House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Housing and Assistant Treasurer the Hon Michael Sukkar MP)

Glossary

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

General outline and financial impact

Hybrid mismatch rules

Schedule 1 to the Bill amends the hybrid mismatch rules in the ITAA 1997 to:

•

clarify the operation of the hybrid mismatch rules for trusts and partnerships;

•

clarify the circumstances in which an entity is a deducting hybrid;

•

clarify the operation of the dual inclusion income rule;

•

clarify the operation of provisions that refer to corresponding foreign hybrid mismatch rules;

•

clarify that, for the purpose of applying the hybrid mismatch rules, foreign income tax generally does not include foreign municipal or State taxes;

•

clarify that the hybrid mismatch rules apply to MEC groups in the same way as they apply to consolidated groups;

•

ensure that the hybrid mismatch integrity rule can apply appropriately to financing arrangements that have been designed to circumvent the operation of the hybrid mismatch rules; and

•

where distributions made on Additional Tier 1 capital instruments give rise to a foreign income tax deduction:

-

allow franking benefits on those distributions; and

-

include an amount equal to the amount of the deduction in the assessable income of the entity that makes the distribution.

Date of effect: The amendments to ensure that the hybrid mismatch integrity rule can apply appropriately to certain arrangements apply to assessments made for income years starting on or after 2 April 2019.

The amendments to clarify the meaning of foreign hybrid mismatch rules apply to assessments made for income years starting on or after 1 July 2020.

The amendments relating to distributions made on Additional Tier 1 capital instruments apply to distributions made on or after 1 January 2019.

The remaining amendments to clarify the operation of the hybrid mismatch rules apply to assessments made for income years starting on or after 1 January 2019

Proposal announced: This Schedule fully implements:

•

the measure Tax Integrity - clarifying the operation of the hybrid mismatch rules from the 2019-20 Budget; and

•

the measure Tax Integrity - improving the operation of the hybrid mismatch rules from the 2019-20 Mid-Year Economic and Fiscal Outlook.

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

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 7.

Compliance cost impact: Minimal.

Schedule 2 - Single Touch Payroll reporting - child support information

Schedule 2 to the Bill amends the TAA to broaden the amounts that employers can voluntarily report under the Single Touch Payroll rules to include employer withholding of child support deductions from salary or wages and child support garnishee amounts from salary or wages that are paid to the Child Support Registrar.

Schedule 2 also amends the CSRCA to ensure that if employers choose to report under Single Touch Payroll to the Commissioner of Taxation, they do not also have to report the amounts to the Child Support Registrar.

Date of effect: 1 July 2020.

Proposal announced: This Schedule partially implements the measure "Single Touch Payroll - expansion" from the 2019-20 Budget.

Financial impact: Nil.

Human rights implications: This Schedule engages human rights but does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 7.

Compliance cost impact: This Schedule is estimated to have a minor ongoing reduction in regulatory impact.

Deductible gift recipient status for community sheds

Schedule 3 to the Bill amends the ITAA 1997 to introduce a new general category of DGR for community sheds. The new DGR category applies to public institutions that are registered charities and satisfy the definition of a community shed.

To be a community shed a public institution must:

•

have the dominant purposes of advancing mental health and preventing or relieving social isolation;

•

principally advance these purposes through providing a physical location at which individuals are supported to work on projects or undertake other activities in the company of others; and

•

have membership that is open to members of the public.

Date of effect: The measure applies to gifts made on or after 1 July 2020.

Proposal announced: This Schedule fully implements the measure 'Philanthropy - extending deductible gift recipient status to Men's Sheds and Women's Sheds' from the 2019-20 Budget.

Financial impact: This measure is estimated to have the following impact on revenue over the forward estimates period.

- Nil

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 7.

Compliance cost impact: Low. If an organisation chooses to seek DGR endorsement in this general category, it will need to register with the Australian Charities and Not-for-profits Commission and comply with ACNC reporting obligations and governance requirements.

Schedule 4 - Funding capital increases for the World Bank Group

Schedule 4 to the Bill amends the IMA Act 1947 and IFC Act 1955 to facilitate Australia making additional capital contributions to the International Bank for Reconstruction and Development (IBRD), and the International Finance Corporation (IFC) of the World Bank Group.

To achieve this, the amendments streamline the existing legislative processes under which Australia enters into agreements to fund capital increases to the IBRD and revise the way the existing 'Articles of Agreement' of the IFC are incorporated into the IFC Act 1955. The amendments also establish appropriations to facilitate payments that Australia is required to make under an agreement with the IBRD or the Articles of Agreement of the IFC.

Date of effect: The amendments take effect from the time they commence.

Proposal announced: This Schedule implements the legislative amendments required to facilitate the measure 'World Bank Group - capital increase' from the 2018-19 MYEFO.

Financial impact: Australia's capital contributions will have no direct impact on underlying cash as the payment will be classified as an equity investment in financial assets.

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 7.

Compliance cost impact: Nil

Deductible gift recipients

Schedule 5 to the Bill amends the ITAA 1997 to allow the following entities to be deductible gift recipients under the income tax law:

•

Governor Phillip International Scholarship Trust;

•

High Resolves;

•

Australian Academy of Law;

•

Superannuation Consumers' Centre Ltd;

•

Motherless Daughters Australia Limited;

•

The Headstone Project (Tas) Inc.;

•

Foundation Broken Hill Limited;

•

C E W Bean Foundation.

Date of effect: The following listings apply to gifts made between 1 July 2018 and 30 June 2025 (inclusive):

•

Governor Phillip International Scholarship Trust;

•

High Resolves;

•

C E W Bean Foundation.

The following listings apply to gifts made between 1 July 2019 and 30 June 2025 (inclusive):

•

Australian Academy of Law;

•

Superannuation Consumers' Centre Ltd;

•

Motherless Daughters Australia Limited;

•

The Headstone Project (Tas) Inc.;

•

Foundation Broken Hill Limited.

Proposal announced: This Schedule completes the implementation of the measure 'Philanthropy - updates to the list of specifically listed deductible gift recipients' from the 2018-19 MYEFO and partially implements the measure of the same name from the 2019-20 Budget.

The extension of deductible gift recipient status of these entities to 30 June 2025 (inclusive) was not previously announced.

Financial impact: The component of the MYEFO measure being implemented by this Schedule was estimated to have a cost to revenue of $0.6 million over the forward estimates period at the time of the MYEFO. The component of the Budget measure being implemented by this Schedule was estimated to have a cost of revenue of $0.1 million over the forward estimates period at the time of the Budget.

The extension of the deductible gift recipient status of these entities to 30 June 2025 (inclusive) has no financial impact over the current forward estimates period.

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 7.

Compliance cost impact: Nil.

Tax secrecy

Schedule 6 to the Bill makes amendments to the tax secrecy provisions in the TAA to allow protected information relating to the JobKeeper scheme to be disclosed to the Fair Work Commission and the Fair Work Ombudsman for the purposes of the administration of the Fair Work Act 2009.

Date of effect: Schedule 6 to the Bill will commence on the day after the day on which the Bill receives Royal Assent.

Proposal announced: This schedule has not previously been announced.

Financial impact: Nil.

Human rights implications: This Schedule raises human rights issues but is compatible with human rights. See Statement of Compatibility with Human Rights - Chapter 7.

Compliance cost impact: An exemption from Regulation Impact Statement requirements was granted by the Prime Minister as there were urgent and unforeseen circumstances.

Chapter 1 - Hybrid mismatch rules

Outline of chapter

1.1 Schedule 1 to the Bill amends the hybrid mismatch rules in the ITAA 1997 to:

•

clarify the operation of the hybrid mismatch rules for trusts and partnerships;

•

clarify the circumstances in which an entity is a deducting hybrid;

•

clarify the operation of the dual inclusion income rule;

•

clarify the operation of provisions that refer to corresponding foreign hybrid mismatch rules;

•

clarify that, for the purpose of applying the hybrid mismatch rules, foreign income tax generally does not include foreign municipal or State taxes;

•

clarify that the hybrid mismatch rules apply to MEC groups in the same way as they apply to consolidated groups;

•

ensure that the hybrid mismatch integrity rule can apply appropriately to financing arrangements that have been designed to circumvent the operation of the hybrid mismatch rules; and

•

where distributions made on Additional Tier 1 capital instruments give rise to a foreign income tax deduction:

-

allow franking benefits on those distributions; and

-

include an amount equal to the amount of the deduction in the assessable income of the entity that makes the distribution.

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

Context of amendments

1.3 The hybrid mismatch rules are designed to prevent entities that are liable to income tax in Australia from being able to avoid income taxation, or obtain double taxation benefits, by exploiting differences between the tax treatment of entities and instruments across different countries.

1.4 The types of hybrid mismatch arrangements are:

•

deduction/non-inclusion mismatches, which occur when a deduction is provided for a payment in one country, but the corresponding income is not included as assessable income in the recipient country; and

•

deduction/deduction mismatches, which occur when an entity receives a deduction in two countries for the same payment.

1.5 A mismatch is covered by the hybrid mismatch rules if it is:

•

a hybrid financial instrument mismatch;

•

a hybrid payer mismatch;

•

a reverse hybrid mismatch;

•

a branch hybrid mismatch;

•

a deducting hybrid mismatch; or

•

an imported hybrid mismatch.

1.6 The principal objective of the hybrid mismatch rules is to neutralise the effects of the hybrid mismatches so that unfair tax advantages do not accrue for multinational groups as compared to domestic groups.

1.7 A targeted integrity rule applies to prevent the effect of the hybrid mismatch rules to neutralise double non-taxation outcomes from being compromised by multinational groups using interposed conduit type vehicles to invest in Australia (as an alternative to investing into Australia using hybrid instruments or entities or investing into Australia directly).

1.8 The hybrid mismatch rules were introduced in 2018 and apply to income years starting on or after 1 January 2019.

1.9 These amendments will clarify aspects of the hybrid mismatch rules and improve their operation. The amendments address concerns raised by both the Australian Taxation Office and industry stakeholders following the commencement of the hybrid mismatch rules and will provide greater certainty to affected taxpayers.

