House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer, the Hon. Stuart Robert MP)

Glossary

The following abbreviations and acronyms are used throughout these explanatory materials.

General outline and financial impact

Non-compliant payments

Schedule 1 to the Bill denies an income tax deduction for certain payments if the associated withholding obligations have not been complied with. This will provide a greater incentive for employers and entities engaging contractors to comply with their withholding obligations.

Date of effect: 1 July 2019

Proposal announced: This measure was announced in 2018-19 Budget Paper No. 2 as 'Black Economy Package - removing tax deductibility of non-compliant payments'.

Financial impact: The measure is estimated to have a small unquantifiable gain to revenue over the forward estimates period.

- Nil

* Unquantifiable

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 4, paragraphs 4.1 to 4.4.

Compliance cost impact: Minimal. For further information, please refer to the Black Economy Taskforce Final Report.

Third party reporting

Schedule 2 to this Bill requires entities providing road freight, IT or security, investigation or surveillance services that have an ABN to report to the ATO information about transactions that involve engaging other entities to undertake those services for them.

Date of effect: The amendments contained in Schedule 2 apply from 1 July 2019.

Proposal announced: This measure was announced in 2018-19 Budget Paper No. 2 as 'Black Economy Package - further expansion of taxable payments reporting'.

Financial impact: As at the 2018-19 Budget, the measure is estimated to have a net gain to the budget of $605.8 million in fiscal balance terms over the forward estimates period comprising:

In underlying cash balance terms, this measure is estimated to have a net gain to the budget of $545.8 million over the forward estimates period.

Human rights implications: Schedule 2 is compatible with human rights. See Statement of Compatibility with Human Rights - Chapter 4, paragraphs 4.5 to 4.13.

Compliance cost impact: low.

Taxing tobacco at the time of manufacture

The Bills amend the Excise Acts to establish a framework to make excise duty on tobacco due and payable at the time of manufacture.

Date of effect: The amendments apply to tobacco manufactured on or after 1 July 2019.

Proposal announced: This measure was announced by the Government on 6 May and included in 2018-19 Budget Paper No. 2 as 'Black Economy Package - combatting illicit tobacco'.

Financial impact: As in 2018-19 Budget Paper No. 2, the whole package of combatting illicit tobacco reforms is estimated to result in a net gain to the budget of $3.6 billion over the forward estimates period, comprising:

Human rights implications: This Schedule is compatible with Human Rights. See Statement of Compatibility with Human Rights - Chapter 4, paragraphs 4.14 to 4.26.

Compliance cost impact: Nil.

Chapter 1 Non-compliant payments

Outline of chapter

1.1 Schedule 1 to the Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018 (the Bill) denies an income tax deduction for certain payments if the associated withholding obligations have not been complied with. This will provide a greater incentive for employers and entities engaging contractors to comply with their withholding obligations.

Context of amendments

1.2 Under the Pay-As-You-Go (PAYG) Withholding system, employers must withhold an amount from certain payments for work and services (Subdivision 12-B in Schedule 1 to the Taxation Administration Act 1953). This includes payments for employees' wages (section 12-35), payments to directors (section 12-40), payments made to religious practitioners (section 12-47) and payments made by labour hire firms (section 12-60).

1.3 An entity must withhold an amount from a payment it makes to another entity for a supply where the payee has not quoted its Australian Business Number (ABN) (section 12-190, the 'no ABN withholding rule').

1.4 Under section 14-5, an entity must pay an amount to the Commissioner of Taxation (the Commissioner) if it provides a non-cash benefit that - had the benefit been paid as cash - would have been subject to withholding. This does not impose a withholding obligation as such, although the provider of the benefit may seek to recover an equivalent amount as a debt from the recipient of the benefit (section 14-15).

1.5 Entities must pay withheld amounts and amounts relating to non-cash benefits to the Commissioner (section 16-70). Noncompliance is a strict liability offence subject to a penalty of up to 10 penalty units or administrative penalties equal to the value of the withholding amount (sections 16-25 and 16-30).

1.6 An entity that must pay an amount to the Commissioner (including a nil amount) must also notify the Commissioner (section 16-150). In addition, from 1 July 2018 certain withheld amounts made by 'substantial employers' must be reported under the Single Touch Payroll system that is reflected in Division 389. Section 389-5 mandates same-day reporting for wages, director fees and payments to religious practitioners. That section does not apply to payments under labour hire arrangements but those payments may be reported voluntarily under section 389-15.

1.7 Making a report under section 389-5 or 389-15 relieves the employer of the obligation to report under section 16-150 (section 389-20). The transition to Single Touch Payroll began on 1 July 2018 for employers with 20 or more employees, and for smaller employers will begin from 1 July 2019.

1.8 Businesses are generally entitled to claim a general deduction in relation to payments to employees and suppliers (section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)).

Summary of new law

1.9 To encourage voluntary compliance with these withholding obligations, deductions will be denied for payments to which withholding obligations relate if the obligations to withhold or to notify the Commissioner are not complied with at all.

