for GST, and acquires the potential residential land for a creditable purpose. This ensures that the obligation does not apply to certain business to business transactions. [Schedule 5, item 1, paragraph 14-250(1)(b)]

5.14 The application of the measure to subdivisions of potential residential land, other than in a business to business transaction, is intended to cover house and land packages, where a purchaser may receive a taxable supply of a vacant block of land which is the subject of a property subdivision plan. [Schedule 5, item 1, paragraph 14-250(2)(b)]

5.15 Where a supply is between members of a GST group, or is made by the operator of a GST joint venture to a participant in the joint venture, then those supplies are not taxable supplies and the withholding obligation does not apply (subsections 48-40(2) and 51-30(2) of the GST Act).

5.16 Both withholding obligations are limited to supplies by way of sale or long term lease (broadly, a lease for a period of 50 years or more). This limits the application of the withholding obligation to permanent transfers of property, broadly consistent with the definition of new residential premises. [Schedule 5, item 1, subsection 14-250(2)]

5.17 The obligation to make a payment falls on the recipient of the supply. Where there are multiple recipients, such as where a couple may purchase a property as tenants in common, each recipient is treated as receiving a separate supply in proportion to their interest in the property. The amount of the payment that each recipient is required to make is proportionate to their interest in the property. Where the recipients of the supply are joint tenants, they are treated as having received a single supply, and they each have an obligation to make the payment. Either one of the joint tenants may discharge this obligation. [Schedule 5, item 1, subsection 14-250(11)]

Example 5.1 - Joint withholding at settlement

Gerald and Beth acquire new residential premises for $1.1 million. They acquire title to the property as tenants in common. The sale is not under the margin scheme, so the amount of the payment is 1/11th of the value of the contract price.

Gerald and Beth are each taken to have received a separate supply, and each have an obligation to make a payment to the Commissioner in equal shares.

Gerald has received a 50 per cent interest in the property. Gerald is taken to have paid $550,000 for that supply. Gerald must pay $50,000 to the Commissioner on or before the day they provide consideration for the property. Beth must pay the same amount to the Commissioner.

Between them, Gerald and Beth are required to withhold $100,000 from the amount they pay to the vendor. They may make a payment to the ATO at the same time.

Example 5.2 - Joint withholding at settlement

Assume the same facts as above, except Gerald and Beth acquire the property as joint tenants.

In this case, Gerald and Beth are taken to have received a single supply, and they have an obligation to withhold $100,000. The obligation to make the payment may be discharged by either of the parties.

They may make a single payment to the ATO.

5.18 To avoid any unintended consequences, the Commissioner may, by legislative instrument, determine that the withholding obligation does not apply to certain kinds of supplies of new residential premises or subdivisions of potential residential land. [Schedule 5, item 1, subsection 14-250(3)]

Timing of withholding obligation

5.19 Where a purchaser receives a taxable supply to which the withholding obligation applies, they are required to pay to the Commissioner an amount on or before the day that consideration for the supply (other than consideration provided as a deposit) is first provided, or if the parties are associates and no consideration is provided, on the day the supply is made. [Schedule 5, item 1, subsections 14-250(1) and (4)]

5.20 In the majority of cases, consideration (other than a deposit) is provided on the day of settlement of the property. Where this is the case, the intention is that the purchaser must make a payment to the Commissioner on or before the day on which settlement occurs. Where consideration under a contract is paid by instalments, the intention is that the purchaser instead has to make a payment by the end of the day that they make the first instalment payment, as this will be when consideration is first provided. Generally, this outcome aligns with the GST attribution rules, as the tax period in which consideration is first paid is generally when the supplier is required to pay the amount to the Commissioner. [Schedule 5, item 1, subsection 14-250(4)]

5.21 Money that is held as a deposit is generally not considered to be consideration (within the meaning of the GST Act), unless the deposit is forfeited or is applied as consideration for the supply. When a purchaser provides consideration to another entity as a deposit, the purchaser does not face a withholding obligation at that time. If that deposit is later forfeited, and the intended supply of new residential premises or potential residential land does not occur then there would be no withholding obligation. Instead, the withholding obligation applies to the first payment of consideration that is provided other than as a deposit. This is expected to simplify compliance for purchasers. The withholding obligation also applies for the first payment if it includes both a deposit and any additional amount of consideration. [Schedule 5, item 1, subsection 14-250(4)]

5.22 To avoid any unintended consequences, the Commissioner may, by legislative instrument, vary the day by which the payment is to be made to the Commissioner for specified types of supplies. This may include varying the number of payments that are to be made to the Commissioner, so that amounts may be paid by instalments on multiple different specified days. For example, where consideration is provided in instalments, the Commissioner could provide that withholding payments may be made by the end of the day on which each instalment is paid. [Schedule 5, item 1, subsections 14-250(4) and (5)]

The amount to be paid

5.23 The amount to be paid to the Commissioner is a proportion of the 'contract price' or if the contract does not specify a contract price, the price of the supply. [Schedule 5, item 1, subsection 14-250(6)]

5.24 The contract price is, effectively, the price set for the supply in the contract, not taking into account any potential adjustments that may occur (regardless of the likelihood of any of these adjustments occurring). Using the contract price, if it exists, provides entities with certainty about the amount that needs to be withheld. [Schedule 5, item 1, subsection 14-250(6)]

5.25 The price of a supply is the amount of money paid for the supply, or if the consideration is not expressed as money, the GST inclusive market value of the consideration (section 9-75 of the GST Act). [Schedule 5, item 1, subsection 14-250(7)]

5.26 The proportion of the contract price that must be withheld differs based on whether the margin scheme applies to the supply. [Schedule 5, item 1, subsection 14-250(6)]

5.27 If the margin scheme does not apply, the purchaser must withhold 1/11th of the contract price or price. [Schedule 5, item 1, paragraph 14-250(6)(b)]

5.28 If the margin scheme applies to the taxable supply, the purchaser must withhold 7 per cent of the contract price or price, or a greater amount that has been determined by the Minister in a legislative instrument. However, any determination by the Minister cannot require more than 9 per cent of the contract price or price to be withheld, which prevents an amount being set in excess of the GST payable on the supply. [Schedule 5, item 1, subsection 14-250(8) and paragraph 14-250(6)(a)]

5.29 Special rules apply to supplies made between associates for less than the GST inclusive market value. In this case, the purchaser must pay to the Commissioner an amount equal to 10 per cent of the GST exclusive market value of the supply. This is consistent with the rules that generally apply to the GST treatment of transactions between associates. Where no consideration is provided, the purchaser must pay the amount to the ATO on the day on which the taxable supply is made. [Schedule 5, item 1, subsection 14-250(9)]

5.30 In some cases, a transaction may consist of multiple different types of supplies under a single agreement. It is also possible that a single contract may be for a composite supply which includes a taxable supply to which the withholding obligation applies. Where it is possible to ascertain the amount that is attributable to the supply to which the withholding obligation applies, the purchaser only has to withhold a proportion of that reduced amount, depending on whether the sale is under the margin scheme or not. [Schedule 5, item 1, subsection 14-250(10)]

5.31 If the consideration under the contract is expressed as a single amount that covers all taxable supplies, it may not be possible to determine at the time consideration is provided the proportion of the consideration that relates to the particular supply (or part of a composite supply) to which the withholding obligation applies. This is unlikely to be common for supplies of real property. However, where this is the case, the purchaser must withhold from the whole of the price. [Schedule 5, item 1, subsection 14-250(10)]

5.32 This rule creates the appropriate incentive for the supplier to assign a proportion of the price to the supply to which the withholding obligation applies, as they will have a larger amount withheld and suffer a cash-flow disadvantage if they do not. [Schedule 5, item 1, paragraph 14-250(10)]

Example 5.3 - Withholding at settlement

On 3 December 2018, Rick enters into a contract for the purchase of a new apartment from MortimerHomeCo for $700,000. The margin scheme does not apply to the sale.