Summary of new law

1.10 Schedule 1 to the Bill amends the hybrid mismatch rules to:

•

clarify the operation of the hybrid mismatch rules for trusts and partnerships;

•

clarify the circumstances in which an entity is a deducting hybrid;

•

clarify the operation of the dual inclusion income rule;

•

clarify the operation of provisions that refer to corresponding foreign hybrid mismatch rules;

•

clarify that, for the purpose of applying the hybrid mismatch rules, foreign income tax generally does not include foreign municipal or State taxes;

•

clarify that the hybrid mismatch rules apply to MEC groups in the same way as they apply to consolidated groups;

•

ensure that the hybrid mismatch integrity rule can apply appropriately to financing arrangements that have been designed to circumvent the operation of the hybrid mismatch rules; and

•

where distributions made on Additional Tier 1 capital instruments give rise to a foreign income tax deduction:

-

allow franking benefits on those distributions; and

-

include an amount equal to the amount of the deduction in the assessable income of the entity that makes the distribution.

Comparison of key features of new law and current law

Detailed explanation of new law

1.11 Schedule 1 to the Bill amends the hybrid mismatch rules to:

•

clarify the operation of the hybrid mismatch rules for trusts and partnerships;

•

clarify the circumstances in which an entity is a deducting hybrid;

•

clarify the operation of the dual inclusion income rule;

•

clarify the operation of provisions that refer to equivalent foreign hybrid mismatch rules;

•

clarify that, for the purpose of applying the hybrid mismatch rules, foreign income tax generally does not include foreign municipal or State taxes;

•

clarify that the hybrid mismatch rules apply to MEC groups in the same way as they apply to consolidated groups;

•

ensure that the hybrid mismatch integrity rule can apply appropriately to financing arrangements that have been designed to circumvent the operation of the hybrid mismatch rules; and

•

where distributions made on Additional Tier 1 capital instruments give rise to a foreign income tax deduction:

-

allow franking benefits on those distributions; and

-

include an amount equal to the amount of the deduction in the assessable income of the entity that makes the distribution.

Operation of the hybrid mismatch rules for trusts and partnerships

1.12 The amendments clarify the operation of the hybrid mismatch rules for trusts and partnerships.

1.13 In this regard, for the purposes of applying the hybrid mismatch rules, it may be necessary to identify an entity and determine whether the entity:

•

makes a payment to, or receives a payment from, another entity;

•

holds, acquires, or disposes of an asset, interest or other property; and

•

enters into or carries out a scheme or a part of a scheme.

1.14 The hybrid mismatch rules then test the consequences that arise from applying the tax laws of different countries to that entity's payments and income or profits.

1.15 Some uncertainty has arisen in applying the hybrid mismatch rules to trusts and partnerships because of, for example:

•

the way that the Australian income tax law applies to these entities; and

•

the way in which these entities are treated under the income tax law of foreign jurisdictions.

Certain provisions in the income tax law disregarded

1.16 A number of provisions in the hybrid mismatch rules refer to an entity making a payment to another entity. Certain provisions in the income tax law are disregarded in determining whether an entity makes or receives a payment. The disregarded provisions are:

•

the single entity rule (subsection 701-1(1)) that applies for the purposes of Australia's tax consolidation regime;

•

Part IIIB of the ITAA 1936 (which contains special rules for Australian branches of foreign banks); and

•

any law of a foreign country that, for the purposes of a foreign tax, treats a different entity as having made a payment, or disregards a payment (such as a foreign law that has a similar effect to the single entity rule under Australia's tax consolidation regime).

[Schedule 1, item 1, subsection 832-30(1)]

1.17 The purpose of subsection 832-30(1) is to establish a uniform basis for recognising payments between entities across all jurisdictions. In some cases, a payment may not have a tax consequence because the payment is disregarded for tax purposes.

1.18 This outcome is consistent with the outcome that currently arise under section 832-30. However, the existing subsection is being repealed and replaced due to the inclusion of special rules for trusts and partnerships.

Trusts and partnerships taken to have done certain things

1.19 For the purpose of applying the hybrid mismatch rules to an entity that is a trust or a partnership, the trust or partnership (instead of a trustee or partner) is taken to:

•

make or receive a payment;

•

hold, acquire or dispose of an asset, interest or other property; and

•

enter into or carry out a scheme or a part of a scheme.

[Schedule 1, item 1, subsection 832-30(2)]

1.20 The fact that the trust or partnership (instead of a trustee or partner) is taken to have done these things must also be taken into account in identifying the income or profits of the trust or partnership. [Schedule 1, item 1, subsection 832-30(3)]

1.21 The objective of these amendments is to clarify the operation of the hybrid mismatch rules for trusts and partnerships. For trusts and partnerships, consistent with the definition of entity in section 960-100 (which defines an entity to include a trust or a partnership), the hybrid mismatch rules make a distinction:

•

for a trust - between the trust and the trustees; and

•

for a partnership - between the partnership and the partners.

1.22 The hybrid mismatch rules operate on the basis that the test entity can be:

•

for a trust - the trust (instead of the trustee); or

•

for a partnership - the partnership (instead of the partners).

1.23 For example, the test entity to which the hybrid payer rules in Subdivision 832-D apply in respect of a payment made by a trustee is the trust (rather than the trustee).

1.24 Therefore, as neither trusts nor partnerships are legal persons, for the purpose of applying the hybrid mismatch rules, the trust or partnership (instead of a trustee or partner) is treated as the entity that does the specified things.

Identifying income and profits of entities

1.25 A number of provisions in the hybrid mismatch rules refer to income and profits of an entity. For the purposes of applying the hybrid mismatch rules, things recognised in accordance with subsection 832-30(1) or (2) as being done by an entity are to be taken into account in identifying the income or profits of the entity. [Schedule 1, item 1, subsection 832-30(3)]

Assessable income and deductions of trusts and partnerships

1.26 Under the income tax law that generally applies to trusts, the trustee must work out the net income of the trust. The net income of the trust is, broadly, the total assessable income of the trust calculated as if the trustee were a taxpayer in respect of that income and an Australian resident, less allowable deductions (with some exceptions).

1.27 Broadly, any beneficiaries who are presently entitled to a share of the income of the trust are taxable on the corresponding proportion of the net income of the trust. The trustee is generally taxed on the balance of net income - broadly:

•

the net income which is not assessed to beneficiaries on the basis of present entitlement; or

•

the share of net income attributable to a beneficiary who is under a legal disability.

1.28 A similar outcome arises for attribution managed investment trusts and their members (noting that the mechanism is different).

1.29 For a trust that is a public trading trust, the net income of the trust is worked out on a similar basis. However, the trustee of the trust is liable to tax on that net income.

1.30 Under the income tax law that applies to partnerships, the net income or partnership loss of the partnership must be worked out. The net income of the partnership is, broadly, the assessable income of the partnership calculated as if the partnership were a taxpayer and an Australian resident, less allowable deductions (with some exceptions). A partnership loss arises if, broadly, the allowable deductions exceed the amount of the assessable income of the partnership.

1.31 Therefore, if the hybrid mismatch rules operate to include an amount in the assessable income of an entity, or make an amount allowable (or not allowable) as a deduction to an entity, the amount is taken to be included, allowable or not allowable (as the case requires) in determining:

•

for an entity that is a trust (including a trust that is a public trading trust or an attribution managed investment trust, but not a trust that is a superannuation entity) - the net income of the entity; or

•

for a partnership - the partnership's net income or partnership loss.

[Schedule 1, item 1, subsection 832-30(4)]

1.32 The definition of net income is being extended so that:

•

for a public trading trust, net income has the same meaning as in section 102M of the ITAA 1936; and

•

for an attribution managed investment trust, net income means the trust's assessable income reduced by all deductions of the trust (see section 276-265).

[Schedule 1, items 39 and 40, definition of 'net income' in subsection 995-1(1)]

Section 832-30 does not affect the interpretation of other provisions

1.33 Section 832-30 modifies the way that the hybrid mismatch rules apply to trusts and partnerships in the sense that it treats the trust or partnership (instead of a trustee or partner) as doing certain things and clarifies the operation of provisions in the hybrid mismatch rules that refer to amounts being included in assessable income or amounts being deductible.

1.34 However, section 832-30 does not affect whether tax or foreign income tax is imposed on an entity. [Schedule 1, item 1, subsection 832-30(5)]

1.35 In addition, the modifications made by section 832-30 only affect the operation of the hybrid mismatch rules. They do not limit, by implication, any other provision in the income tax law. [Schedule 1, item 1, subsection 832-30(6)]

Trustees and beneficiaries may be liable entities

1.36 A number of provisions in the hybrid mismatch rules refer to an entity that is a liable entity. Generally, an entity is a liable entity in Australia if income tax is imposed on the entity in respect of all or part of its profits, or in respect of all or part of the profits of another entity (section 832-325). An entity may be a liable entity for a country even if it has no actual liability to pay income tax.

1.37 A trust that is taxed under Division 6 of Part III of the ITAA 1936 is taxed as a flow-through entity. In these circumstances:

•

the trustee of the trust (in its capacity as trustee) is a liable entity in Australia in respect of the income or profits of the trust because it is liable to tax on the net income of the trust in some circumstances; and

•

each beneficiary of the trust is also a liable entity in Australia in respect of the income or profits of the trust because they are liable to tax on the net income of the trust in some circumstances.

Example 1.1:

NZUT is a unit trust that is resident in New Zealand. Benny and Anne are each unit holders. The trustee of NZUT is Constance.

NZUT is subject to Division 6 of Part III of the ITAA 1936 for Australian income tax purposes. It is treated as a company for New Zealand income tax purposes.

Constance, as trustee of the NZUT makes a payment to Benny. The payment:

•

is not considered to be a distribution from the trust for the purposes of Division 6; and

•

is not income of the trust to which Benny is presently entitled.

However, the payment is deductible against the income or profits of the NZUT for New Zealand income tax purposes.

Subsection 832-30(2) provides that the NZUT is taken to have made the payment which was actually made by Constance as trustee.

Section 832-320 provides that NZUT (the test entity) will be a hybrid payer if:

•

NZUT is a liable entity in the deducting country (New Zealand) in respect of its own income or profits and not also a liable entity in New Zealand in respect of Benny's income or profits; and

•

NZUT or another entity is a liable entity in Australia in respect of NZUT's income or profits and that entity is also liable in Australia in respect of income of profits of Benny.

Under subparagraph 832-325(1)(b)(i), NZUT is a liable entity in New Zealand because New Zealand imposes tax on the NZUT in respect of all of its income or profits.

Under paragraph 832-325(2)(a), Benny, Anne and Constance (in her capacity as trustee) are all liable entities in Australia.

•

Benny and Anne are liable entities because, as unit holders, tax would be imposed on them in respect of part of the income or profits of NZUT.

•

Constance is also a liable entity because, if NZUT had net income attributable to Australian sources but no income to which any beneficiary was presently entitled, Constance (in her capacity as trustee) would be liable to taxation under section 99A of the ITAA 1936.

Consequently, as section 832-320 is satisfied, NZUT is a hybrid payer.