1.10 This implements recommendation 7.5 of the Black Economy Taskforce Final Report.

Comparison of key features of new law and current law

Detailed explanation of new law

1.11 A deduction is not allowed in relation to a payment:

•

of salary, wages, commissions, bonuses or allowances to an employee;

•

of directors' fees;

•

to a religious practitioner;

•

under a labour hire arrangement; or

•

for a supply of services - excluding supplies of goods and supplies of real property - where the payee has not quoted its ABN

if the PAYG Withholding regime applied to the payment, the payer was required to withhold an amount and the payer did not withhold an amount from the payment or did not notify the Commissioner when required under section 16-150 (or section 389-5). [Schedule 1, item 1, subsections 26-105(1) and (3) of the ITAA 1997]

1.12 This amendment is intended to create a financial disincentive to businesses making payments to those operating in the black economy by disallowing deductions that would normally be available. The disincentive created by denying the deduction will complement existing penalties for failures to withhold amounts under the PAYG system.

1.13 The deduction is only denied where no amount has been withheld at all or no notification is made to the Commissioner. Withholding an incorrect amount will not affect the entitlement to a deduction. [Schedule 1, item 1, subparagraph 26-105(1)(b)(i) of the ITAA 1997]

1.14 Similarly, purporting to comply with the reporting obligations by notifying an incorrect amount will not affect the entitlement to a deduction. If, because of an error, the amount reported does not reflect the amount required to be withheld or the amount actually withheld (if those amounts are different), the deduction is maintained. [Schedule 1, item 1, subparagraph 26-105(1)(b)(ii) of the ITAA 1997]

1.15 Provided an amount is withheld and a notification is made, there is an opportunity to correct any remaining contraventions in respect of the amount or the payment of the amount. Total failures to withhold represent the most significant risk to government revenue and are targeted by this amendment.

1.16 A deduction is also denied in relation to a non-cash benefit provided in lieu of a cash payment referred to in paragraph 1.11. In this case, there is no underlying obligation to withhold an amount but an amount must be paid and reported to the Commissioner. The deduction is denied if no notification is made to the Commissioner. [Schedule 1, item 1, subsections 26-105(2) and (3) of the ITAA 1997]

1.17 The amendments do not apply to an obligation to withhold a nil amount from a payment, or to report a nil amount that must be paid to the Commissioner. [Schedule 1, item 1, subsection 26-105(4) of the ITAA 1997]

Exception where ABN quoted by employee

1.18 The Government recognises there are situations where an employer honestly believes their employees are acting as contractors - and has complied with the no ABN withholding rule that would apply in that scenario - but this position is not upheld by the Commissioner. The amendments do not deny a deduction in such situations.

1.19 An employer that makes a payment to an employee they believe to be a contractor is not denied a deduction if, had the employer been correct in characterising the employee as a contractor, the employer would not have been required to withhold. The amendments mirror the relevant provisions of section 12-190 to determine if this is the case. [Schedule 1, item 1, subsections 26-105(5) and (6) of the ITAA 1997]

Example 1.1 Incorrectly classified employee payments

Super Express Deliveries Pty Ltd carries on a business as a bicycle courier service. Super Express Deliveries engages around 30 bicycle couriers to enable it to fulfil orders from its customers.

Super Express Deliveries seeks legal advice about the engagement of the bicycle couriers. The advice concludes the bicycle couriers are independent contractors and are not employees. To this end, Super Express Deliveries requires each of its bicycle couriers to obtain an ABN and provide it to the company. Super Express Deliveries concludes that it did not have to withhold any amounts from the payments it made to couriers.

The Commissioner conducts an audit of Super Express Deliveries and decides that the bicycle couriers are employees of Super Express Deliveries. After considering the Commissioner's reasons and legal authorities, Super Express Deliveries does not dispute this conclusion and agrees to begin fulfilling its withholding obligations on this basis.

The deduction available to Super Express Deliveries for its previous payments to bicycle couriers is not affected by its failure to withhold.

Super Express Deliveries is still subject to penalties for its failure to withhold.

1.20 The deduction is also retained if the taxpayer has purported to withhold under section 12-190 when the payment was in fact made to an employee.

1.21 However, if the payer would have been subject to withholding under section 12-190 (for example because the employee did not quote an ABN), and the payer failed to withhold or notify, the deduction is in fact denied because of the failure to withhold or notify under the correct withholding provision: section 12-35.

Exception for voluntary notification

1.22 A deduction that would otherwise be denied under these amendments is maintained (in the original income year) if the taxpayer voluntarily notifies the Commissioner, in the approved form, of their mistake before the Commissioner commences an audit or other compliance activity. This encourages taxpayers to come forward and comply with their withholding obligations. [Schedule 1, item 1, subsections 26-105(7) and (8) of the ITAA 1997]

Example 1.2 Voluntary notification

Caleb carries on a business as a mechanic. Caleb does not have any employees until he hires an apprentice, Bianca, in May 2020.

Caleb is not aware that he must withhold an amount from Bianca's wages.

Caleb visits his accountant in September 2020 to prepare his 2019-20 income tax return. He mentions his expenditure to pay Bianca's wages. Caleb's accountant advises Caleb he should have been withholding from the wage payments.