The contract of sale included the required notice providing relevant details to enable Rick to withhold and remit the correct amount to the ATO at settlement. MortimerHomeCo advises Rick that he will be required to make a payment of $63,636, which is 1/11th of the contract price of $700,000, on or before the day of settlement.

Settlement occurs on 6 June 2019. Rick's conveyancer makes a payment to the ATO at settlement of $63,636 (being the GST component of the purchase), and notifies the ATO of a payment of the withheld amount.

Because Rick has paid $63,636 to the ATO, he does not have to provide this amount to MortimerHomeCo, even though the contract price states that the consideration includes the $63,636.

MortimerHomeCo receives a credit for this amount in their June BAS, and does not then have to make a payment of the amount when paying their net amount for the tax period ending 30 June.

Example 5.4 - Withholding when sale is under the margin scheme

Assume the same facts as in Example 5.3, except Rick and MortimerHomeCo have agreed that the margin scheme applies to the supply and no determination has been made by the Minister that a percentage greater than 7 per cent needs to be withheld in relation to supplies to which the margin scheme applies.

In MortimerHomeCo's notice to Rick, they instead advise that the amount Rick will be required to pay is 7 per cent of the contract price of $700,000.

Example 5.5 - Payment by bank cheque at settlement

Assume the same facts as in Example 5.3, except Rick's conveyancer does not make a payment to the ATO directly, and instead provides a bank cheque made out to the ATO to MortimerHomeCo for $63,636.

Rick is protected from penalties if MortimerHomeCo does not provide this amount to the ATO as the bank cheque for the required amount has been provided at settlement and his conveyancer keeps a record of that exchange.

MortimerHomeCo forwards the cheque to the ATO on the same day. When the cheque is received by the ATO, MortimerHomeCo gets a credit for this amount in their June BAS and does not then have to make a payment of the amount when paying their net amount for the period.

Example 5.6 - Withholding at settlement using the PEXA platform as agent for the purchaser

Assume the same facts as in Example 5.3, except an online conveyancing portal is used to complete the transaction.

PEXA is an online conveyancing portal used for completing property settlements. PEXA's portal enables payments to be made directly through it so all parties have complete assurance and visibility of the relevant transaction details.

Each party inputs the required details to PEXA's portal to enable the transaction to be completed. In preparation for the settlement, Rick and MortimerHomeCo input the relevant account information, payment amounts and property information (as a shared line item so that each party has visibility of the account details).

Rick transfers the whole of the consideration to PEXA, which through their financial settlement facility disburse 1/11th of the purchase price to the ATO, and the remainder to MortimerHomeCo.

MortimerHomeCo receives a credit for this amount in their June BAS, and does not have to make a payment of the amount when paying their net amount for the tax period.

Example 5.7 - Withholding on land where premises not built

Alison buys land in a new master-planned development. The vendor selling the land has also indicated the purchase of the land is subject to the construction of a new home built on that land by an agreed developer.

Alison agrees to this condition and the vendor prepares a land contract, and a building contract is drawn up separately. Alison settles on the land first, withholds the GST on the contract price of the land and remits that to the ATO at settlement.

As the contract for the construction of the house is for the supply of goods and services and not land, the withholding does not extend to the supplies under this contract. GST on those supplies is paid in the usual way.

Notification by suppliers of residential premises or potential residential land

5.33 To help purchasers comply with their obligation to withhold, an entity that makes a supply of residential premises or potential residential land by way of sale or long term lease is required to notify the purchaser in writing of certain matters before making the supply. [Schedule 5, item 1, subsection 14-255(1)]

5.34 Unlike the withholding obligation, which only applies to new residential premises or new subdivisions of potential residential land, the notification requirement applies to the supply of residential premises or potential residential land by way of sale or long term lease. However, the supplier does not have to provide a notice in relation to potential residential land where the purchaser that receives the notice is registered for GST, and acquires the land for a creditable purpose. The supplier also does not have to give a notice where the supply is of commercial residential premises. [Schedule 5, item 1, subsections 14-255(1) and (2)]

5.35 Where the supply does not require a payment to be made by the recipient to the Commissioner (for example, because it is an input taxed supply of existing residential premises), then the supplier only needs to provide this information. [Schedule 5, item 1, subsection 14-255(1)]

5.36 Where the purchaser must make a payment to the Commissioner, the supplier must identify this in the notice, and also advise the purchaser of the amount that must be paid to the Commissioner. This simplifies compliance for the purchaser, and makes the supplier responsible for working out if there are any determinations in effect from the Commissioner that mean that a withholding obligation does not apply in relation to the supply, or that varies the amount to be withheld. [Schedule 5, item 1, subsection 14-255(1)]

5.37 Where the supply requires a withholding payment to be made, the following other matters must also be included in the notice to the purchaser:

•

the name and ABN of the entity that made the supply;

•

when the purchaser is required to pay that amount to the Commissioner;

•

where some or all of the consideration is not expressed as an amount of money - the GST inclusive market value of the consideration that is not expressed as an amount of money; and

•

such other matters as are specified in the regulations.

[Schedule 5, item 1, subsection 14-255(1)]

5.38 The time when a purchaser is required to pay the amount to the Commissioner may be expressed in the notice as a specific date, if known by the entities, or more generally, for example, by stating that the payment is to be made at settlement.

Offence for failing to notify

5.39 Where a person fails to give the required notice in writing to the purchaser, they have committed an offence. A person has failed to give the required notice where they do not make one or more of the required representations, or if they make incorrect representations. [Schedule 5, item 1, subsection 14-255(4)]

5.40 Because this is a strict liability offence, it is not necessary to establish fault in failing to make any or all of the required representations. Strict liability is appropriate in this case because the offence is committed by failing to make the required representations. It is important for the integrity of the regulatory regime to make suppliers responsible for a failure to provide an accurate notice, regardless of their intentions. Withholding is being introduced to address non-compliance by certain suppliers and it would undermine the effectiveness of the regime if suppliers could knowingly fail to provide a notice when required without consequences. Suppliers have clear notice about their obligations and the matters covered in the notice are either known or readily able to be determined by the supplier. If notices are not provided by a supplier, then purchasers may not have the information that they require to make a withholding payment. [Schedule 5, item 1, subsections 14-255(4) and (5)]

5.41 Because the offence is subject to the general defence for strict liability offences set out in the Criminal Code, a person will not be subject to the offence if they can show they have made an honest mistake of fact (section 9.2 of the Criminal Code). This would include where a person made an honest and reasonable mistake about whether the property was new residential premises or existing premises, and failed to give the required notice as a result. However, multiple instances of similar misstatements may indicate that an honest and reasonable mistake has not been made. [Schedule 5, item 1, subsections 14-255(4) and (5)]