However, the payment will give rise to a hybrid payer mismatch under subsection 832-305(1) only if:

•

the payment satisfies the other conditions to meet the hybrid requirement;

•

the payment gives rise to a deduction/non-inclusion mismatch; and

•

the payment is made under the relevant scope requirements.

1.38 A trust that is an attribution managed investment trust taxed under Division 276 is also taxed as a flow-through entity. Therefore:

•

the trustee of the attribution managed investment trust (in its capacity as trustee) is a liable entity in Australia in respect of the income or profits of the trust; and

•

each member of the attribution managed investment trust who is attributed a share of the income of the trust is also a liable entity in Australia in respect of the income or profits of the trust.

1.39 A trust that is a public trading trust taxed under Division 6C of Part III of the ITAA 1936 is not taxed as a flow-through entity - that is, only the trustee of the public trading trust (in its capacity as trustee) is liable to pay income tax in respect of the income or profits of the trust. However, as public trading trusts are effectively taxed like companies, for the purposes of applying the hybrid mismatch rules, a public trading trust (including a public trading trust that has made a choice to be the head company of a consolidated group) is taken to be a liable entity in Australia. [Schedule 1, item 15, subparagraph 832-325(1)(a)(ii)]

1.40 Similarly, for the purposes of applying the hybrid mismatch rules, an entity will be a liable entity in a foreign country if the law of a foreign country imposes income tax on the income or profits of the entity in a way that corresponds to the way that foreign income tax is imposed under the law of that country on the income or profits of a company (regardless of whether the foreign income tax is actually imposed on that entity or another entity). [Schedule 1, item 15, subparagraph 832-325(1)(b)(ii)]

1.41 In this regard, a company is universally recognised as an incorporated legal person that is an entity which is treated as opaque for tax purposes.

1.42 A trust that is a superannuation entity taxed under Division 295 is also not taxed as a flow-through entity - that is, only the trustee of the superannuation entity (in its capacity as trustee) is liable to pay income tax in respect of the income or profits of the trust. However, for the purposes of applying the hybrid mismatch rules, a trust that is a superannuation entity is taken to be a liable entity in Australia. [Schedule 1, item 15, subparagraph 832-325(1)(a)(iii)]

1.43 Subsection 832-325(2) specifies when an entity is a liable entity in respect of another entity's (the test entity's) income or profits. A modification is being made so that an entity is not a liable entity in respect of the income or profits of a test entity as a result of the operation of subparagraph 832-325(1)(a)(ii), (a)(iii) or (b)(ii). This reflects the company-like taxation treatment of the test entity in these circumstances. [Schedule 1, item 20, subsection 832-325(2A)]

Division 832 control group

1.44 For the purposes of applying some of the hybrid mismatch rules it is necessary to work out whether two or more entities are in the same Division 832 control group. Generally, this is worked out by considering whether an entity has, broadly, a controlling interest in another entity.

1.45 The amendments clarify that, if a trust is in a Division 832 control group (because of the operation of subsection 832-205(1)), then the trustee of the trust is taken to be in the same Division 832 control group. [Schedule 1, item 12, subsection 832-205(1A)]

Consequential amendments

1.46 In addition, as a consequence of the amendments in section 832-30 to clarify the operation of the hybrid mismatch rules for entities that are trusts and partnerships, minor amendments are made to, for example, notes that refer to an entity's payments, income or profits. [Schedule 1, items 5, 6, 14, 16, 17, 19 and 21, section 832-125, notes after subsection 832-320(1), subsection 832-325(1), subsection 832-325(2) and subsection 832-410(1)]

The deducting hybrid mismatch rule

1.47 A payment or other amount gives rise to a deducting hybrid mismatch if there is a deducting hybrid in relation to the payment or other amount.

1.48 Unlike other hybrid mismatch rules, where Australia is the primary response country, there is no requirement that the payment is made between members of a Division 832 control group or that the payment is made under a structured arrangement. Consequently, the deducting hybrid mismatch rule can, in some circumstances, result in inappropriate outcomes arising where the likelihood of a payment giving rise to double tax benefits for the entity is minimal.

1.49 To address this concern, the circumstances in which an entity is a deducting hybrid are being modified. That is, in addition to the requirements that, broadly, the payment gives rise to a deduction/deduction mismatch and that the entity makes the payment, an entity will be a deducting hybrid if:

•

the entity is a liable entity in one deducting country (but not both);

•

in both deducting countries, the entity:

-

is a liable entity; and

-

satisfies the hybrid mismatch residency test (in subsection 832-555(9)); or

•

the entity is a member of a consolidated group or MEC group.

[Schedule 1, item 25, paragraph 832-550(c)]

1.50 As a result, the scope of the deducting hybrid payment mismatch rule will be narrowed with the effect that individuals and certain small business entities and trusts will generally not be a deducting hybrid.

1.51 However, a trust that is not a liable entity in Australia but is a liable entity in another deducting country will be a deducting hybrid. Similarly, a public trading trust or a trust that is a superannuation entity may be a deducting hybrid if they are not a liable entity in another deducting country.

Dual inclusion income

1.52 Dual inclusion income is income or profits that is taxed in two countries (section 832-680). Dual inclusion income can be applied to reduce the neutralising amount for a hybrid payer mismatch or a deducting hybrid mismatch (sections 832-330 and 832-560). It can also give rise to a later year adjustment for a hybrid payer mismatch or a deducting hybrid mismatch (sections 832-335 and 832-565).

1.53 An amount of income or profits is taken to be taxed in Australia if it is subject to Australian income tax. However, for the purposes of applying the dual inclusion income rule, in determining whether an amount of income or profits is taken to be subject to Australian income tax, subsection 832-125(2) (which is about when an amount that is included in the assessable income of a trust or partnership is subject to Australian income tax) is disregarded, but only to the extent that it applies in relation to assessable income from a foreign source. [Schedule 1, items 30 and 31, subsection 832-680(1A) and paragraph 832-680(2)(a)]

1.54 As a result, foreign source income of an Australian trust or partnership which flows through to a foreign resident beneficiary or partner will be taken to be subject to Australian income tax for the purposes of applying the dual inclusion income rule.

1.55 To avoid doubt, to the extent that a provision in section 832-680 has the effect that an amount is treated as if it were subject to Australian income tax or subject to foreign income tax, then that effect extends to another provision of the income tax law that refers to an amount that is (as the case requires):

•

subject to Australian income tax for the purposes of subsection 832-680(1); or

•

subject to foreign income tax for the purposes of subsection 832-680(1).

[Schedule 1, item 37, subsection 832-680(9)]

1.56 Examples of other provisions that refer to these amounts include paragraph 832-330(2)(b), subparagraph 832-335(1)(b)(ii), paragraph 160ZZZL(3)(c) of the ITAA 1936 and paragraph 160ZZZN(1)(c) of the ITAA 1936.

Clarifying the operation of the Australian foreign income tax offset adjustment

1.57 Currently, an amount of income or profits that is subject to Australian income tax is treated as if it were not subject to Australian income tax (or is subject to Australian income tax to a lesser extent) if an amount of foreign income tax paid in respect of the income or profits counts towards an Australian foreign income tax offset (subsection 832-680(2)). This reduces the extent to which an amount of income or profits can be regarded as dual inclusion income.

1.58 In practical terms, it is very difficult for trusts and partnerships that are taxed as flow-through vehicles to apply subsection 832-680(2) because the trust or partnership does not know the tax details of the underlying investors or partners who receive the benefit of the foreign income tax offset.

1.59 In this regard, the OECD Action 2: 2015 Final Report (at paragraph 126) states that:

Double tax relief, such as a domestic dividend exemption granted by the payer jurisdiction or a foreign tax credit granted by the payee jurisdiction should not prevent an item from being treated as dual inclusion income where the effect of such relief is simply to avoid subjecting that item to an additional layer of taxation in either jurisdiction.

1.60 Subsection 832-680(2) represents a departure from this position and was introduced to address integrity concerns that could otherwise arise for companies.

1.61 Therefore, to improve the operation of the dual inclusion income rule and reduce compliance costs, the amendments ensure that the reduction to dual inclusion income to reflect an Australian foreign income tax offset applies only to corporate tax entities. [Schedule 1, item 32, paragraph 832-680(2)(a)]

1.62 A corporate tax entity is defined in section 960-115 to mean an entity that is:

•

a company;

•

a corporate limited partnership; or

•

a public trading trust.

The dual inclusion income on-payment rule

1.63 Currently, the dual inclusion income on-payment rule (subsections 832-680(4), (5) and (6)) applies if, broadly:

•

a payment which forms income or profits of the payee (the on-payment amount) is made within a dual inclusion income group; and

•

the payment can be traced or reasonably linked to an amount of income or profits of the payer (the funding income or profits) that have a tax outcome which results in the income or profits being subject to Australian income tax or subject to foreign income tax (as the case may be).

1.64 Concerns have been raised that the operation of the dual inclusion income on-payment rule is uncertain where, for example, a payment is made through multiple members of a dual inclusion income group.

1.65 One of the requirements for the dual inclusion income on-payment rule to apply is that the funding income or profits must be subject to Australian income tax or subject to foreign income tax (paragraph 832-680(4)(d)). The amendments modify this test so that the test is satisfied if it is reasonable to conclude that the funding income or profits must be subject to Australian income tax or subject to foreign income tax (including as a result of a previous application of paragraph 832-680(4)(d)). [Schedule 1, items 34 and 35, paragraph 832-680(4)(d) and subsection 832-680(4A)]

1.66 Example 1.2 illustrates the iterative operation of the dual inclusion income on-payment rule under subsection 832-680(4) following the amendments. Under this example, the on-payment rule is applied to a bottom-up series of payments within a dual inclusion income group. However, in appropriate circumstances, the on-payment rule can equally be applied to a top-down series of payments within a dual inclusion income group.

Example 1.2

Aus Head Co, Aus Sub 1 and Aus Sub 2 are all members of a tax consolidated group in Australia (and therefore the same dual inclusion income group in Australia).

Aus Head Co (a deducting hybrid) borrowed an amount from an external bank and makes interest payments to the external bank. The interest payments give rise to deduction/deduction mismatches.

The funds borrowed by Aus Head Co from the external bank were on-lent (via Aus Sub 1) to Aus Sub 2. As a result:

•

Aus Sub 2 makes interest payments to Aus Sub 1; and

•

Aus Sub 1 makes interest payments to Aus Head Co.

Aus Sub 2 receives external income which is subject to Australian income tax. However:

•

Aus Head Co does not receive any income other than the interest payments from Aus Sub 1; and

•

Aus Sub 1 does not receive any income other than the interest payments from Aus Sub 2.