Caleb notifies the Commissioner of his mistake. Caleb may still be subject to penalties for his failure to withhold. However, he is entitled to claim the deduction for the cost of Bianca's wages in his 2019-20 income tax return.

Application provisions

1.23 The amendments commence on the first day of the quarter following Royal Assent. [Clause 2 of the Bill]

1.24 The amendments apply to payments made and non-cash benefits provided on or after 1 July 2019. [Schedule 1, item 2]

Chapter 2 Third party reporting

Outline of chapter

2.1 Schedule 2 to this Bill amends Schedule 1 to the TAA 1953 to require entities with ABNs providing 'road freight', 'IT' or 'security, investigation or surveillance' services to report to the ATO information about transactions in which other entities are engaged to undertake those services on their behalf.

2.2 All legislative references in this Chapter are to Schedule 1 to the TAA 1953 unless otherwise stated.

Context of amendments

2.3 The black economy is a significant, complex and growing economic and social problem in Australia. The Black Economy Taskforce's Final Report estimated that the size of the black economy had likely doubled since 2012 from 1.5 percent of GDP to 3 per cent of GDP, or around $50 billion.

2.4 In response to this problem, the Government established the Black Economy Taskforce, chaired by Mr Michael Andrew AO.

2.5 In May 2017, the Government released the Black Economy Taskforce's Interim Report, which contained a number of initial recommendations based on the experience of foreign jurisdictions, extensive consultation with stakeholders and anecdotal evidence the taskforce had received.

2.6 In the 2017-18 Budget, the Government announced that it would adopt the initial recommendations of the Taskforce. One of the initial recommendations was to extend the operation of the TPRS to entities engaging contractors in the courier and cleaning industries.

2.7 On 7 February 2018, the Government introduced the Treasury Laws Amendment (Black Economy Taskforce Measures No. 1) Bill 2018 to Parliament, which includes amendments to extend the operation of the TPRS to entities engaging contractors in the courier and cleaning industries.

2.8 As part of the 2018-19 Budget, the Government released the Black Economy Taskforce's Final Report. The Final Report also recommended that the TPRS be extended to additional high-risk industries, including security, road freight and IT.

2.9 The Government responded with an announcement that it would further extend the operation of the TPRS to entities engaging contractors in the security, road freight, and IT industries.

2.10 The TPRS is a transparency measure that was first applied to the building and construction industry. It requires businesses to report to the ATO payments they make to contractors for services. Evidence suggests that this program has improved contractor tax compliance in the building and construction industry.

Summary of new law

2.11 Schedule 2 to this Bill makes amendments to require entities that provide 'road freight', 'IT' or 'security, investigation or surveillance' services to report to the ATO details of transactions that involve engaging other entities to undertake those services on their behalf.

Comparison of key features of new law and current law

Detailed explanation of new law

Entity required to report

2.12 The amendments require entities that have an ABN and make supplies of 'road freight', 'IT' or 'security, investigation or surveillance' services to report information to the Commissioner about transactions with contractors providing such services on behalf of these entities. [Schedule 2, item 1, table items 12 to 14 of section 396-55 in Schedule 1 to the TAA 1953]

Transactions that are required to be reported

2.13 An entity providing a 'road freight', 'IT' or 'security, investigation or surveillance' service is required to report information to the Commissioner about transactions where the entity has provided consideration (within the meaning of the GST Act) to another entity wholly or partly to provide that service on its behalf.

2.14 Consideration (as defined in section 9-15 of the GST Act) includes any payment, or any act of forbearance, in connection with a supply of anything and any payment, or any act or forbearance, in response to or for the inducement of a supply of anything. Usually consideration will be a monetary payment, but it can also include other forms of non-cash benefits and constructive payments. [Schedule 2, item 1, table items 12 to 14 of section 396-55 in Schedule 1 to the TAA 1953]

2.15 The basis on which a contractor is paid by the reporting entity does not affect whether the transaction is required to be reported. For example, it does not matter whether the contractor is paid on a 'time basis', rather than a 'project basis' for work performed.

2.16 Entities are required to report information in the approved form to the Commissioner either annually, or at such other times as the Commissioner determines by legislative instrument.

2.17 The general rules that apply to information that must be reported under Division 396 apply to this regime. This means that if an entity has given the Commissioner a report that they have become aware contains a material error, they must give the Commissioner an updated report within 28 days of becoming aware of the error. Similarly, if an entity has failed to give a report, or a corrected report, to the Commissioner by the time required, an administrative penalty applies (see subsection 286-75(1)). An administrative penalty also applies if a report includes any false or misleading statements (see subsection 284-75(1)).

2.18 Entities are not required to report in relation to transactions if they and the entities engaged to provide 'road freight', 'IT' or 'security, investigation or surveillance' services on their behalf are members of the same consolidated group or Multiple Entry Consolidated group. Entities are also not required to report any payments to which Division 12 of Schedule 1 to the TAA 1953 (PAYG withholding payments) applies as those payments are subject to their own withholding and reporting regime. [Schedule 2, item 1, table items 12 to 14 of section 396-55 in Schedule 1 to the TAA 1953]

2.19 This is consistent with the exceptions that apply to transactions that are required to be reported by the building and construction and courier and cleaning industries.