5.42 The maximum penalty for the strict liability offence is 100 penalty units. A penalty unit is currently $210. Where a corporation is convicted of the offence, the penalty that the court may impose is 5 times the maximum penalty that the court could impose as a penalty for the offence (section 8ZF of the TAA 1953). This penalty creates a strong disincentive for potential phoenix companies to misrepresent that a property is not 'new residential premises' or 'potential residential land' to avoid the withholding obligation from applying. The penalty amount is set having regard to the significant sums of money involved in such real property transactions. Without a strong disincentive, phoenix operators may not be discouraged from making such a false representation. [Schedule 5, item 1, subsection 14-255(4)]

5.43 The offence applies to all entities that supply residential premises or potential residential land, to reduce the compliance burden on purchasers. This means that each time residential premises or potential residential land are supplied, the vendor must advise the purchaser if a withholding payment must be made. The representation by a vendor that receiving a supply of residential premises or potential residential land does not require a payment to be made is important to the operation of the defence for the administrative penalty that applies for failing to make a withholding payment. It provides a basis for the purchaser to determine whether they are required to make a payment or not. [Schedule 5, item 1, subsection 14-255(1)]

5.44 If a purchaser has not been presented with a notice indicating if they are required to make a payment, there may be uncertain as to whether they are under an obligation to withhold. To provide certainty to purchasers and conveyancers where they are uncertain about their withholding obligations, they can make a payment to the Commissioner and will not face penalties if they do so. Making the payment to the Commissioner will discharge them from liability to account for the amount of the withholding payment to any other entity (section 16-20 of Schedule 1 to the TAA 1953). This provides certainty to purchasers and conveyancers in cases where a supplier has failed to provide a notice. Where this occurs and there was no obligation for the purchaser to make a payment, the supplier may apply to the Commissioner for a refund of the amount of the payment that was made in error. Because the Commissioner may have regard to the circumstances that gave rise to the error when deciding whether to issue a refund, a factor that may be considered is whether it appears the purchaser's error was a result of the supplier deliberately failing to provide a certificate. This provides a strong incentive for the supplier to issue a notice, as they will suffer a cash-flow disadvantage and will have to apply to the Commissioner for a refund if they do not issue the notice. [Schedule 5, items 1 and 4, section 18-85 and subsection 14-255(3)]

5.45 An administrative penalty may also be applied where a person fails to make the required representation. The elements that are required to establish the administrative penalty are the same as the elements for the criminal penalty. The penalty is 100 penalty units. [Schedule 5, item 1, subsection 14-255(6)]

5.46 This penalty is subject to the rules in Division 298 of Schedule 1 to the TAA 1953 about the application of administrative penalties. It is also subject to the rule in section 8ZE of the TAA 1953, that prevents an administrative penalty being imposed where a prosecution for the criminal offence has been instituted, and that where a prosecution is later commenced, that the Commissioner must refund the amount of penalty imposed. [Schedule 5, item 1, subsection 14-255(6)]

5.47 Because this is an administrative penalty the provisions of the Criminal Code that provide a defence of honest and reasonable mistake of fact for strict liability criminal offences do not apply. However, the amendments provide that if a person:

•

failed to give a notice containing the matters that are required to be included when making a supply of 'new residential premises' or a subdivision of potential residential land to which a withholding obligation applies; and

•

reasonably believed at the time they gave the notice that they were not required to give a notice (for example, because they believed that the supply was a supply of commercial residential premises);

they are not liable to the administrative penalty. [Schedule 5, item 1, subsection 14-255(7)]

Defences for failing to withhold

5.48 The criminal penalty in section 16-25 does not apply to a failure to make a Division 14-E payment. However, the administrative penalty in section 16-30 does apply to such a failure. Because the penalty under section 16-30 applies, the TAA 1953 is amended to provide a number of specific defences for where a purchaser fails to withhold. [Schedule 5, items 14 and 15, subsection 16-25(2) and paragraph 16-25(4)(b)]

5.49 The first defence applies where the purchaser failed to pay an amount to the Commissioner if:

•

the amount relates to a taxable supply of new residential premises (other than commercial residential premises) to which a withholding obligation applies; and

•

the purchaser was given a notice under section 14-255 that either:

-

stated that the premises were not new residential premises; or

-

indicated that the purchaser will not be required to make a withholding payment in relation to the supply; and

•

at the time that the purchaser was required to make a payment to the Commissioner, there was nothing that made it unreasonable for the entity to believe that the notice was correct.

[Schedule 5, item 2, subsection 16-30(2)]

5.50 The defence applies if the purchaser relies on the notice, unless other information relating to the supply makes this reliance unreasonable. This means that in order to obtain the benefit of the defence, the purchaser is not required to make any additional inquiries about the premises. Instead, they are only unable to rely upon the notice if information they are already aware of contradicts it or calls it into question. For example, a circumstance that might indicate that reliance on the notice was unreasonable is where the purchaser has made an off-the-plan purchase of a new apartment, but the vendor has represented in the notice that it is not new residential premises. [Schedule 5, item 2, subsection 16-30(2)]

5.51 The second defence applies where the purchaser failed to pay an amount to the Commissioner if:

bull;

the purchaser gives the supplier a bank cheque on or before the day the payment is required to be made; and

bull;

the bank cheque is for the amount the purchaser is required to pay to the Commissioner, and is payable to the Commissioner.

[Schedule 5, item 2, subsection 16-30(3)]

5.52 This defence is intended to cover situations where a supplier requires the purchaser to provide them with a bank cheque that is payable to the Commissioner so the supplier can be certain that the payment has been made. The defence is to ensure that if the supplier does not provide the bank cheque to the Commissioner by the required time that the purchaser does not face a penalty. This is intended to provide certainty to purchasers that these types of arrangements will not expose them to penalties, which should minimise disruption to the usual settlement process. [Schedule 5, item 2, subsection 16-30(3)]

Withholding tax credits

5.53 An entity that makes a taxable supply to which the measure applies is entitled to a credit for the amount paid to the Commissioner by a purchaser in relation to the supply as a result of the withholding regime. The credit arises when an assessment has been made of the supplier's net amount for the tax period of the supplier in which the payment was made. [Schedule 5, item 3, subsections 18-60(1) and (3)]

5.54 The availability of a credit to the supplier is contingent on the purchaser paying the amount to the Commissioner. A credit does not arise merely because an amount has been withheld from a payment to the supplier. This ensures that the integrity of the credit system is not undermined by purchasers withholding amounts but not remitting them. [Schedule 5, item 3, subsection 18-60(1)]

5.55 The amount of the credit is the whole of the payment that is made. [Schedule 5, item 3, subsection 18-60(2)]

5.56 Where an amount is refunded, the amount of the credit that the supplier is entitled to receive is reduced by the amount of the refund that has been given, including by reducing the amount to nil if the whole of the amount has been refunded (section 18-5 of Schedule 1 to the TAA 1953).

5.57 Part IIB of the TAA 1953 (about Running Balance Accounts) sets out how the Commissioner must treat a credit once it has arisen. These rules apply to credits for amounts withheld under the new withholding regime.