The interest payments made between Aus Sub 2, Aus Sub 1 and Aus Head Co are disregarded for Australian income tax purposes (because of the operation of the consolidation single entity rule in subsection 701-1(1)).

However, the interest payments made by Aus Sub 1 to Aus Head Co are subject to foreign income tax in Country B.

Disregarding the dual inclusion income on-payment rule, the interest payments made by Aus Sub 1 to Aus Head Co are not dual inclusion income. This is because, although these interest payments are subject to foreign income tax in Country B, they are disregarded for Australian income tax purposes.

However, the interest payments made by Aus Sub 1 to Aus Head Co may be treated as if they were subject to Australian income tax under subsection 832-680(4).

In this regard:

•

subsection 832-680(4) can first be applied to the interest payments made by Aus Sub 2 to Aus Sub 1; and

•

subsection 832-680(4) can next be applied to interest payments made by Aus Sub 1 to Aus Head Co.

If the interest payments made by Aus Sub 2 to Aus Sub 1 satisfy subsection 832-680(4), the interest income received by Aus Sub 1 from Aus Sub 2 is taken to be subject to Australian income tax. Subsection 832-680(4) can then be applied to the interest payments made by Aus Sub 1 to Aus Head Co.

The interest payments made by Aus Sub 1 to Aus Head Co will ultimately be taken to be subject to Australian income tax if it is reasonable to conclude that:

•

the interest payments made by Aus Sub 2 to Aus Sub 1 were funded by external income received by Aus Sub 2 which is subject to Australian income tax (under the first application of subsection 832-680(4)); and

•

the interest payments made by Aus Sub 1 to Aus Head Co were funded by interest income received by Aus Sub 1 from Aus Sub 2 (under the second application of subsection 832-680(4)).

Dual inclusion income group

1.67 Currently, a dual inclusion income group can be formed only if there is only one liable entity in respect of the income or profits of the group members. As a result, investments held by a transparent holding vehicle with multiple investors typically would not be able to form a dual inclusion income group.

1.68 A modification is being made to the definition of dual inclusion income group so that two or more entities (the member entities) are members of a dual inclusion income group in a country for the purposes of applying the hybrid mismatch rules if, in that country:

•

the same entity or entities are liable entities in respect of the income or profits of each of the member entities; and

•

no other entity is a liable entity in respect of the income or profits of each of any of member entities.

[Schedule 1, item 36, subsection 832-680(6)]

Example 1.3 :

P1, P2 and P3 are companies that are residents of Country X and that collectively have a wholly owned partnership interest in a limited partnership (XLP).

XLP, which is also formed in Country X, has a wholly owned Australian subsidiary (Aus Co) that is treated as a disregarded entity - that is, for Country X purposes, Aus Co is treated as part of XLP and not as a separate liable entity.

For Country X tax purposes, P1, P2 and P3 are each:

•

liable entities in respect of their own income or profits and part of the income and profits of both XLP and Aus Co; and

•

not liable entities in respect of each other's income or profits.

Aus Co derives income of $100 in an income year. This income is subject to Australian income tax in the hands of Aus Co. This same income will be subject to foreign income tax in Country X in the hands of P1, P2 and P3 based on their respective partnership interests in XLP.

For Country X tax purposes, P1, P2 and P3 are the liable entities in respect of each of Aus Co and XLP. Apart from P1, P2 and P3, there are no other liable entities in respect of Aus Co and XLP's income or profits. Therefore, Aus Co and XLP will be members of a dual inclusion income group in Country X.

P1, P2 and P3 will not be members of this dual inclusion income group in Country X as they are not liable entities in respect of each other's income or profits.

For the same reason, XLP will also not be in a dual inclusion income group in Country X with any of P1, P2 or P3.

Foreign hybrid mismatch rules

1.69 A number of provisions in the hybrid mismatch rules refer to equivalent foreign hybrid mismatch rules.

1.70 Concerns have been raised that the definition of foreign hybrid mismatch rules in subsection 995-1(1) requires the foreign law to correspond to, or have substantially the same effect as, Division 832. Therefore, when benchmarking a foreign law, it is uncertain whether the foreign law is benchmarked against Division 832 as a whole or whether there is scope to benchmark the foreign law against, for example, the provisions of a particular hybrid mismatch.

1.71 To address this concern, the definition of foreign hybrid mismatch rules in subsection 995-1(1) is being amended so that it refers to a foreign law corresponding to any of the following Subdivisions:

•

Subdivision 832-C (the hybrid financial instrument mismatch rule);

•

Subdivision 832-D (the hybrid payer mismatch rule);

•

Subdivision 832-E (the reverse hybrid mismatch rule);

•

Subdivision 832-F (the reverse hybrid mismatch rule);

•

Subdivision 832-G (the deducting hybrid mismatch rule); or

•

Subdivision 832-H (the imported hybrid mismatch rule).

[Schedule 1, item 50, definition of 'foreign hybrid mismatch rules' in subsection 995-1(1)]

1.72 In addition, the amendments clarify the operation of provisions that have regard to the operation of equivalent foreign hybrid mismatch rules.

1.73 Therefore, under the hybrid financial instrument mismatch rule, Australia is required to apply the secondary response unless, in the country in which the foreign income tax deduction arose, the mismatch is covered by:

•

foreign hybrid mismatch rules that correspond to the hybrid financial instrument mismatch rule; or

•

a law that has substantially the same effect as foreign hybrid mismatch rules that correspond to the hybrid financial instrument mismatch rule.

[Schedule 1, item 42, subsection 832-185(2)]

1.74 In addition, a hybrid financial instruments mismatch will not be an offshore hybrid mismatch if it is covered by:

•

foreign hybrid mismatch rules that correspond to the hybrid financial instrument mismatch rule; or

•

a law that has substantially the same effect as foreign hybrid mismatch rules that correspond to the hybrid financial instrument mismatch rule.

[Schedule 1, item 43, paragraph 832-195(1)(c)]

1.75 Under the hybrid payer mismatch rule, Australia will be required to apply the secondary response unless, in the country in which the foreign income tax deduction arose, the mismatch is covered by:

•

foreign hybrid mismatch rules that correspond to the hybrid payer mismatch rule; or

•

a law that has substantially the same effect as foreign hybrid mismatch rules that correspond to the hybrid payer mismatch rule.

[Schedule 1, item 44, subsection 832-290(2)]

1.76 In addition, a hybrid payer mismatch will not be an offshore hybrid mismatch if it is covered by:

•

foreign hybrid mismatch rules that correspond to the hybrid payer mismatch rule; or

•

a law that has substantially the same effect as foreign hybrid mismatch rules that correspond to the hybrid payer mismatch rule.

[Schedule 1, item 45, paragraph 832-300(1)(c)]

1.77 Under the reverse hybrid mismatch rule, a reverse hybrid mismatch will be an offshore hybrid mismatch if:

•

the deduction component of the mismatch is a foreign income tax deduction; and

•

the country in which the foreign income tax deduction arose has foreign hybrid mismatch rules that correspond to the reverse hybrid mismatch rule.

[Schedule 1, item 46, subsection 832-390(1)]

1.78 Under the branch hybrid mismatch rule, a branch hybrid mismatch will be an offshore hybrid mismatch if:

•

the deduction component of the mismatch is a foreign income tax deduction;

•

the country in which the foreign income tax deduction arose has foreign hybrid mismatch rules that correspond to the branch hybrid mismatch rule; and

•

subsection 23AH(4A) of the ITAA 1036 does not apply in relation to the branch hybrid mismatch.

[Schedule 1, item 47, paragraph 832-465(1)(b)]

1.79 Under the deducting hybrid mismatch rule, Australia will be required to apply the secondary response unless, in the primary response country, the mismatch is covered by:

•

foreign hybrid mismatch rules that correspond to the deducting hybrid mismatch rule; or

•

a law that has substantially the same effect as foreign hybrid mismatch rules that correspond to the deducting hybrid mismatch rule.

[Schedule 1, item 48, paragraph 832-535(2)(b)]

1.80 In addition, a deducting hybrid mismatch will not be an offshore hybrid mismatch if, in any country in which a foreign income tax deduction arose; it is covered by:

•

foreign hybrid mismatch rules that correspond to the deducting hybrid mismatch rule; or

•

a law that has substantially the same effect as foreign hybrid mismatch rules that correspond to the deducting hybrid mismatch rule.

[Schedule 1, item 49, paragraph 832-540(1)(b)]

1.81 A mismatch is covered by foreign hybrid mismatch rules that correspond to the relevant Subdivision in Division 832 if those foreign hybrid mismatch rules can apply to the mismatch. For these purposes, it is not necessary to determine whether the foreign jurisdiction has actually applied the foreign hybrid mismatch rules to neutralise the mismatch.

Example 1.4 :

Aus Sub and Aus Sub 2 are members of the XYZ Ltd consolidated group. Aus Sub incurs service fees which are paid to Aus Sub 2 in respect of its permanent establishment in Country X.

XYZ Ltd is a liable entity in Australia in respect of the income or profits of Aus Sub and Aus Sub 2. Therefore, the requirement in subsection 832-325(3) is met.

In Country X, Aus Sub is the liable entity in respect of its own income or profits.

Consequently, the service fee paid by Aus Co to Aus Sub 2:

•

is deductible in Country X against the profits of Aus Sub's Country X permanent establishment; and

•

is not subject to Australian income tax because of the single entity rule.

Accordingly, Aus Sub is a hybrid payer and the service fee payment gives rise to a deduction/non-inclusion mismatch.

Country X has a law that results in denials of deductions or inclusions in assessable income for hybrid mismatches in respect of payments that give rise to a deduction in one country and non-inclusion of income in the recipient country.

However, as this law only applies in respect of payments in the nature of interest and royalties for Country X purposes, it does not cover the payment of service fees from Aus Sub to Aus Sub 2.

Consequently, the mismatch is not covered by:

•

foreign hybrid mismatch rules that correspond to the hybrid payer mismatch rules in Subdivision 832-D; or

•

a law that has substantially the same effect as foreign hybrid mismatch rules that correspond to the hybrid payer mismatch rules in Subdivision 832-D.

Therefore, under subsection 832-290(2), Australia is required to apply the secondary response to the hybrid payer mismatch.

Foreign income tax does not include foreign municipal or State taxes

1.82 The hybrid mismatch rules apply to a payment only if:

•

a deductible payment gives rise to double non-taxation because it is not included in a tax base - that is, a deduction/non-inclusion mismatch arises; or

•

a payment gives rise to two deductions - that is, a deduction/deduction mismatch arises.