2.20 In addition, under the existing law, a government related entity (within the meaning of the GST Act) may be required to report information about when they provide consideration to an entity for a supply of relevant services (section 396-55, table item 2). This includes a 'road freight', 'IT' or 'security, investigation or surveillance' service.

Definition of road freight, IT or security, investigation or surveillance service

2.21 The terms 'road freight', 'IT' and 'security, investigation or surveillance' are not defined and are intended to take their ordinary meaning.

Road freight

2.22 A 'road freight' service has been added to the third party reporting table item that covers courier services. This ensures that there is a single reporting obligation for entities that make a supply of a courier service or a road freight service. If an entity supplies either service, they are required to report to the Commissioner, unless otherwise provided.

2.23 The use of the phrase 'road freight' in addition to 'courier' is intended to ensure that any service where goods are transported over road is covered by the reporting obligation. 'Road freight' refers to the transport of goods by freight over road, which is not included in the meaning of a 'courier' service. Typically, goods will be sent by road freight where the goods are transported in bulk using large vehicles. This includes services such as road freight transport, log haulage, road freight forwarding, taxi trucks, furniture removal and road vehicle towing. A road freight service does not, however, need to include the whole of a service offering but may include only part of a road freight service. For example, an entity may be required to report details of transactions where it has engaged specialist drivers to deliver freight goods using a vehicle owned by the reporting entity.

2.24 The use of the word road in relation to freight limits the requirement to only those freight services that relate to road transport, and excludes other modes of freight transportation, such as by boat or aeroplane. However, this qualification is not intended to apply to courier services, which may involve the transportation of goods other than on road, such as by bike on bike paths.

IT services

2.25 An 'IT' service involves the provision of expertise in relation to computer hardware or software to meet the needs of a client. These services may be performed on site, or may be provided remotely through the internet, and include services that support or modify the operation of hardware or software.

2.26 An IT service does not include the mere sale or lease of hardware or off-the-shelf software. However, if the seller or lessor of the hardware or software modifies it for the purchaser or lessee, or develops specific software for them, then those services will be an IT service.

2.27 If computer software is used by the entity to provide a service other than an IT service, the mere use of software in these circumstances does not make the service an IT service. For example, the use of software to provide an accounting, project management, or word processing service is not an IT service.

2.28 Some examples of IT services performed in relation to a computer include:

•

technical support;

•

computer facilities management;

•

internet and web design consulting;

•

computer hardware consulting;

•

software development;

•

computer network systems design and integration;

•

software installation;

•

computer programming;

•

software simulation and testing;

•

computer software consulting; and

•

systems analysis.

Security, investigation and surveillance services

2.29 Security refers to protection from, or measures taken against, injury, damage, espionage, theft, infiltration, sabotage or the like. The use of this term is intended to include services such as locksmithing, burglary protection, body guards, security guards, armoured cars and any other services which can be provided to protect individuals or property. However, it would not generally refer to things such as policing, or the general operation of detention facilities.

2.30 An investigation refers to a searching inquiry in order to ascertain facts. This would typically be conducted by a detective or an enquiry agency, and may be about matters that are not necessarily related to security. For example, it could refer to investigations conducted or enquiries made to assess the veracity of insurance claims. Generally, investigation services involve a person making specific investigations into persons or matters.

2.31 However, an investigation service does not refer to any service which may be used to compile or gather information, such as online search engines or databases which are maintained to perform checks. Where a person merely checks an existing database for information (such as for the purpose of preparing a police check or credit score), this would not usually be considered an investigation service. An investigation service also would not refer to the making of general enquiries, such as requesting a person's name, date of birth, or address.

2.32 A surveillance service refers to a general watch or observation maintained over an area or location, by one or more persons or by using devices such as motion detector alarms, cameras or recorders. This includes watchmen services, alarm monitoring and services that involve the use of closed circuit television cameras for the purpose of surveillance or maintaining security.

Application and transitional provisions

2.33 The amendments in Schedule 2 commence on the later of:

•

the first 1 January, 1 April, 1 July or 1 October after the amendments receive Royal Assent; and

•

immediately after the commencement of the legislation in the Treasury Amendment (Black Economy Taskforce Measures No. 1) Bill 2018 that provides for the TPRS to be extended to entities engaging contractors in the courier and cleaning industries.

[Clause 2]

2.34 The amendments in Schedule 2 do not commence if the Treasury Amendment (Black Economy Taskforce Measures No. 1) Bill 2018 that provides for the TPRS to be extended to entities engaging contractors in the courier and cleaning industries has not commenced. This is required because Schedule 2 makes amendments to the tax law assuming that the Treasury Amendment (Black Economy Taskforce Measures No. 1) Bill 2018 has been enacted.