Refunds for amounts where the payment is made in error

5.58 Where a purchaser withholds in error, but in purported compliance with the obligation to withhold, (for example, where residential premises are not new residential premises and therefore withholding does not apply), then the supplier may apply for a refund separate to the usual BAS process of the amount of the payment to the extent it was made in error. The amount that may be refunded is the amount that is withheld in error. [Schedule 5, item 4, subsections 18-85(1) and (2)]

5.59 The supplier must apply to the Commissioner in the approved form. The application must also be lodged at least 14 days before the GST is payable on the supply by the supplier (subject to the Commissioner's general powers in relation to approved forms). This restriction is to avoid any administrative complications that may arise because of the proximity in timing of giving a refund and the tax credit arising after assessment of the supplier's net amount. Because the supplier will receive a credit that may result in a refund after an assessment of their net amount at the end of the tax period, there is minimal disadvantage in waiting for the refund to arise under the BAS. This has the effect that a supplier cannot apply for a refund through this process once the credit arises at the time of assessment at the conclusion of the tax period and it is applied against the GST liability of the supplier. [Schedule 5, items 3 and 4, subsections 18-60(3), 18-85(1) and (2)]

5.60 If the supplier is entitled to apply for a refund, applies in the approved form, and the Commissioner is satisfied that:

•

another entity has withheld an amount from a payment to the supplier and made a withholding payment, or has purportedly withheld an amount to the supplier and made a withholding payment; and

•

the payment was made in error;

the Commissioner must refund the amount required if it would be fair and reasonable to do so. [Schedule 5, item 4, subsections 18-85(1) and (4)]

5.61 When determining what is fair and reasonable, the Commissioner must have regard to:

•

the circumstances that gave rise to the obligation (if any) to make the payment; and

•

the nature of the error; and

•

any other matter the Commissioner considers relevant.

[Schedule 5, item 4, subsection 18-85(4)]

5.62 A person receiving a payment from which an amount is withheld under the amendments, may not claim a refund from the purchaser where the amount has been withheld in error. [Schedule 5, item 24, sub-paragraph 18-65(1)(a)(ii)]

Existing machinery provisions

5.63 The definitions of 'amount required to be withheld', 'amount withheld' and 'withholding payment' are amended to ensure that other machinery provisions in Schedule 1 to the TAA 1953 apply correctly to the measure. [Schedule 5, items 7, 8, 10 and 11, the definitions of 'amount required to be withheld', 'amount withheld' and 'withholding payment' (first and second occurring) in subsection 995-1(1) of the ITAA 1997]

5.64 Where a withholding payment is made to the Commissioner, the purchaser is discharged under the tax law from all liability to pay or account for that amount to any entity except the Commissioner, despite any provision of a contract that provides for the whole of the consideration to be paid to the supplier (section 16-20 of Schedule 1 to the TAA 1953).

5.65 Division 16 is specifically amended to ensure that certain machinery provisions apply to the measure correctly, including that:

•

a purchaser that fails to make a withholding payment is required to pay the general interest charge on unpaid amounts (section 16-80 Schedule 1 to the TAA 1953); and

•

amounts are to be paid to the Commissioner in the way set out in section 16-85 of Schedule 1 to the TAA 1953; and

•

purchasers are required to notify the Commissioner on or before the day specified by the Commissioner by legislative instrument, or if no such instrument has been made, the date they make a payment (section 16-150 of Schedule 1 to the TAA 1953).

[Schedule 5, items 17, 20, 21, 22 and 25 subsections 16-70(3) and 16-150(1), (2), (3) and paragraph 389-20(1)(a)]

5.66 Unlike other types of Division 14 withholding payments, withholders are not required to be registered with the ATO, so the provisions relating to registration do not apply. [Schedule 5, items 18 and 19, paragraphs 16-140(1)(b) and 16-140(2)(b)]

Consequential amendments

5.67 A number of terms that are used in the GST Act are inserted into the dictionary in section 995-1 of the ITAA 1997, to ensure that where those terms are used they have the same meaning. [Schedule 5, item 9, the definitions of 'commercial residential premises', 'consideration', 'margin scheme', 'money', 'potential residential land', 'price' 'property subdivision plan' and 'substantial renovations' in subsection 995-1(1) of the ITAA 1997]

5.68 A number of notes are also inserted into the GST Act to direct readers that a withholding obligation applies in relation to those types of supplies. [Schedule 5, items 5 and 6, section 33-1 and subsection 40-65(2) of the GST Act]

5.69 An amendment is also made to paragraph 14-215(1)(d) in Schedule 1 to the TAA 1953 so that a purchaser is required to make a withholding payment under both the foreign resident capital gains withholding measure, and Division 14-E. [Schedule 5, item 13, paragraph 14-215(1)(d)]

5.70 A consequential amendment is also made to Division 18 of Schedule 1 to the TAA 1953, to ensure that the provisions that relate to credits for income tax do not apply to the measure. [Schedule 5, item 12 and 23, subsection 18-10(1)]

Application and transitional provisions

5.71 Generally, the withholding obligation and all associated amendments apply in relation to supplies for which any of the consideration is first provided (other than consideration provided solely as a deposit) on or after 1 July 2018, whether or not the supply was entered into before, on or after the commencement of the schedule. [Schedule 5, item 26]

General transitional rules

5.72 The exception to this general rule is where the contract for supply was entered into before 1 July 2018, and consideration for the supply is first provided before 1 July 2020, providing a two year transitional period for pre-existing contracts. [Schedule 5, item 27]

5.73 Where a contract is entered into before 1 July 2018, and consideration for the supply is first provided after 1 July 2020, then the amendments will apply. This means that after 1 July 2020, the supplier has an obligation to provide a notice before making a taxable supply. [Schedule 5, item 27]

Example 5.8 - Transitional arrangements

Jamie enters into a contract with Hal Developments on 22 June 2018 to purchase a new apartment for $750,000.

Settlement for the property takes place on 15 March 2020, and no consideration is provided before that date. As settlement takes place before 1 July 2020, Hal is not required to notify Jamie of the withholding requirement, nor is Jamie required to withhold.

Hal Developments must remit any GST payable as a result of the supply to the ATO on its next BAS.

Example 5.9 - Transitional arrangements

Assume the same facts as in example 5.8, except settlement is delayed by six months, and the premises settle on 15 September 2020.

As this settlement takes place on or after 1 July 2020, Hal is required to provide a notice to Jamie, indicating that a withholding obligation applies in relation to the property. On settlement, Jamie provides Hal with a bank cheque for the amount of the withholding payment, which Hal's solicitor then provides to the ATO.

Existing property development arrangements

5.74 Under certain property development agreements, there may be an agreed distribution or 'waterfall' payment arrangement, which provides for how the consideration for the supply of the property is to be distributed amongst the parties to the arrangement. Such an arrangement may contemplate how the supplier is to discharge their GST liability, and take this into account in the distribution of the consideration between the parties. However, those arrangements that are entered into prior to 1 July 2018 may not contemplate a withholding obligation applying. In that case, if the existing distribution arrangement is in place, the parties may not be in the position that they would be in if the withholding obligation did not apply.

5.75 To avoid parties to an arrangement being advantaged or disadvantaged as a result of the withholding obligation, transitional relief will apply if four application conditions are met. The four application conditions are an integrity requirement restricting what types of arrangements are within the scope of the transitional relief, to ensure that it only applies where it is necessary to avoid unintended consequences.