1.83 At least one of the components of a deduction/non-inclusion mismatch or a deduction/deduction mismatch is determined by reference as to whether an amount is subject to foreign income tax.

1.84 Concerns have been raised that there is some uncertainty about whether foreign income tax includes foreign municipal taxes and State taxes.

1.85 If foreign municipal taxes and State taxes were taken into account in determining whether a payment is subject to foreign income tax and gives rise to a deduction/non-inclusion mismatch or a deduction/deduction mismatch, it would be necessary to consider the taxation consequences for a payment at multiple levels of government in a foreign jurisdiction for the purpose of determining whether a hybrid mismatch arises. This would place an unreasonable compliance burden on affected taxpayers.

1.86 To address these concerns, the amendments clarify that, for the purposes of applying the hybrid mismatch rules, foreign income tax does not include:

•

municipal tax; and

•

in the case of a federal foreign country - a State tax.

[Schedule 1, item 11, subsection 832-130(7)]

1.87 This is relevant for the purposes of determining whether:

•

a foreign income tax deduction arises in relation to an amount - this is a core concept that affects the operation of all of the hybrid mismatch rules and the hybrid mismatch integrity rule;

•

an amount is subject to foreign income tax - this is a core concept that affects the operation of all of the hybrid mismatch rules (other than the imported hybrid mismatch rule) and the hybrid mismatch integrity rule;

•

the extended operation of the hybrid financial instrument mismatch rule in relation to concessional foreign taxes applies;

•

an entity is a liable entity - this is a core concept that affects the operation of all of the hybrid mismatch rules and the hybrid mismatch integrity rule;

•

the hybrid requirement in the branch hybrid mismatch rule is satisfied;

•

an entity is a branch hybrid for the purposes of the branch hybrid mismatch rule;

•

a country is a secondary response country for the purposes of the deducting hybrid mismatch rule;

•

a payment made by an entity is an importing payment in relation to an offshore hybrid mismatch for the purposes of the imported hybrid mismatch rule; and

•

the adjustment to dual inclusion income for an Australian foreign income tax offset applies.

[Schedule 1, items 2 to 4, 7 to 10, 13, 18, 23, 24, 26, 28, 29 and 33, sections 832-110, 832-120, 832-130, 832-235, 832-325, 832-480, 832-485, 832-555, 832-625 and 832-680]

1.88 As a result of these amendments, taxes imposed at the local or State level in a foreign jurisdiction will not have to be taken into account in determining whether a payment gives rise to a deduction/non-inclusion mismatch or a deduction/deduction mismatch.

1.89 However, for the purpose of applying the hybrid mismatch integrity rule, in working out whether foreign income tax has been imposed on the payment in a foreign jurisdiction at a rate of 10 per cent or more, any foreign municipal taxes and State taxes will be taken into account. [Schedule 1, item 38, subsection 832-725(1A)]

1.90 In this regard, the hybrid mismatch integrity rule is intended to apply only if a scheme results in the total foreign income tax being imposed on a payment is at a rate of 10 per cent or less.

Operation of the hybrid mismatch rules for MEC groups

1.91 Under the consolidation regime (Part 3-90), an Australian owned corporate group can be treated as a single entity for income tax purposes by forming a consolidated group (consisting of the Australian head company and its wholly owned subsidiaries).

1.92 A foreign owned corporate group that has Australian resident members (and two or more first tier Australian subsidiaries) can also be treated as a single entity for income tax purposes by forming a MEC group (consisting of the Australian entities in the group). One of the first tier Australian subsidiaries of the group (an eligible tier-1 company) is taken to be the head company of the group.

1.93 The amendments ensure that the hybrid mismatch rules apply to members of MEC groups in the same way that they apply to members of consolidated groups.

1.94 Therefore, for the purpose of working out whether a reverse hybrid mismatch arises, an entity is not a transparent entity in Australia if, so far as is relevant, the entity is a member of a consolidated group or a MEC group. [Schedule 1, item 22, subparagraph 832-410(2)(b)(ii)]

1.95 Similarly, for the purpose of working out whether a deducting hybrid mismatch arises, an entity can be a deducting hybrid in relation to a payment if, among other things, the entity is a member of a consolidated group or a MEC group. [Schedule 1, item 25, subparagraph 832-550(c)(iii)]

1.96 A consequential amendment is made to a note to section 832-325 (which specifies when an entity is a liable entity) so that it appropriately refers to a subsidiary member of a consolidated groups or MEC group. [Schedule 1, item 17, note 2 after subsection 832-325(1)]

The hybrid mismatch integrity rule

1.97 The targeted hybrid mismatch integrity rule operates to disallow an Australian income tax deduction of an entity for a payment of interest (or a payment of a similar character), or an amount under a derivative financial arrangement, under a scheme to a foreign entity if, among other things, the scheme results in foreign income tax being imposed on the payment at a rate of 10 per cent or less.

1.98 The integrity rule does not apply if, among other things, the payment gives rise to a hybrid mismatch under one of the specific hybrid mismatch rules.

1.99 The amendments ensure that the hybrid mismatch integrity rule can apply appropriately to financing arrangements that have been designed to circumvent the operation of the hybrid mismatch rules.

Both the deducting hybrid mismatch rule and the integrity rule can apply to a payment

1.100 The integrity rule does not apply to financing arrangements that, for example, give rise to both:

•

a deduction/deduction outcome that gives rise to a deducting hybrid mismatch; and

•

an effective replication of a deduction/non-inclusion outcome by the interposition of a foreign entity located in a no or low tax jurisdiction.

1.101 The deduction/deduction outcome may trigger the deducting hybrid mismatch rule. However, the entitlement to a deduction may not be neutralised because, for example, Australia is the secondary response country or the deduction has been sheltered by dual inclusion income.

1.102 In these circumstances, the integrity rule does not apply to neutralise the replicated deduction/non-inclusion outcome even though the entitlement to a deduction has survived.

1.103 Therefore, to address these concerns, the integrity rule is being modified so that it can apply to a payment even if the payment gives rise to a deducting hybrid mismatch. [Schedule 1, item 58, subsection 832-725(6)]

1.104 However, the hybrid financial instrument mismatch will continue to take precedence over the integrity rule. Therefore, the integrity rule will not apply to deny a deduction for a payment to the extent that the deduction is denied under subsection 830-530(2) because the payment gives rise to a deducting hybrid mismatch. [Schedule 1, item 59, subsection 832-725(7)]

1.105 Minor technical amendments are also being made to the integrity rule to:

•

update the guide material for the integrity rule; and

•

clarify that the entity that may be entitled to a deduction in respect of a payment (but for the operation of the integrity rule) may not be the paying entity.

[Schedule 1, items 54 to 57, section 832-720, paragraph 832-725(1)(e) and subsection 832-725(3)]

1.106 Generally, if a deduction for a payment is denied under the deducting hybrid mismatch rule in an income year, a deduction may be allowed for the payment in a later income year if an amount of dual inclusion income that has been subject to Australian income tax or foreign income tax or is available to be applied by the deducting hybrid in that later income year (section 832-565).

1.107 To protect the integrity of the hybrid mismatch rules, this later year deduction will not be allowed if a deduction would have been denied in the earlier income year under the integrity rule (on the assumption that the integrity rule applied to the payment in that earlier income year). [Schedule 1, item 53, subsection 832-565(2A)]

1.108 This reflects the outcome that would arise if the integrity rule (rather than the deducting hybrid mismatch rule) had applied in the earlier income year. That is, if the integrity rule applies to deny a deduction for a payment in an income year, a deduction is not allowed in a later income year where there is an amount of dual inclusion income in that later income year.

Example 1.5

In the 2020-21 income year, Aus Co:

•

makes an interest payment of $10,000 to Interposed Foreign Co; and

•

derives an amount dual inclusion income of $2,000 - that is, an amount that is less than the interest payment.

Interposed Foreign Co is a resident of a foreign country that has a corporate tax rate of 8 per cent. Both Aus Co and Interposed Foreign Co are members of the Global Co corporate group.

The interest payment made by Aus Co to Interposed Foreign Co gives rise to a deducting hybrid mismatch under section 832-545.

Australia is identified as the primary response country with respect to the deducting hybrid mismatch under section 832-555.

As the deducting hybrid mismatch rule takes priority over the integrity rule, that rule operates in the first instance to deny a deduction for the interest payment under section 832-530 in the 2020-21 income year.

However, dual inclusion income derived by Aus Co ($2,000) is available to reduce the neutralising amount of $10,000. Therefore, only $8,000 of the deduction is disallowed under the deducting hybrid mismatch rule. As a result, a remaining part of the deduction for the interest payment ($2,000) is still available.

Subsection 832-725(7) allows the integrity rule to apply to the interest payment to deny that part of the deduction for the interest payment that was not denied under the deducting hybrid mismatch rule.

As the conditions for applying the integrity rule in subsection 832-725(1) are satisfied in relation to the interest payment (and none of the exceptions in subsections 832-725(4) to (6) apply), subsection 832-725(3) will apply to deny the remaining part of the deduction ($2,000) for the interest payment.

In the 2022-23 income year, Aus Co identifies an additional amount of dual inclusion income ($8,000) that is available to be applied by the deducting hybrid. However, if the earlier year application of the deducting hybrid mismatch rule to disallow a part of the deduction in the 2020-21 income year is disregarded, the integrity rule would have applied to deny a deduction (assuming the principal purpose test in paragraph 832-725(1)(h) is satisfied) for the whole amount of the interest payment in that income year.

Therefore, subsection 832-565(2A) prevents Aus Co from being able to claim a deduction under subsection 832-565(2) for the interest payment in the 2022-23 income year.

Example 1.6

The facts are the same as Example 1.5 except that:

•

in the 2020-21 income year, Australia is identified as the secondary response country with respect to the deducting hybrid mismatch under section 832-555; and

•

the relevant primary response country has foreign hybrid mismatch rules.

As a result, the additional requirements in section 832-535 for a secondary response are not met and section 832-530 does not apply to disallow any deduction for the interest payment that gives rise to a deducting hybrid mismatch.

Subsection 832-725(7) allows the integrity rule to apply to the interest payment to deny a deduction for the interest payment that was not denied under section 832-530 - that is, $10,000.

The conditions for applying the integrity rule in subsection 832-725(1) are satisfied (assuming the principal purpose test in paragraph 832-725(1)(h) is satisfied) in relation to the interest payment (and none of the exceptions in subsections 832-725(4) to (6) apply).