2.35 These amendments apply to consideration that is provided on or after 1 July 2019, whether under an existing ongoing arrangement or otherwise, and regardless of the time the supply occurred or the service is provided. However, it does not apply where the entity is merely liable to provide consideration prior to 1 July 2019, if no consideration is provided on or after 1 July 2019. [Schedule 2, item 2]

Transitional provision: Commissioner is taken to have made a determination in relation to road freight services

2.36 Subitem 3(1) of Schedule 2 to the Treasury Laws Amendment (Black Economy Taskforce Measures No. 1) Act 2018 provides that the Commissioner is taken to have made a determination that excludes a class of reporting entities from reporting courier or cleaner contractor payments. To the extent that this relates to courier services, this provision is revoked by this Schedule, with effect from the later of 1 July 2019 or the commencement of this Schedule. [Schedule 2, item 3(1)]

2.37 As a result of the amendments, the determination that the Commissioner is taken to have made exempts entities that make a supply of a courier or road freight service from the requirement to prepare and give a report to the Commissioner on payments made to other entities for courier or road freight services. The exemption applies if:

•

the total payments a reporting entity receives for both courier services and road freight services are less than 10 per cent of the entity's relevant GST turnover (the turnover-threshold test);

•

the reporting entity is not required to report details of the transaction under a separate reporting obligation in section 396-55 of Schedule 1 to the TAA 1953; and

•

the entity has not chosen to prepare and give the report.

[Schedule 2, item 3(2)]

2.38 The revised determination reflects that there is a single reporting obligation for courier and road freight services, and that supplies of both of those services should be combined to determine whether an entity exceeds the turnover-threshold test. This recognises that many businesses offer both courier and road freight services. [Schedule 2, item 3(2)]

2.39 Even where the reporting entity satisfies the turnover-threshold test and is not otherwise required to report details of the transaction, the entity may still choose not to be covered by the exemption and to lodge a report setting out details of the transactions. An entity is not required to notify the Commissioner before making a choice whether or not to give a report. The giving of the report for the transaction is sufficient evidence of the making of the choice to give the report. [Schedule 2, items 3(2)(c) and 3(3)]

2.40 Similarly, if an entity is not otherwise required to lodge reports, a choice that is made by the entity about whether to lodge a report for one reporting period does not restrict that entity from choosing whether or not to report for a later reporting period.

2.41 A number of terms are defined for the purposes of the application provision, including alternative reporting period, amended provision, relevant GST turnover, inserted item and road freight service transaction. [Schedule 2, items 2(3) and 3(7)]

2.42 The exemption is taken to have been made under the Commissioner's power to exempt classes of entities from the requirement to prepare and give reports, or to prepare and give reports for specified classes of transactions.

2.43 While the exemption is taken to have been made under subsection 396-70(4), it is not a legislative instrument. This means that the exemption is not subject to a range of provisions under the Legislation Act 2003 which would otherwise apply to legislative instruments, such as the requirement to register a legislative instrument, the requirement that legislative instruments must be tabled for disallowance, or the requirement that legislative instruments sunset after a period of time. This is appropriate as the making of the exemption in the primary law is subject to scrutiny by Parliament. For similar reasons, the revoking of the determination that the Commissioner is taken to have made by the Treasury Laws Amendment (Black Economy Taskforce Measures No. 1) Act 2018 is also not a legislative instrument. [Schedule 2, item 3(4)]

2.44 Ordinarily, a legislative instrument is not able to contradict or modify the operation of an Act unless that Act explicitly contemplates that outcome. Because the exemption is made by an Act of Parliament, a provision has been inserted to ensure that a new instrument made under the existing power in subsection 396-70(4) can amend or repeal the determination that is taken to be made. This ensures that there is flexibility to modify the determination to address any concerns with its operation raised by affected entities in the future. [Schedule 2, item 3(5)]

2.45 Schedule 2 also addresses the situation in which the Commissioner determines an alternative reporting period that begins prior to 1 July 2019. In such situations, transactions occurring on or after 1 July 2019 that are made in that alternative reporting period are instead subject to the deemed determination made under the Treasury Laws Amendment (Black Economy Taskforce Measures No. 1) Act 2018, disregarding that the determination may have been revoked on 1 July 2019. This ensures that a determination is in place to allow the exemption from reporting for courier transactions for the alternative reporting period that includes both a period prior to 1 July 2019 and also after that date. [Schedule 2, item 3(6)]

Chapter 3 Taxing tobacco at the time of manufacture

Outline of chapter

3.1 The Bills amend the Excise Acts to establish a framework to make excise duty on tobacco due and payable at the time of manufacture.

Context of amendments

Excise on tobacco

3.2 Excise is a tax on certain goods produced in Australia. Imported goods comparable to those subject to excise, known as excise-equivalent goods, attract customs duty that includes a component imposed at the same rate as the excise applied to locally produced goods. This component is commonly referred to as excise-equivalent customs duty.

3.3 Under the Excise Acts, duties of excise are imposed on entities that manufacture tobacco under licence (for this purpose, tobacco means products covered by subitems 5.1 and 5.5 in the table in the Schedule to the Excise Tariff Act). Significant criminal and other penalties apply to the manufacture of tobacco without a licence.

3.4 Broadly, excise must generally be paid before the Commissioner (also referred to in the Excise Act as the CEO) or a delegate of the Commissioner (jointly referred to with the Commissioner in the Excise Act as the Collector) permits goods to be entered for home consumption.