5.76 The first application condition requires that an arrangement must have been entered into before 1 July 2018 between an entity making a taxable supply to which the amendments apply and one or more entities, at least one of which is supplying (or is to supply) development services in relation to the real property. The arrangement must also deal with the distribution between the parties to the arrangement of the consideration for the taxable supply. [Schedule 5, subitem 28(a)]

5.77 The second application condition is based on the distribution of the consideration. To satisfy this condition, under the arrangement either of the following must occur:

•

an amount must be required to be distributed to the supplier for the payment of the supplier's liability to GST for the taxable supply, which is to take into account any relevant entitlement to input tax credits; or

•

distributions of the consideration, between the parties, must be adjusted to take into account the supplier's GST liability.

[Schedule 5, subitem 28(b)]

5.78 The third application condition is about the position of the parties if the withholding obligation did not apply. To satisfy this condition if the distributions under the arrangement were to be made when an amount has been withheld, and the parties would not be in the same position as they would have been in if there was no withholding obligation, then the transitional relief will apply. [Schedule 5, subitem 28(c)]

5.79 The fourth application condition requires that a withholding payment has been made in relation to the taxable supply. [Schedule 5, subitem 28(d)]

5.80 Where all four application conditions are satisfied, the amount of the payment that is made to the Commissioner is deemed to have been received by the supplier. This applies in cases where the supplier either receives the proceeds of sale directly, or is entitled to a distribution of the proceeds of sale from a third party. [Schedule 5, item 28]

5.81 In the first case, where the supplier is the recipient of the proceeds, the supplier would distribute the proceeds to the other parties as though the supplier was in possession of the full amount, and a payment was not made to the ATO. [Schedule 5, item 28]

5.82 In the second case where the supplier is not the recipient of the consideration, the arrangement may require funds to be paid into an account, such as a trust account, where the trustee will then distribute the consideration to the parties to the arrangement. Where this occurs, the supplier is taken as having received a distribution of the amount of the payment under the arrangement, because they will ultimately be entitled to a credit of equal value. [Schedule 5, item 28]

5.83 This is intended to preserve the position of all parties to a property development agreement that existed prior to 1 July 2018 and avoid windfall gains.

Example 5.10 - Property Development Agreement

Hamilton Enterprises owns a large parcel of land that they intend to develop into a multi-staged residential village, consisting of houses, townhouses and high-rise apartments. Hamilton wants to retain control over the land.

On 1 July 2015, Hamilton enters into a PDA with William Developments that outlines the development process and how the money from each of the sales of new properties would be distributed between Hamilton and William. (Condition 1)

The arrangement provides for 20 per cent of the purchase price to be distributed to Hamilton from the trust account as a priority. The balance of the amount is to be distributed to William as a fee for its development services. The distribution between the parties is set in a way that takes into account Hamilton's GST liability. (Condition 2)

If the withholding obligation did not apply, and someone purchased a new apartment from Hamilton for $1.1 million Hamilton would receive $220,000 and William would receive $880,000 under the distribution. In this scenario, Hamilton will have a GST liability of $100,000 and William will have a liability of $80,000 for the supply of development services. Hamilton will be eligible to claim an input tax credit of $800,000 so that its net GST liability is $20,000.

After GST has been paid, Hamilton receives a net $200,000 and William receives a net $800,000. The total GST paid to the ATO is $100,000.

If withholding did apply, and a purchaser paid $1,000,000 into the trust account held on behalf of Hamilton and William, the distribution without any modification would be $220,000 (20 per cent of the purchase price) and $780,000 respectively.

Hamilton is also entitled to a $100,000 credit, so is not in the same position as it would have been in had the withholding measure not applied. Similarly, William has received $100,000 less from the distribution, and is also not in the same position. Accordingly, it is necessary to apply the transitional relief where a withholding payment is made. (Condition 3)

Jade buys a new apartment from Hamilton for $1.1 million, inclusive of GST. Jade pays $1.0 million of the purchase price into the trust account held on behalf of Hamilton and William. Jade pays $100,000 to the ATO as a withholding payment. (Condition 4)

Because Jade has made a payment to the ATO, when amounts are being distributed from the trust account Hamilton is taken to have been distributed the amount of the payment. This means that Hamilton will only receive a further $120,000 as a distribution, and William will receive $880,000.

Hamilton will have a GST liability of $100,000 on the supply of the property and William will have a GST liability of $80,000 for its development services. Hamilton will be eligible to claim an input tax credit of $80,000 so that its net GST liability is $20,000. Hamilton receives a $100,000 credit for the withholding payment, which entitles it to an $80,000 refund from the ATO when it lodges its BAS.

At the end, William receives $800,000, Hamilton receives $200,000 and the ATO is paid $100,000. This places the parties in the position they would have been in had the withholding obligation not applied.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

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

Payment of GST on taxable supplies of certain real property

5.84 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

5.85 Schedule 5 to this Bill amends Schedule 1 to the TAA 1953 and makes a number of consequential amendments to the ITAA 1997 and GST Act, to require purchasers of new residential premises or new residential subdivisions to remit the GST on the purchaser price directly to the ATO as part of the settlement.

5.86 Where a purchaser fails to make a withholding payment, an administrative penalty applies to the purchaser, which is subject to a number of specific defences.

5.87 To facilitate the operation of this regime, suppliers of residential premises or potential residential land are required to give a notice to the purchaser which indicates whether a withholding obligation applies in relation to the supply.

5.88 The amendments also require information to be collected and reported to the ATO, to enable the withholding payment regime to be administered.

Human rights implications

Article 17

5.89 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 entities that are required to make a payment to the ATO will need to provide personal information to the ATO about the transaction.

5.90 This reporting obligation is compatible with the prohibition, as it is neither arbitrary nor unlawful. In addition, it is aimed at the legitimate objective of ensuring that the ATO has sufficient information about the transaction to administratively process it, and assign a tax credit to the supplier. The requesting of this information for that purpose is a proportionate means of achieving that objective, as it only requires the minimum amount of information necessary to identify relevant taxpayers and transactions.

5.91 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.

5.92 To the extent that the amendments engage Article 17, they do so appropriately. This is because the collection of the information is required to assign credits to taxpayers, and to the extent that personal information is collected and stored, its disclosure or use is limited to where a specific legislative exemption applies.

Article 14(2)

5.93 A number of provisions of the Schedule engage article 14(2) of the International Covenant on Civil and Political Rights, that a person shall have the right to be presumed innocent until proven guilty according to law.

5.94 Where a purchaser fails to make a withholding payment, they are subject to an existing administrative penalty under section 16-30 of the TAA 1953. The amendments create a number of specific defences to this administrative penalty, each of which engage Article 14(2) because they displace the assumption that every element of the contravention must be proven to establish the penalty.

5.95 Generally, the defences apply where:

•

a purchaser has been given a notice required by law by the supplier that indicated that the purchaser did not have to make a withholding payment, and there were no circumstances that existed that made it unreasonable for the purchaser to rely on that notice; and

•

a purchaser has provided a bank cheque to the supplier which is payable to the ATO for the withholding amount.