Therefore, as subsection 832-530(2) has not applied to deny a deduction for the interest payment to any extent, subsection 832-725(3) will apply to deny the entire deduction for the interest payment.

Adjustment under the hybrid financial instrument mismatch rule where a payment is taxed in a later income year may be denied

1.109 If a payment gives rise to a hybrid financial instrument mismatch in an income year, a deduction may be denied in that income year for the deduction component of the mismatch (section 832-180).

1.110 As the payment gave rise to a hybrid financial instrument mismatch in that income year, the integrity rule does not apply in that income year (subsection 832-725(6)), even though the conditions to apply the integrity rule (as set out in subsection 832-725(2)) would be satisfied in relation to that payment. That is, the hybrid financial instrument mismatch takes precedence over the integrity rule.

1.111 If some or all of the payment is subject to foreign income tax or Australian income tax in a later income year, then the hybrid financial instrument mismatch rules apply to allow a deduction for the taxed amount of the payment in the later income year (section 832-240).

1.112 To protect the integrity of the hybrid mismatch rules, this later year deduction will not be allowed if a deduction would have been denied in the earlier income year under the integrity rule (on the assumption that the integrity rule applied to the payment in that earlier income year). [Schedule 1, item 52, subsection 832-240(2A)]

1.113 This reflects the outcome that would arise if the integrity rule (rather than the hybrid financial instrument mismatch rule) had applied in the earlier income year. That is, if the integrity rule applies to deny a deduction for a payment in an income year and some or all of the payment is subject to foreign income tax or Australian income tax in a later income year, a deduction is not allowed for the payment in that later income year.

Example 1.7

At the start of the 2020-21 income year, Aus Co enters into a 5 year interest bearing loan, borrowing from Interposed Foreign Co. Under the terms of the loan arrangement, Aus Co is required to make a lump sum payment for the accrued interest at the end of the arrangement.

Interposed Foreign Co is a resident of a foreign country that has a corporate tax rate of 8 per cent. Both Aus Co and Interposed Foreign Co are members of the Global Co corporate group.

The interest bearing loan is a Division 230 financial arrangement for Australian income tax purposes. Aus Co is entitled to a deduction in respect of accrued interest under the loan for the 2020-21 income year due to sufficiently certain (and fixed and determinable) financial benefits (being the interest payment made by Aus Co) to be provided on maturity under the terms of the loan arrangement.

For purposes of applying the hybrid mismatch rules, the accrued interest is a payment made by Aus Co to Interposed Foreign Co and gives rise to a hybrid financial instrument mismatch.

A deduction/non-inclusion mismatch arises because:

•

Aus Co is entitled to a deduction in respect of the interest payment on an accruals basis (under the taxation of financial arrangements regime) in the 2020-21 income year; and

•

the interest payment will not be subject to foreign income tax in a foreign tax period ending within 12 months after the end of the 2020-21 income year - that is, under the law of the foreign country in which Interposed Foreign Co is a resident, Interposed Foreign Co is taxed only when the cash payment is received in 2024-25 income year (when the lump sum payment is made at the end of the loan arrangement).

Consequently, sections 832-180 and 230-522 apply so that Aus Co is not entitled to a deduction for the payment (being a taxation of financial arrangements loss) in the 2020-21 income year.

In the 2024-25 income year, the cash payment of the interest is subject to foreign income tax in the foreign country in which Interposed Foreign Co is a resident.

Under the current law, section 832-240 would apply to allow a deduction to Aus Co for the payment in the 2024-25 income year.

However, if the payment had not given rise to a hybrid financial instrument mismatch in the 2020-21 income year, the conditions for applying the integrity rule in subsection 832-725(1) would have been satisfied (assuming the principal purpose test in paragraph 832-725(1)(h) is satisfied) in relation to the interest payment (and none of the exceptions in subsections 832-725(4) to (6) would have applied). Therefore, the integrity rule would have applied to deny a deduction for the payment in the 2020-21 income year.

Consequently, subsection 832-240(2A) prevents Aus Co from being able to claim a deduction under subsection 832-240(2) for the whole amount of the interest payment in the 2024-25 income year.

Foreign municipal taxes and State taxes continue to be recognised

1.114 The amendments which clarify that, for the purposes of applying the hybrid mismatch rules, foreign income tax does not include any foreign municipal taxes and State taxes do not affect the operation of the hybrid mismatch integrity rule.

1.115 That is, for the purposes of applying the hybrid mismatch integrity rule, in working out whether foreign income tax has been imposed on the payment in a foreign jurisdiction at a rate of 10 per cent or more, any foreign municipal taxes and State taxes will be taken into account. [Schedule 1, item 38, subsection 832-725(1A)]

1.116 In this regard, the hybrid mismatch integrity rule is intended to apply only if a scheme results in the total foreign income tax being imposed on a payment is at a rate of 10 per cent or less.

Franking benefits on distributions made on Additional Tier 1 capital instruments issued in Australia

1.117 Additional Tier 1 capital can be issued by ADIs and insurance companies and other entities that are grouped for prudential purposes. If an ADI or insurance company (or other grouped entity) that has a foreign branch issues Additional Tier 1 capital, part of the Additional Tier 1 capital may be attributable to the foreign branch (depending on the laws of the particular foreign country) because the relevant entity is carrying on business in the foreign country where the branch is located (whether or not the Additional Tier 1 capital is issued in Australia).

1.118 An issue has arisen with the operation of the hybrid mismatch rules because all or part of the distribution on Additional Tier 1 capital issued by an Australian entity that is attributed to a foreign branch located in some foreign jurisdictions may be deductible in one or more of those foreign jurisdictions.

1.119 In this regard, currently the hybrid mismatch rules operate to deny imputation benefits on a distribution if all or part of the distribution gives rise to a foreign income tax deduction (paragraph 207-145(db), paragraph 207-150(1)(eb) and section 207-158). An amount that reflects all or part of the distribution will give rise to a foreign income tax deduction if an entity is entitled to deduct the amount in working out the tax base for a foreign tax period under the law of a foreign country dealing with foreign income tax (section 830-120).

1.120 The amount of the deduction entitlement in the foreign country for a distribution on the Additional Tier 1 capital instrument issued by an Australian ADI or insurance company may be for a comparatively small part of the distribution. However, regardless of how small the foreign income tax deduction is compared to the amount of the distribution, this will result in the denial of franking benefits on the whole distribution to investors in the Additional Tier 1 capital instrument. This would have a significant impact on the pricing of Additional Tier 1 capital instruments in Australia.

1.121 Therefore, the amendments ensure that franking benefits are not denied on distributions made in respect of an equity interest if the interest forms part of the Additional Tier 1 capital for the purposes of:

•

applicable prudential standards (as defined in subsection 995-1)(1) - the prudential standards are defined to mean the prudential standards determined by the APRA and in force under section 11AF of the Banking Act 1959;

•

applicable prudential standards determined by APRA and in force under section 32 of the Insurance Act 1973; or

•

applicable prudential standards determined by APRA and in force under section 230A of the Life Insurance Act 1995.

[Schedule 1, item 63, section 207-158]

1.122 In this regard, the relevant prudential standards apply to the Additional Tier 1 capital of:

•

an ADI;

•

a general insurance company; or

•

a life insurance company; or

•

a non-operating holding company of an ADI, general insurance company or life insurance company.

1.123 In these circumstances, an amount equal to the foreign income tax deduction is included in the assessable income of the entity that made the franked distribution in:

•

if the foreign tax period in which the foreign income tax deduction arises falls wholly in an income year of the entity - that income year; or

•

if the foreign tax period in which the foreign income tax deduction arises straddles two income years of the entity - the later of those income years.

[Schedule 1, item 62, section 15-80]

1.124 A consequential amendment is made to the table that lists particular kinds of assessable income. [Schedule 1, item 61, section 10-5]

Application and transitional provisions

1.125 The amendments relating to distributions made on Additional Tier 1 capital instruments commence on the day that the relevant Act receives the Royal Assent.

1.126 The remaining amendments commence on the first 1 January, 1 April, 1 July or 1 October to occur after the day that the relevant Act receives the Royal Assent.

1.127 The following amendments clarify the operation of the hybrid mismatch rules and ensure that they operate as intended:

•

clarify the operation of the hybrid mismatch rules for trusts and partnerships;

•

clarify the circumstances in which an entity is a deducting hybrid;

•

clarify the operation of the dual inclusion income rule;

•

clarify the operation of provisions that refer to corresponding foreign hybrid mismatch rules;

•

clarify that, for the purpose of applying the hybrid mismatch rules, foreign income tax generally does not include foreign municipal or State taxes; and

•

clarify that the hybrid mismatch rules apply to MEC groups in the same way as they apply to consolidated groups.

1.128 Therefore, these amendments apply to assessments made for income years starting on or after 1 January 2019 - that is, from the time that the hybrid mismatch rules started to apply. [Schedule 1, item 41]

1.129 These amendments are beneficial to affected taxpayers as they will improve the operation of the hybrid mismatch rules by making the rules more certain and removing some anomalous outcomes that arise under the existing law.

1.130 The amendments to clarify the meaning of foreign hybrid mismatch rules apply to assessments made for income years starting on or after 1 July 2020. [Schedule 1, item 51]

1.131 These amendments are intended to clarify the operation of the existing law but apply prospectively because they have not been previously announced.

1.132 The amendments to ensure that the hybrid mismatch integrity rule can apply appropriately to financing arrangements that have been designed to circumvent the operation of the hybrid mismatch rules could disadvantage some taxpayers and therefore apply to assessments made for income years starting on or after 2 April 2019 - that is, to income years starting after the date of announcement. [Schedule 1, item 60]

1.133 In this regard, these amendments will ensure that the hybrid mismatch integrity rule applies as intended. The primary objective of the integrity rule is to prevent the effect of the hybrid mismatch rules to neutralise double non-taxation outcomes from being compromised by multinational groups by using interposed conduit type entities that pay effectively no tax to invest in Australia, as an alternative to investing into Australia using hybrid instruments or entities.

1.134 The amendments relating to distributions made on Additional Tier 1 capital instruments apply to distributions made on or after 1 January 2019. [Schedule 1, item 64]

1.135 These amendments are beneficial to, and have been sought by, affected stakeholders as they will ensure that investors in the Additional Tier 1 capital instruments are not denied franking benefits on franked distributions made in respect of those instruments.

Chapter 2 - Single touch payroll reporting - child support information

Outline of chapter

2.1 Schedule 2 to the Bill amends the TAA to broaden the amounts that employers can voluntarily report under the Single Touch Payroll rules to include employer withholding of child support deductions from salary or wages and child support garnishee amounts from salary or wages that are paid to the Child Support Registrar.