3.5 Entities may apply for a periodic settlement permission that allows goods to be delivered without formal entry. If goods are delivered under a periodic settlement permission, payment must be made at the time and in the manner set out in the permission (generally this will involve weekly payments of duty) (see sections 54 and 61C of the Excise Act).

3.6 Until tobacco is entered for home consumption it is subject to the control of the Commissioner (see section 61 of the Excise Act). Significant penalties apply to entities that deal with goods under the control of the Commissioner in a way that is not permitted by the Excise Act or that manufacture tobacco without a licence (see for example sections 25 and 60 of the Excise Act).

3.7 Tobacco seed, plant and unprocessed leaf are not subject to excise, but are subject to strict controls. They also generally cannot be held or produced without a licence (see for example sections 26 to 31, 33 and 44 of the Excise Act).

3.8 Currently, no entities in Australia are licensed to manufacture or produce tobacco.

Combating illicit tobacco

3.9 Illicit tobacco represents a major risk to Australia's tobacco excise tax base by undermining collection of duty on tobacco and reducing tax revenues collected for the benefit of all Australian taxpayers.

3.10 One of the main sources of illicit tobacco in Australia is leakage of legally imported tobacco held in licensed customs warehouses. As tobacco held in these warehouses has not yet been entered for home consumption, customs duty has not been collected on such leaked goods.

3.11 To address these concerns, the Government announced in the 2018-19 Budget that from 1 July 2019 importers of tobacco will be required to pay all duty and tax liabilities upon importation. As a result existing warehousing and weekly settlement arrangements would no longer apply.

3.12 The Government also announced that the taxing point for any future domestic manufacture of tobacco would be changed to be broadly consistent with the new taxing point for tobacco imports.

3.13 The 2018-19 Budget also included related measures to target the other principal sources of illicit tobacco - smuggling and unlicensed domestic manufacture. All of the measures build upon the enhanced penalty regime set out in the Treasury Laws Amendment (Illicit Tobacco Offences) Act 2018 and the Customs Amendment (Illicit Tobacco Offences) Act 2018.

Summary of new law

3.14 The Bills amend the Excise Acts so that an entity manufacturing tobacco goods under licence is liable for excise at the time of manufacture and the goods are taken to be entered and delivered for home consumption at that time.

3.15 A manufacturer must pay any excise duty payable on tobacco goods it has manufactured in a seven day period - the 'tobacco excise period' - on the first business day after the end of the period. To the extent any liabilities are not paid at this time, general interest charge under the TAA 1953 will apply.

3.16 Manufacturers must also provide the Commissioner with a tobacco excise return in the approved form for each tobacco excise period at the same time as any payment for that period would be due.

3.17 The Bills also amend the Excise Acts to clarify the obligations of manufacturers of tobacco goods to provide security and how excise duty applies to goods manufactured from components that were subject to excise or customs duty.

3.18 The amount of excise duty payable on goods manufactured from tobacco that has previously been subject to tobacco excise or excise-equivalent customs duty is reduced by the amount of excise or customs duty that has previously been paid.

Comparison of key features of new law and current law

Detailed explanation of new law

Excise on tobacco goods

3.19 The Bills amend the Excise Acts to make tobacco goods subject to excise at the time of manufacture rather than deferring liability until the time goods are entered or delivered for home consumption. [Schedule 3, item 7 of the Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018, section 66 of the Excise Act]

Tobacco goods

3.20 'Tobacco goods' are goods subject to excise under subitem 5.1, 5.5 or 5.8 of the table in the Schedule to the Excise Tariff Act 1921 or which are blended tobacco goods - see paragraphs 3.29 to 3.32. [Schedule 3, item 1 of the Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018, the definition of 'tobacco goods' in subsection 4(1) of the Excise Act]

3.21 This includes cigarettes, cigars, loose leaf tobacco and snuff.

3.22 It does not include unprocessed tobacco leaf, tobacco plants or tobacco seed. No change is made to the existing legislative regime applying to these goods under the Excise Act.

Payment of excise on tobacco goods

3.23 Tobacco goods are taken to be entered and delivered for home consumption at the time of manufacture. As a result they are immediately subject to excise at the rate specified in the Schedule to the Excise Tariff Act for that time. [Schedule 3, item 7 of the Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018, subsection 66(7) of the Excise Act]

3.24 Manufacturers must pay all excise on tobacco goods they have manufactured in a tobacco excise period on the first business day after the end of the period. Late payments are subject to the general interest charge. [Schedule 3, item 7 of the Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018, subsection 66(6), subparagraph 66(5)(b)(i) and section 67 of the Excise Act]

3.25 The tobacco excise period for a licensed manufacturer is a recurring seven day period determined by the Collector (ie. the Commissioner or a delegate) at the time an entity is issued with a licence under the Excise Act that permits the manufacture of tobacco, and runs for seven days. The tobacco excise period for an entity must be stated in their licence. [Schedule 3, item 7 of the Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018, subsections 66(1) and (3) of the Excise Act]