5.96 In both cases, these matters are within the knowledge of the purchaser. It would be unreasonably time consuming to ask the ATO to disprove in each case whether there was any circumstances which made it unreasonable to rely on the notice. Similarly, it is within the knowledge of the purchaser whether they have provided a bank cheque to the supplier. The purchaser would be able to more easily establish whether there were any such circumstances that made it unreasonable to rely on the notice, or if they have provided a bank cheque to the supplier.

5.97 Accordingly, because the matters are within the knowledge of the purchaser it is appropriate that the purchaser must establish the defence, and that the ATO does not have to prove that the matters included in the defence are not present in order to apply the administrative penalty.

5.98 The notice provision in section 14-255 also engages Article 14(2), as it creates a strict liability criminal offence where a vendor fails to provide the required notice to the purchaser. Where strict liability applies to the offence, it will be made out by the existence of the physical fault elements, without the need to establish fault.

5.99 Strict liability is appropriate in this case, as requiring proof of fault about why a required notice was not provided would undermine the deterrent effect that the offence is intended to have, as it would be difficult to establish fault elements in relation to the physical element, which could be constituted by an omission. It is important for the integrity of the regulatory regime to make suppliers responsible for a failure to provide an accurate notice, regardless of their intentions. Withholding is being introduced to address non-compliance by certain suppliers and it would undermine the effectiveness of the regime if suppliers could knowingly fail to provide a notice when required without consequences. Suppliers have clear notice about their obligations and the matters covered in the notice are either known or readily able to be determined by the supplier. Where a notice is not provided by a supplier, or it is false in a material particular, then purchasers may not have the information that they require in order to comply with their obligations under the taxation law, and may fail to make a withholding payment.

5.100 Because the offence is subject to the CCA 1995, a person will not be subject to the offence if they can show they have made an honest mistake of fact (CCA 1995 section 9.2). This includes where a person was mistaken about whether the premises were new residential premises or whether they were existing residential premises.

5.101 To establish this defence, a person bears the burden of adducing or pointing to evidence that suggests a reasonable possibility that the matter exists or does not exist. If the defendant can discharge this burden, the prosecution must prove those matters beyond a reasonable doubt. This is easier for a defendant to discharge, and does not completely displace the prosecutor's burden; it merely defers that burden until after the evidential burden is discharged.

5.102 Accordingly, the application of strict liability is appropriate for failing to provide a notice.

Conclusion

5.103 This Schedule 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 Schedule complies with the provisions, aims and objectives of the ICCPR.

5.104 This Schedule is also consistent with article 14(2) of the ICCPR, as the way in which the Schedule engages with the right that a person shall be presumed innocent until proven guilty according to law is appropriate and adapted. To this extent, the Schedule complies with the provisions, aims and objectives of the ICCPR.

REGULATION IMPACT STATEMENT

Introduction

5.105 This Regulation Impact Statement relates to the 2017-18 Budget measure to address GST integrity in the property development sector. The measure provided that from 1 July 2018, purchasers of new residential premises and new subdivisions would remit the GST owed on the purchase price directly to the ATO as part of the settlement process.

5.106 GST applies to the sale of new residential^[1] and commercial premises (such as houses, hotels, office buildings), and new subdivisions. Special GST rules apply for property development^[2], reflecting the large value and complex nature of such transactions and the period of time between acquisition of land and development and sale of the land and any buildings.

1. The Problem

5.107 There have been a growing number of businesses in the property development industry that have failed to remit GST to the ATO after the sale of new residential premises or new subdivisions. This failure to remit is due to businesses intentionally dissolving before their next Business Activity Statement (BAS) is lodged to avoid remitting the GST, or through businesses having not sufficiently budgeted to meet their GST obligations.

5.108 The ATO has been using a range of strategies to tackle failure to remit due to both of these reasons, but with limited success. These strategies have included taxpayer guidance, improved debt collection practices and enforcement activities. The strategies are labour intensive, highly intrusive, and costly to undertake and sustain. More importantly, the risk has not abated. The "after the fact" nature of the activities has proven to be inadequate; as the problem usually emerges well after the property transaction has occurred.

5.109 By allowing vendors to remit GST after the sale of new residential premises and new subdivisions up to 3 months later through their BAS, there is time for businesses to dissolve and avoid paying the GST to the ATO (sometimes described as "phoenixing"). As the ATO is an unsecured creditor, they never receive the GST owed even though the vendor bears a legal obligation to pay the GST.

5.110 The high value nature of the transactions, and consequently the large amount of GST involved, magnifies the risk that the GST amount will be diverted to other purposes.

5.111 This issue is primarily concentrated in the residential premises development sector, due to the much larger size of this sector compared to the commercial premises development sector. The ATO considers there is less risk in the commercial premises development sector as the smaller size of this sector (about 1/12th the size of the residential property development industry) makes it easier to monitor. Therefore, the Budget measure specifically relates to the residential premises development sector where many of these issues frequently arise. A consideration for the future is whether commercial transactions should be included, which would require further assessment of the extent of the problem within the commercial development sector, and balance this with the costs of extending the withholding to business-to-business commercial property transactions.

2. Why is Government action needed?

5.112 As this problem poses regulatory failures, there is scope for Government action to correct these failures, which cannot be addressed by the market through private actors, or by any other means.

5.113 The problem is large enough to warrant addressing by the Government. Despite sustained compliance activity, the problem remains; for example, in April 2015, the ATO reported to the Senate Standing Committee on Economics, "Inquiry into Insolvency in the Australian Construction Industry", that 3,355 individuals had been identified as being in control of over 13,000 entities with a history of insolvency in the property development industry. These entities are part of the population considered to be at risk of "phoenix" behaviour.

3. What policy options are being considered?

Option 1: Require purchasers of new residential premises and new subdivisions to remit GST to the ATO at the time of settlement

5.114 Under this option, purchasers of new residential premises or new subdivisions would be required to withhold 1/11th of the purchase price, and to pay this amount directly to the ATO as part of the settlement process. The GST would be credited by the ATO to the vendor's account. This would remove the opportunity for non-compliance by the developer.

5.115 As noted above in the problem identification section, since the main mischief of phoenixing has been found to occur in the residential premises development sector, this option applies only to sales that are new residential premises developments and new land subdivisions rather than new commercial premises development.

5.116 This option does not change the amount of GST owed, and keeps the legal obligation to pay GST on the vendor. It would apply to all new residential premises and new subdivision sales, and to all developers without any exemptions or carve-outs for developers who are perceived to be more compliant or have a turnover over a specified threshold. Carve outs were considered and raised by stakeholders but found not to be viable for the following reasons.

5.117 The ATO has noted this type of phoenixing activity occurs across the industry, and not only in the smaller or medium end of the market.

5.118 Introducing exemptions creates competition concerns by favouring larger businesses over small businesses and imposes barriers to entry for newer developers.

5.119 There are also difficulties in the case of Joint Ventures (JV), where one party is exempt and the other is not.

5.120 Carving out larger entities adds to complexity for conveyancers, purchasers, developers and would add to the tax administration cost and complexity for the ATO. For example:

5.121 Conveyancers would have to make further enquiries for each transaction to discover whether developers were in or out of the regime.

5.122 Developers would have to prove their compliance history with the ATO in order to get an exemption certificate (depending on the operation of the model). Developers would face additional burdens in seeking to extend compliance certification on their special purpose vehicles (SPVs) and in joint venture arrangements which are distinct entities for tax compliance purposes.