2.2 Schedule 2 to the Bill also amends the CSRCA to ensure that if employers choose to report this information under Single Touch Payroll to the Commissioner of Taxation, they do not also have to report the amounts to the Child Support Registrar. It also makes other minor amendments to child support laws.

2.3 All legislative references in this Chapter are to the TAA unless otherwise stated.

Context of amendments

2.4 Single Touch Payroll involves the reporting of employee salary and wages to the ATO each payday. The Single Touch Payroll rules were introduced in 2016, initially applying to substantial employers from 1 July 2018, and applying to all employers from 1 July 2019 regardless of the number of employees they have. The Single Touch Payroll rules include mandatory reporting obligations and voluntary reporting.

2.5 Single Touch Payroll was set up as a platform which could be expanded upon to streamline employer reporting. These amendments to broaden the Single Touch Payroll reporting rules were announced as part of the 2019-20 Budget.

2.6 The current approach of requiring employers to provide or confirm information to Government agencies, often as part of a manual process, is inefficient for all involved. Industry in particular has consistently highlighted the significant administrative burden associated with ongoing reporting obligations to Government, and responding to ad-hoc requests for information. Many of these requests stem from Services Australia (formerly the Department of Human Services), as part of administrative processes associated with social security payment claims processing and compliance activities, particularly on child support withholding payments. Currently, employers experience highly resource intensive manual interactions with Services Australia on child support withholding payments which could be streamlined through Single Touch Payroll.

2.7 The expansion of Single Touch Payroll reporting to include reporting of child support deductions and the introduction of an automated data-sharing solution is designed to reduce the compliance burden on employers by removing duplicate reporting requirements and manual processes for employers, giving them a greater return on their investment in Single Touch Payroll.

2.8 An automated data-sharing solution will commence from 1 July 2020 which will enable the sharing of data in near real-time between the ATO and other Commonwealth agencies where the law already allows for the sharing of data. This will cover the exchange of child support information reported to the ATO to the Child Support Registrar.

2.9 Schedule 2 partially implements the expansion of Single Touch Payroll as announced in the 2019-20 Budget. Other measures relating to extending the Single Touch Payroll reporting requirements to other data sets (including disaggregated gross pay amounts and employee separation information) are being implemented through legislative instruments made by the Commissioner of Taxation.

Summary of new law

2.10 Schedule 2 to the Bill amends the TAA to broaden the amounts that employers can voluntarily report under the Single Touch Payroll rules to include employer withholding of child support deductions from salary or wages and child support garnishee amounts from salary or wages that are paid to the Child Support Registrar.

2.11 Schedule 2 to the Bill also amends the CSRCA to ensure that if employers choose to report under Single Touch Payroll to the Commissioner of Taxation, they do not also have to report the amounts to the Child Support Registrar. It also makes other minor amendments to child support laws.

Comparison of key features of new law and current law

Detailed explanation of new law

Reporting of child support withholding amounts and child support garnishee amounts by employers

Amendments to the TAA

2.12 Schedule 2 to the Bill amends the TAA to broaden the amounts that employers can voluntarily report under the Single Touch Payroll rules to include employer withholding of child support deductions from salary or wages and child support garnishee amounts from salary or wages that are paid to the Child Support Registrar.

2.13 Schedule 2 to the Bill also amends the CSRCA to ensure that if employers choose to report under Single Touch Payroll to the Commissioner of Taxation, they do not also have to report the amounts to the Child Support Registrar. It also makes other minor amendments to child support laws.

2.14 Single Touch Payroll reporting gives employers the option to voluntarily report certain amounts to the Commissioner of Taxation under subsection 389-15(3) in Schedule 1. Employers can voluntarily report:

•

employer superannuation contributions (item 1), and

•

fringe benefits amounts (item 2).

2.15 The amendments extend Single Touch Payroll voluntary reporting to laws other than taxation laws. Voluntary reporting is broadened to include child support deductions and child support garnishee amounts that are deducted from salary or wages of the employee. [Schedule 2, item 8, subsection 389-30(1) in Schedule 1 (table items 1, 2 and 3)]

2.16 The amendments allow employers to voluntarily report an amount of child support deducted from salary or wages paid to an employee that is made in compliance with a notice to make child support deductions given by the Child Support Registrar. This amount can be reported on or before the day the deduction is made. [Schedule 2, item 8, table item 1 to the table in subsection 389-30(1) in Schedule 1]

2.17 Where an employer is under an obligation to make periodic child support deductions from salary or wages of the employee and makes a nil deduction, the amendments allow the voluntary reporting of a nil amount. This amount can be reported at the following times:

•

on or before the day on which the employer pays salary or wages; or

•

on or before the day an employer would ordinarily pay salary or wages to the employee, but the employer does not do so because no salary or wages are payable (for example, when an employee is on leave without pay).

[Schedule 2, item 8, table item 2 to the table in subsection 389-30(1) in Schedule 1]

2.18 The amendments allow the voluntary reporting of an amount of child support garnisheed from salary or wages and paid to the Child Support Registrar in compliance with a garnishee notice given by the Child Support Registrar. This amount can be reported on or before the day the amount is paid. [Schedule 2, item 8, table item 3 to the table in subsection 389-30(1) in Schedule 1]

2.19 Allowing for the voluntary reporting of child support deductions and child support garnishee amounts under the Single Touch Payroll rules reduces the compliance burden on employers interacting with Services Australia and provides the ATO with more detailed information than it currently receives.

2.20 The voluntary reporting of child support deductions and child support garnishee amounts must be provided to the Commissioner of Taxation in the approved form. [Schedule 2, item 8, subsection 389-30(2) in Schedule 1]

2.21 This information will then be disclosed by the Commissioner of Taxation to the Child Support Registrar under the existing taxation law.

2.22 A disclosure of personal information (within the meaning of the Privacy Act 1988) to the Commissioner of Taxation under subsection 389-30(1) in Schedule 1 is taken to be authorised for the purposes of the Privacy Act 1988. [Schedule 2, item 8, subsection 389-30(3) in Schedule 1]

2.23 The terms 'employee', 'employer', 'payer' and 'salary or wages' used in the table to subsection 389-30(1) have the same meaning as in the CSRCA. [Schedule 2, item 8, subsection 389-30(4) in Schedule 1]

Amendments to child support laws

2.24 Schedule 2 makes consequential amendments to the CSRCA to ensure that an employer is not subject to their ordinary requirements to report under the CSRCA to the extent that the employer has voluntarily reported to the Commissioner of Taxation under the Single Touch Payroll rules. [Schedule 2, item 4, subsection 47(1B) of the CSRCA]

2.25 This means that if an employer chooses to report the child support withholding amounts (as well as nil amounts) under Single Touch Payroll, they are exempt from the reporting requirements under the CSRCA. If an employer chooses not to, or fails to, report these amounts under Single Touch Payroll, their ordinary reporting obligations under section 47 of the CSRCA continue to apply.

2.26 The existing rules in the CSRCA relating to the employer remittance of child support payments owed to the Child Support Registrar remain unchanged.

Example 2.1 - reporting child support amounts withheld from salary and wages

Charles is an employer who has a child support withholding obligation under which he must withhold child support amounts from his employee Eric's salary, and pay the amount to the Child Support Registrar. Charles has elected to report the amount under the Single Touch Payroll reporting rules.

Eric is paid a fortnightly wage of $5,000. Under the employer withholding notice $500 must be withheld for child support. This does not reduce Eric's fortnightly ordinary time earnings and salary or wages, and does not affect the existing amounts that must be reported under the mandatory reporting amounts.

Under the amended Single Touch Payroll reporting requirements, Charles can voluntarily report the following amount under table item 1 to the table in subsection 389-30(1): $500.

Under the existing Single Touch Payroll reporting requirements, Charles is required to report Eric's fortnightly wage under table item 2 to the table in subsection 389-5(1) of the mandatory reporting rules: $5,000.

Because Charles has chosen to report the child support withholding amount under the Single Touch Payroll rules, and Charles reports that amount, Charles is exempt from reporting the amount to the Child Support Registrar.

2.27 Schedule 2 to the Bill makes consequential amendments to the Child Support (Assessment) Act 1989 and the CSRCA to ensure that the Child Support Registrar can require the Commissioner of Taxation to provide the Registrar with information that is in the possession of the Commissioner, or that may come into the Commissioner's possession (including information that comes into existence after the requirement is made). It also provides that the requirement may be of a standing nature. This allows for the ongoing disclosure of information through the automated data-sharing solution. [Schedule 2, items 1 and 2, subsection 150D(1) of the Child Support (Assessment) Act 1989 and subsection 16C(1) of the CSRCA]

2.28 The requirement being of a standing nature means information voluntarily reported after a requirement is made can be provided by the Commissioner to the Registrar even though the information was not in existence at the time the Registrar made the requirement. For example, after a requirement is made by the Registrar, child support information may then come into the possession of the Commissioner through a subsequent employer voluntary reporting of child support information under Single Touch Payroll. Under the amended child support laws, this information which was not in the possession of the Commissioner at the time of the requirement (and not in existence at the time of the requirement) can be shared by the Commissioner to the Registrar.

2.29 The information that can be required includes tax file numbers (TFNs). Use of Single Touch Payroll for reporting of child support requires the child support information and the TFN information to be exchanged between the Commissioner and the Registrar to identify clients.

Consequential amendments

2.30 Schedule 2 to the Bill makes amendments as a consequence of extending voluntary Single Touch Payroll reporting, including inserting provisions and headings which explain and reference 'voluntary reporting' and Guide material. [Schedule 2, items 6 and 7, sections 389-1 and 389-15 in Schedule 1]

2.31 An amendment to the CSRCA to clarify that if the employer reports the child support information under Single Touch Payroll, there is no offence arising under the CSRCA for this disclosure. [Schedule 2, item 5, subsection 58(2A) of the CSRCA]

2.32 Schedule 2 to the Bill also corrects a spelling error in the CSRCA. [Schedule 2, item 3, subparagraph 42B(1)(a)(ii) of the CSRCA]

Application and transitional provisions

2.33 The amendments in relation to a requirement made by the Registrar for the Commissioner to provide the Registrar with information about people, including tax file numbers, apply after the commencement of Schedule 2. [Schedule 2, subitem 9(1)]

2.34 The amendments allowing employers to report child support deductions and child support garnishee amounts deducted from salary or wages apply in relation to amounts that an employer may notify to the Commissioner of Taxation if the entitlement to notify arises on or after 1 July 2020. [Schedule 2, subitem 9(2)]

Chapter 3 - Deductible gift recipient status for community sheds

Outline of chapter

3.1 Schedule 3 of the Bill amends the ITAA 1997 to introduce a new general category of DGR for community sheds. The new DGR category applies to public institutions that are registered charities and satisfy the definition of a community shed.