3.26 Special rules apply to periods in which an entity is granted a licence or ceases to hold a licence. The first period begins on the day the entity is granted the licence and payment for the last period must be provided on the first business day after the entity ceases to hold a licence. [Schedule 3, item 7 of the Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018, subsection 66(2) and subparagraph 66(5)(b)(ii) of the Excise Act]

Tobacco excise return

3.27 A licensed manufacturer must also provide the Collector with a tobacco excise return for each tobacco excise period on the same day payment is due. [Schedule 3, item 7 of the Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018, subsections 66(4) and (5) of the Excise Act]

3.28 This return must be in the approved form and detail the quantity of tobacco goods manufactured during the period and the amount of excise duty payable on those goods. [Schedule 3, item 7 of the Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018, subsections 66(4) and (5) of the Excise Act]

Reduction in excise duty for previously paid duty

3.29 As a result of the amendments, it is not possible to defer the time at which duty is payable on tobacco goods, even where the goods may be intended for later use as a component of other tobacco goods (for example, if loose leaf tobacco is manufactured and used in the manufacture of cigarettes).

3.30 To prevent double taxation, the excise duty payable on tobacco goods is reduced (but not below zero) to take account of excise that has previously been paid on tobacco used in the manufacture of the goods. [Schedule 1, item 2 and 5 of the Excise Tariff Amendment (Collecting Tobacco Duties at Manufacture) Bill 2018, subsection 6AAC(1) of the Excise Tariff Act and subitem 5.8 of the table in the Schedule to the Excise Tariff Act]

3.31 Tobacco goods made from other tobacco goods are referred to as 'blended tobacco goods'. [Schedule 1, item 1 of the Excise Tariff Amendment (Collecting Tobacco Duties at Manufacture) Bill 2018, the definition of 'blended tobacco goods' in subsection 3(1) of the Excise Tariff Act]

3.32 The excise duty payable on tobacco goods is also reduced (but not below zero) to take account of customs duty paid on imported tobacco that is used in the manufacture of the goods. However, the amount of the reduction cannot exceed the amount of excise that would have been payable on the imported goods had they been manufactured in Australia at the time of import. [Schedule 1, item 2 of the Excise Tariff Amendment (Collecting Tobacco Duties at Manufacture) Bill 2018, subsection 6AAC(2) of the Excise Tariff Act]

Securities for tobacco goods

3.33 Under section 16 of the Excise Act, the Collector may require an entity to provide security to ensure compliance with the Excise Acts and for the protection of the revenue generally.

3.34 If an entity fails to provide security, the Commissioner may refuse to permit goods to be entered or delivered for home consumption.

3.35 Following the changes to the treatment of tobacco goods, this consequence would no longer be relevant as the goods would automatically be taken to be entered and delivered on manufacture. Given the high value of tobacco goods and the ongoing issues around illicit tobacco, the inability to enforce the requirement to provide a security would result in significant risks to revenue.

3.36 The amendments address this gap by providing that if at any time a licensed manufacturer of tobacco goods does not provide a security when required under the Excise Act, their licence may be suspended and potentially cancelled. Similarly, the Commissioner may refuse to grant a licence for the manufacture of tobacco goods unless the entity applying for the licence has provided the Commissioner with an appropriate security when required. [Schedule 3, items 2 and 4 of the Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018, paragraphs 39A(2)(m) and 39G(1)(ma) of the Excise Act]

3.37 On suspension an entity may no longer manufacture excisable goods and the Collector may exercise a range of power in relation to goods held on their premises.

3.38 This change ensures that the Commissioner is able to prevent manufacturers of tobacco goods from being able to manufacture and sell goods after refusing to provide a security where this is required under the Excise Act.

Consequential amendments

3.39 The Bills also amend the Excise Acts and the TAA 1953 to address and clarify the consequences of the principal changes set out above, including by adding guide material such as notes. [Schedule 1, item 3 of the Excise Tariff Amendment (Collecting Tobacco Duties at Manufacture) Bill 2018, and Schedule 3, items 3, 5, 8, and 9,of the Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018, the note to subsection 39D(3), subsection 54(4) and paragraph 59(a) of the Excise Act, the heading to section 6G in the Excise Tariff Act and item 3B of the table in subsection 8AAB(4) in Schedule 1 to the TAA 1953]

3.40 The consequential amendments include an amendment to section 61C to make clear that periodic settlement permissions issued under that section do not apply to tobacco goods. [Schedule 3, item 6 of the Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018, subsection 61C(1) of the Excise Act]

3.41 They also include an amendment to subitem 5.5 of the table in the Schedule to the Excise Tariff Act to make clear that this item does not apply to items that are classified to the new item for blended tobacco goods. [Schedule 1, item 4 of the Excise Tariff Amendment (Collecting Tobacco Duties at Manufacture) Bill 2018, subitem 5.5 of the table in the Schedule to the Excise Tariff Act]

3.42 Further amendments will be made to the Excise Regulation 2015 to clarify the operation of those regulations in relation to tobacco goods.