5.123 The ATO would have to continually monitor developers to discover whether they were complying with their requirements.

5.124 Other features of this model include:

•

Processing refunds through the BAS, where the GST owing is less than 1/11th due to the margin scheme applying.

•

Not making the transfer of title conditional on the payment of the GST by the purchaser, as this poses legal and practical difficulties in addition to compliance costs for State Governments in updating IT systems and changing their conveyancing Acts.

•

Ensuring the interpretation of where GST is payable on new residential properties and new subdivisions remains consistent with existing definitions under the GST Act.

•

Introducing a two-year transitional arrangement so that the option applies to contracts entered into from the announced start date (1 July 2018), and to all settlements that take place from 1 July 2020.

Option 2: Expand the ATO compliance function

5.125 This option proposes to expand the ATO's compliance function in the property industry. The ATO's compliance resources could be increased by 9 full-time equivalent staff, which would need to be funded by States and Territories.

5.126 The ATO uses a range of tools to deal with vendors that avoid paying GST on property transactions. This includes:

•

collecting information about current and planned developments from property developers to assist in identifying future sales;

•

using ATO formal investigation powers to seek information from individual developers and third parties;

•

enforcing tax requirements through garnishee notices;

•

undertaking prosecution action when required; and

•

making an assessment for part of a net amount in a tax period when a vendor has a previous history of poor compliance.

5.127 This option would supply additional resourcing that would enable the ATO to carry out these and additional activities, such as:

•

utilising policy 'nudges' such as sending letters, or incentivising compliance through education campaigns to support and encourage compliance; and

•

enforcing higher penalties for non-compliance, through regulatory change and enforcement by exercising the Commissioners discretion.

Option 3: No change - continuing the current approaches

5.128 Under this option, no changes would be made. The ATO would continue with its current compliance and enforcement activities.

4. What is the likely net benefit of each option?

Option 1: Require purchasers of new residential premises and new subdivisions to remit GST to the ATO at the time of settlement

Benefits

5.129 This option directly addresses the core problem of the growing number of businesses in the property development sector failing to meet their GST obligations. By requiring purchasers to remit GST at settlement, it removes the opportunity for vendors to fail to remit GST through phoenixing or inadequate budgeting. This option also strengthens existing GST payment arrangements to ensure streamlined compliance processes that do not impact on the wider economic or business activities of the industry. The proposal does not alter the fundamentals of the GST system, nor the rate or amount of GST legally required to be paid. It will reduce unnecessary and additional intervention through ATO enforcement to bring GST compliance in line with the rest of the business community. In this way, this option will have no indirect or secondary effects on this market.

5.130 Some key strengths of this option include:

•

Incorporating a withholding mechanism backed by penalties for non-compliance, which is likely to increase compliance with the GST system. This directly addresses the problem of the growing number of vendors failing to pay GST through intentional phoenixing or inadequate budgeting;

•

Leveraging existing settlement processes minimises compliance costs and education for relevant stakeholders. The compliance level of other government taxes collected using the existing settlement process is approximately 98%; and

•

Minimising the opportunity for significant GST shortfalls (and late payments) in relation to the sale of new residential property and land. The correct amount payable under the legislation will be collected and this is estimated to result in additional transfers to the States and Territories.

5.131 Avoiding the consequences of poor budgeting by vendors who might be unable to meet their obligation to pay GST to the ATO when it's due.

5.132 Removing the incentive for vendors to phoenix to avoid their GST obligations, as they no longer have access to those funds.

5.133 Utilising a withholding mechanism, which is familiar to industry as an effective tax collection model, this option has the benefit of being easily understood and applied by industry.

5.134 Applying the option to all vendors without exemptions, which reduces complexity and regulatory burden for industry, reduces administration costs and complexity for the ATO, and avoids the perception that the system favours some groups of tax payers over others.

5.135 Furthermore, the administrative costs in ensuring compliance with the law would be materially reduced. The net ongoing saving from a reduction in staffing levels is estimated to be $9.2 million over the forward estimates period.

Costs for taxpayers and purchasers

5.136 This option has some impacts on purchasers, vendors and conveyancers.

Purchasers

5.137 Purchasers would need to comply with the withholding requirement. However, as this option is not linked to title transfer but leverages the settlement system that currently exists, this impact should be minimised. Therefore, this policy is easily integrated into the current system. As most purchasers use conveyancing services to complete their property transaction, this impact is further minimised.

5.138 While it is difficult to quantify the price impacts of this option for purchasers as a result of added conveyancing tasks, it is unlikely to significantly increase conveyancing costs. This is because this option is integrated into the conveyancing process and can be streamlined through the use of online forms to simplify requirements on purchasers. Over the next few years, the rollout of electronic conveyancing for all property transactions also provides further opportunity for the efficient and timely management of this process, further reducing any additional costs for purchasers.

5.139 Withholding and payment of the GST directly to the ATO on behalf of the vendors would be a relatively minor additional cost during this process.

Service providers (e.g. conveyancers)

5.140 The average annual regulatory costs are summarised in Table 2.1 below. The compliance costs of this option are equivalent to a net increase in regulatory burden of about $4 million per year on an annualised basis over 10 years.

5.141 These impacts are expected to fall on vendors, conveyancers and other legal professionals involved in the settlement process. This represents about 40,000 businesses out of a business population of about 3 million entities.

5.142 It is expected that these businesses would need time to implement the new arrangement; to learn and understand what is required, and adapt processes and forms appropriately to deal with the changes to withholding GST.

5.143 Conveyancers and solicitors will need to adapt standard contracts and other documentation to include the withholding and payment of GST to the ATO. This process is likely to be more streamlined by using PEXA.

Property developers

5.144 Developers will no longer enjoy the cash-flow benefit that they currently gain from holding onto the GST from the sale until remittance to the ATO. Currently, at settlement, developers collect GST on behalf of the ATO and are able to retain that amount in their account until it becomes payable through their Business Activity Statement (BAS). Larger businesses with turnover greater than $20 million are required to lodge their BAS monthly, while smaller and medium-sized businesses can lodge quarterly. This creates a temporary cash-flow benefit that increases the risk that these businesses would phoenix to retain the GST that was paid to them.

5.145 In consultation, finance representatives noted that removing this cash-flow benefit is unlikely to affect the ability for developers to secure finance, as banks exclude the GST component of a developer's account when making lending decisions.

5.146 Developer representatives also noted that most developers manage their cash flows so that financial decisions are not reliant on GST flows to meet their financial obligations. For those that are unable to manage finances effectively, this option ensures these businesses are compliant with their GST obligations. This option will also reduce the risk to the system from phoenixing as the GST that was paid is not lost.

5.147 Furthermore, this option evens the playing field for compliant developers because developers that did not remit the GST to the ATO received an unfair advantage due to retaining that amount of money.

5.148 Developers will also need to update their systems, contracts and practices to build the withholding mechanism into their transaction processes.

Transitional relief

5.149 This option includes a transitional arrangement, so as to minimise transitional costs on existing contracts for purchasers, service providers and property developers. Contracts signed before 1 July 2018 can continue under existing arrangements so long as they settle before 1 July 2020. This will allow most existing contracts to wash through (e.g. off the plan apartment purchases that often take 1-2 years between contract and settlement), whilst preventing potential mischief from long dated contracts being signed and ensuring all new residential property contracts come under the withholding regime by 2020.

5.150 There may be small costs for service providers in the short term who will be required to apply both systems for a period of two years. This cost is expected to be small compared to the reduction in costs for conveyancers and developers in no longer needing to change contracts signed before 1 July 2018.

Note: Estimated average annual regulatory costs have been rounded.

5.151 Compliance cost impacts were assessed using a standardised compliance cost assessment methodology. The assessment provides many of the parameters that are used in the quantitative component that models the likely impact based on estimates drawn from the ATO General Compliance Cost Model.

5.152 To implement the changes, conveyancers and property developers would need to learn and understand the changes. It was anticipated that most would be familiar with GST processing and the preparation of the Business Activity Statement. The impact of this change was considered to be low.

5.153 It is possible that some conveyancers will pass on the additional compliance activity by increasing fees payable by purchasers. However, the impact of the change is considered minor and is occurring at a time when a range of disbursements are occurring as part of the transfer of property. For property developers it was considered that once they have learned and understood the changes there will be little or no on-going compliance cost impacts on top of their existing GST compliance processing.

5.154 For quantification purposes, aggregate impacts included conveyancers and property developers and these were placed with market segments of Large, Small and Medium and Micro businesses and totalled about 4,000 conveyancers and 36,500 developers and involved about 80,000 transactions. This produced aggregate potential compliance cost impacts of just under $4 million per year and this equated to an average cost of about $90 per year for each affected business or entity.

Option 2: Expand the ATO compliance function

5.155 This option would expand the compliance activities the ATO undertakes to address the risks in the property industry.

Benefits

5.156 As this option retains the current settlement and GST remittance processes, it has a limited benefit in that vendors and others in the property transfer process would not need to alter their procedures and processes.

Costs for taxpayers and purchasers

5.157 Depending on the scale of this option, the costs could be in the millions for the ATO.

5.158 However, this is anticipated only to lead to a relatively minor increase in GST liabilities - and is unlikely to adequately address the GST risk in the industry. There would continue to be a significant cost in revenue foregone as non-compliance continues.

5.159 This is because this issue arises due to regulatory failure, and merely increasing regulatory activities will not address the opportunity to commit, and the incidence of, the mischief in any meaningful way. Crucially, increasing compliance activities does not address the time-lag between the collection and remittance of GST which provides the benefit in phoenixing. Additional compliance would only provide "after-the-fact" remedies that often fail as the business in question has no remaining assets (and often has ceased to exist) to meet their GST obligations.

5.160 This option is very resource intensive, and all of the risks that are known in the industry are unchanged. ATO compliance/enforcement action in relation to a property vendor can be severely impeded by a lack of 'real-time' information; and after finalising an audit/investigation there is a real risk of not collecting taxes owed because the taxpayer goes into liquidation. Compliance activities to date have proven to be rather ineffectual despite the resources applied and the penalties available.

5.161 The use of Special Purpose Vehicles (SPVs) that is most commonly used in the property industry makes it difficult to collect the GST as there is no compliance history or linkage to persons running the company as each new SPV has different Directors.

5.162 Investment in infrastructure and reporting to provide real-time information would be expensive for the ATO and industry and would require legislative change.

5.163 Under this model, policy nudges will have little effect due to the very high financial rewards of failing to withhold. Higher penalties are also unlikely to deter this behaviour as they often fall on individuals that are placed as directors who have no financial assets, with the controlling mind being legally separated from the dealings.

Option 3 - No change

5.164 Under this option, no change in the GST law would be required and no change in the reporting and payment arrangements by vendors. However, under this option the problem of non-collection would persist.

Benefits

5.165 Vendors and others in the property transfer process would not need to alter their procedures and the processes they currently use.

Costs

5.166 There would be a cost in revenue foregone as non-compliance continued, as the risk cannot be mitigated under the current law. Continued management of the risk would be evaluated and prioritised against other GST risk areas and those that emerge in the future. Phoenixing in the property construction industry will continue because of the time delay between receiving the GST, being required to pay the GST to the ATO, and consequently detecting the pattern of non-payment and undertaking reasonable enquiries to satisfy the nature and extent of non-compliance and taking corrective action.

5.167 Vendors complying with the existing law would continue to be at a GST/taxation disadvantage in comparison with vendors not complying with the law. As well, there is potential for an increase in dissatisfaction in the industry and the wider community as the GST is being paid by the purchaser to the vendor to gain title to the property but is not being paid by the vendor to the Government.

5.168 No regulatory burden or cost offset estimate table has been provided for this option as there is no change to current administrative and compliance arrangements.

5. Who has been consulted about these options?

5.169 The ATO undertook initial consultations in late 2015 with a range of stakeholders, including the property development sector, lawyers, conveyancers, financiers and State and Territory Governments. These consultations canvassed a number of potential solutions.

5.170 Of the options canvassed, all stakeholders at the time agreed that the option involving a withholding model not linked to the transfer of title would be the most effective solution that would have minimal impacts on vendors, purchasers and the sector generally.

5.171 Targeted consultation took place since the announcement of this measure in the 2017-18 Budget. This confirmed the industry's preference for a withholding model as discussed earlier and these consultations further refined their preferred approach to include a transitional arrangement.

5.172 Some stakeholders raised the possibility of introducing carve-outs for certain cohorts of developers perceived to be more compliant with the policy. While this was considered in that context, it was recognised there were costs and complexities in applying carve-outs, particularly on certain groups of developers and on purchasers and service providers who would face additional compliance burdens.

5.173 Consultations in this phase included a range of affected stakeholders from the legal, accounting, financial and the property development sector, such as:

•

Property developers;

•

Law Societies (various);

•

Conveyancers;

•

Housing associations;

•

Banking, Accounting and Taxation Bodies.

5.174 Consultation sessions were held via phone conference and face-to-face meetings. One-on-one feedback was also obtained.

5.175 Public Consultations also took place on exposure draft legislation between 6 November 2017 and 20 November 2017. These consultations involved a combination of face-to-face meetings, phone conferences and emails with key industry stakeholders, and provided an opportunity for industry and the public to provide written submissions on the exposure draft legislation for consideration.

6. What is the best option from those considered?

5.176 Option 1 is recommended, it has the highest net benefit.

5.177 Option 1 imposes low regulatory costs and a process that is straight-forward, easy to apply and fits within existing conveyancing processes. A withholding mechanism is:

•

well understood by the development industry,

•

fits with existing conveyancing processes,

•

is simple for purchasers who would not need to register for GST to apply a withholding payment,

•

leverages the existing disbursement process,

•

can be backed by penalties; and

•

is likely to lead to greater compliance with the law flowing through to higher GST collections.

5.178 A key advantage is that it fits within the existing business processes for transferring property ownership but applies to all vendors - keeping it simpler and more straight-forward and removing from purchasers the need to make inquiries about the status of the vendor.

5.179 Option 2 and 3 either retain the status quo or do not address the tax compliance risks in any systematic manner.

7. How will the proposal be implemented and evaluated?

5.180 Changes to legislation will be required, but these are anticipated to be relatively straightforward.

5.181 The ATO would be responsible for administering the new arrangements. The ATO has considerable experience with this area of GST law and the problems that have occurred, as well as the operation of withholding systems across the taxation system. It will provide guidance and advice to stakeholders to support their implementation efforts.