Application and transitional provisions

3.43 The amendments apply to tobacco manufactured on or after 1 July 2019. [Schedule 1, item 6 of the Excise Tariff Amendment (Collecting Tobacco Duties at Manufacture) Bill 2018 and Schedule 3, item 10 of the Treasury Laws Amendment (Black Economy Taskforce Measures No. 2) Bill 2018]

3.44 As there is currently no licensed manufacture of tobacco in Australia, there is no tobacco held under the control of the CEO currently awaiting entry for home consumption.

Chapter 4 Statement of Compatibility with Human Rights

Non-compliant payments

4.1 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

4.2 Schedule 1 denies an income tax deduction for certain payments if the associated withholding obligations have not been complied with. This will provide a greater incentive for employers and entities engaging contractors to comply with their withholding obligations.

Human rights implications

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

Conclusion

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

Third party reporting

4.5 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

4.6 Schedule 2 to this Bill amends Schedule 1 to the TAA 1953 to require that entities that provide road freight, IT or security, investigation or surveillance services must report to the ATO details of transactions that involve engaging other entities to undertake those services for them.

Human rights implications

4.7 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). This is because entities that provide a road freight, IT, security, investigation or surveillance service will need to provide a range of personal information to the ATO that the entities collect in the ordinary course of business.

4.8 These reporting obligations are compatible with the prohibition concerning privacy, as they are neither arbitrary nor unlawful. In addition, they are aimed at a legitimate objective of ensuring that entities in the road freight, IT, security, investigation and surveillance industries comply with their taxation liabilities and are an effective and proportionate means of achieving that objective by requiring only the minimum amount of information necessary to identify relevant taxpayers and transactions.

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

•

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

•

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

4.10 The objective of requiring reporting by entities that provide a road freight, IT, security, investigation or surveillance service is to improve overall taxpayer compliance in these industries by gathering information regarding potential tax-related liabilities of taxpayers from entities that can provide it to the Commissioner without significant regulatory burden.

4.11 Legislative reporting regimes, such as third party reporting, provide more certainty and consistency of treatment for entities than the alternative, where the Commissioner collects information under his or her general information gathering powers on an ad-hoc basis. The information to be reported by entities under third party reporting is typically limited to the information they already hold that has been collected in the ordinary course of their business. Taxpayer information held by the ATO is subject to strict confidentiality rules that prohibit tax officials from making records or disclosing this information unless a specific legislative exemption applies.

4.12 The amendments allow the Commissioner to exempt entities from reporting where, for example, the Commissioner does not expect to be able to productively use the information or where reporting the information places a disproportionately high compliance cost on the third party relative to the benefit of providing the information to the ATO.

Conclusion

4.13 This Bill is consistent with Article 17 of the ICCPR on the basis that its engagement of the right to privacy will neither be unlawful nor arbitrary. Schedule 2 of the Bill therefore complies with the relevant provisions, aims and objectives of the ICCPR.

Taxing tobacco at the time of manufacture

4.14 These Bills are 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

4.15 The Bills amend the Excise Acts so that an entity manufacturing tobacco goods under licence is liable for excise at the time of manufacture and the goods are taken to be entered and delivered for home consumption at that time.

4.16 A manufacturer must pay any excise duty payable on tobacco goods it has manufactured in a seven day period - the 'tobacco excise period' - on the first business day after the end of the period. To the extent any liabilities are not paid at this time, general interest charge under the TAA 1953 will apply.

4.17 Manufacturers must also provide the Commissioner with a tobacco excise return in the approved form for each tobacco excise period at the same time as any payment for that period would be due.

4.18 The Bills also amend the Excise Acts to clarify the obligations of manufacturers of tobacco goods to provide security and how excise duty applies to goods manufactured from components that were subject to excise or customs duty.

4.19 The amount of excise duty payable on goods manufactured from tobacco that has previously been subject to tobacco excise or excise-equivalent customs duty is reduced by the amount of excise or customs duty that has previously been paid.

Human rights implications

4.20 These Bills engage the prohibition on arbitrary or unlawful interference with privacy contained in Article 17 of the International Covenant on Civil and Political Rights (ICCPR). This is because licensed manufacturers must provide the Commissioner with an excise return in the approved form and provide a range of personal information to the ATO.

4.21 This reporting obligation is compatible with the prohibition concerning privacy, as it is neither arbitrary nor unlawful. Only the minimum amount of information necessary to assess the amount of excise duty payable on the manufactured tobacco by the licensed manufacturer during the relevant period will be collected.

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

•

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

•

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

4.23 The objective of requiring information from the licensed manufacturer is to calculate the amount of excise duty payable.

4.24 Taxpayer information held by the Commissioner is subject to strict confidentiality rules that prohibit tax officials from making records or disclosing this information unless a specific legislative exemption applies.

4.25 To the extent that the amendments engage Article 17, they do so appropriately. This is because the collection of the information is required in order to calculate the amount of excise duty payable, and that information's use or disclosure is limited to where a specific legislative exemption applies.

Conclusion

4.26 These Bills are compatible with Article 17 of the ICCPR on the basis that its engagement of the right to privacy will neither by unlawful nor arbitrary. The Bills therefore comply with the relevant provisions, aims and objectives of the ICCPR.