3.2 To be a community shed a public institution must:

•

have the dominant purposes of advancing mental health and preventing or relieving social isolation;

•

principally advance these purposes through providing a physical location at which individuals are supported to work on projects or undertake other activities in the company of others; and

•

have membership that is open to members of the public.

3.3 All legislative references in this Chapter are to the ITAA 1997, unless otherwise stated.

Context of amendments

3.4 As part of the 2019-20 Budget, the Government announced the establishment of a new DGR general category to enable Men's Sheds and Women's Sheds to access the DGR concession. This Schedule implements the announced measure.

3.5 The income tax law allows income tax deductions for taxpayers who make gifts of $2 or more to a DGR. To be a DGR, an organisation must fall within one of the general categories set out in Division 30 or be specifically listed by name in that Division.

Comparison of key features of new law and current law

Detailed explanation of new law

3.6 Schedule 3 to the Bill amends the ITAA 1997 to introduce a new general category of DGR for community sheds. The new DGR category applies to public institutions that are registered charities and satisfy the definition of a community shed. [Schedule 3, items 1 and 2, table item 1.1.9 in subsection 30-20(1)]

3.7 All legislative references in this Chapter are to the ITAA 1997, unless otherwise stated.

Public institution

3.8 To eligible to be a DGR under the new category, an entity must be a public institution. [Schedule 3, item 3, the definition of community shed in subsection995-1(1)]

3.9 An institution is an organisation that both has a structure distinct from other organisations or entities and undertakes activities on its own behalf. It is distinct from a fund that is a mere repository of moneys and does not undertake activities of its own.

3.10 For an institution to be a public institution, it must be open to the public (or a sufficient section of the community) to join as a member and not carry on its activities on for private profit or gain.

Charity registration

3.11 To be eligible to be a DGR under the amendments, an entity must also be registered as a charity under the Australian Charities and Not-for-profits Commission Act 2012. [Schedule 3, item 1, table item 1.1.9 in subsection 30-20(1)

3.12 This requires, among other things, that all of the purposes of the institution are charitable and that it must not operate for the profit of its members.

3.13 This requirement ensures community sheds are subject to appropriate regulatory oversight, consistent with other DGRs.

Community sheds

3.14 Finally, an entity must meet the definition of a community shed. A community shed is an public institution that:

•

has the dominant purposes of advancing mental health and preventing or relieving social isolation;

•

principally advances these purposes through providing a physical location at which individuals are supported to work on projects or undertake other activities in the company of others; and

•

either:

-

has completely open membership, or

-

has membership that is open to all persons of a particular gender or with Indigenous heritage or both.

[Schedule 3, item 3, the definition of community shed in subsection995-1(1)]

Dominant purposes of advancing mental health and preventing or relieving social isolation

3.15 Community sheds include diverse organisations such as Men's Sheds and Women's Sheds that undertake a range of activities, such as sharing hobbies and interests or participating in community projects.

3.16 However, the distinguishing factor between a community shed covered by the new DGR category and other community organisations is that the activities of a community shed are for the dominant purposes of advancing mental health and preventing or relieving social isolation. The purpose of advancing mental health is a subset of the purpose of advancing health, which is one of the long established charitable purposes identified in the Charities Act 2003. The purpose of preventing or relieving social isolation is a related but distinct purpose, which requires that an organisation seek to address the particular harms that arise from a lack of social contact and loneliness.

3.17 Only organisations with these dominant purposes are eligible to be a DGR because of the amendments. [Schedule 3, item 3, paragraph a of the definition of 'community shed' in subsection 995-1(1)]

3.18 An organisation has the dominant purposes of advancing mental health and preventing or relieving social isolation if those purposes, considered collectively are the sole, ruling or prevailing purposes of the organisation and any other purposes are, in comparison, minor, subordinate or incidental.

3.19 In determining this, the two purposes must be considered in combination together, rather than separately. It is not necessary that each purpose individually be dominant or that they are both pursued equally, but instead only that the two purposes taken together are dominant and not merely minor, incidental or ancillary.

Physical location and support

3.20 Community sheds are also distinguished from other institutions that may have similar purposes by the specific means they principally adopt to advance this purpose - the provision of a physical space in which individuals are supported in pursuing activities or undertaking projects in the company of others.

3.21 Given this, an institution must provide a physical location to be eligible to be a DGR because the amendments. However, that physical location is not required to be fixed or permanent. The physical location is also not required to be a structure and may be outdoors. Arrangements to facilitate electronic communication, such as an online forum or chatroom, do not constitute a physical location. [Schedule 3, item 3, paragraph b of the definition of 'community shed' in subsection 995-1(1)]

3.22 It is also not sufficient that the institution only provide a physical location without further support or encouragement. Rather the institution must additionally support or encourage the use of the location, through facilitating work on projects or other activities at the location, as a key part of how it achieves its dominant purposes.

3.23 A community shed could demonstrate it is supporting its purpose of advancing mental health by providing a physical location where members have access to information and other resources to inform their understanding of mental health issues. A community shed is not expected to provide professional mental health services.

3.24 Likewise, a community shed would usually give effect to its purpose of preventing or relieving social isolation by providing a welcoming environment for individuals from across the community (noting permitted restrictions on membership discussed below) and supporting social connections amongst members. For example, this could involve a community shed organising projects or other activities that foster supportive peer relationships for people at risk of social isolation.

3.25 To be the principal means by which an institution seeks to achieve its purposes, it must be the main means it adopts or the means it uses more than any other. In this context, principally has the same meaning as it does in item 13 of the table in subsection 25-5(5) of the Australian Charities and Not-for-profits Commission Act 2012, as referred to in the definition of registered health promotion charity in the ITAA 1997.

Open membership

3.26 Finally, community sheds must, broadly, be open to the community to join and generally not impose criteria restricting membership based on matters such as age, race or background. [Schedule 3, item 3, paragraph c of the definition of 'community shed' in subsection 995-1(1)]

3.27 However, two restrictions are permitted.

3.28 The first relates to criteria restricting membership to individuals of one gender. This restriction recognises that some of the individuals who are most likely to benefit from the work of community sheds in addressing social isolation are most likely to be comfortable in a space with others of the same gender. [Schedule 3, item 3, subparagraph c(ii) of the definition of 'community shed' in subsection 995-1(1)]

3.29 Similarly, the second restriction, relating to criteria restricting membership to individuals with Indigenous heritage, recognises the special cultural position of Australia's Indigenous people and the benefits community sheds can provide in giving a space for Indigenous cultural traditions to be shared. [Schedule 3, item 3, subparagraph c(ii) of the definition of 'community shed' in subsection 995-1(1)]

3.30 It should be noted that these restrictions relate to the definition of community shed for the purposes of the DGR tax concession. Nothing in these amendments affects any restrictions or obligations that other legislation may impose on membership, participation or anything else.

Consequential amendments

3.31 Consequential amendments are made to the index in section 30-315 of Division 30 to reflect the new category of DGR. [Schedule 3, item 2, table item 34AA of subsection 30-315(2)]]

Application and transitional provisions

3.32 The amendments made by Schedule 3 commence on the first day of the first quarterly period following Royal Assent. [Clause 2]

3.33 The amendments apply to gifts and contributions made on or after 1 July 2020. [Schedule 3, item 4]

Chapter 4 - Funding capital increases for the World Bank Group

Outline of chapter

4.1 Schedule 4 to the Bill amends the IMA Act 1947 and IFC Act 1955 to facilitate Australia making additional capital contributions to the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC) of the World Bank Group.

4.2 To achieve this, the amendments streamline the existing legislative processes under which Australia enters into agreements to fund capital increases to the IBRD and revise the way the existing 'Articles of Agreement' of the IFC are incorporated into the IFC Act 1955. The amendments also establish appropriations to facilitate payments that Australia commits to make under an agreement with the IBRD or the Articles of Agreement of the IFC.

4.3 As a result of these changes, further amendments to either Act will not be required to facilitate future capital increases to the IBRD or the IFC.

Context of amendments

4.4 Australia holds shares in the IBRD and IFC as a member of the World Bank Group. The IBRD and IFC play a vital role in providing financial assistance and advisory services to middle and low income developing countries.

4.5 This assistance creates significant benefits throughout the Indo-Pacific region, allowing countries to reduce poverty and build shared prosperity through investment in much-needed physical infrastructure and improved social outcomes.

Capital Increases for the IBRD and IFC

4.6 In April 2018 the World Bank Group proposed a US$82.6 billion capital increase for the IBRD and the IFC.

4.7 This proposal followed the World Bank Group's latest shareholder review about resourcing, governance and voice reforms. Following this proposal:

•

On 27 September 2018, the Treasurer (as Australia's Governor to the World Bank Group) voted to approve the IBRD and IFC resolutions.

•

On 1 October 2018, the World Bank Group announced the IBRD capital increase had been endorsed by the Governors.

•

On 16 April 2020, the Word Bank Group announced the IFC capital increase had been endorsed by the Governors.

4.8 Under the resolution for the capital increase to the IBRD, Australia has been allocated an additional 7,462 shares in the IBRD at a price equivalent to US$120,635 per share. Under the resolution, Australia is to pay the World Bank Group a proportion of the share value for each share over a five-year period, with a callable capital component attached to the unpaid value of the share.

4.9 Australia's subscription comprises 3,243 shares under a 'general capital increase', and 4,219 shares under a 'selective capital increase' (with different payment arrangements applying to the different increases). Australia's contribution to the IBRD capital increase results in around A$154 million payable over five years starting 2019-20 and a callable capital component of A$1,016.2 million.

4.10 Under the resolution for the capital increase to the IFC, Australia may purchase up to 102,370 additional shares at a price equivalent to US$1,000 each. Australia's contribution would be around A$144 million payable over five years. The IFC also proposes to convert its retained earnings into paid-in capital and so Australia will also receive fully paid in shares to the value of US$313.5 million (around A$402.6 million).

Legislative change required to facilitate subscriptions

4.11 Legislation is required to authorise the appropriations required for Australia to subscribe to the extra shares it has been allocated under the IBRD capital increase package.

4.12 Previous capital increases to the IBRD have been authorised through amendments to the IMA Act 1947. In particular, section 9 of the Act currently refers to the previous capital increase that was authorised in 2010 through the International Financial Institutions Legislation Amendment Act 2010. That section is now redundant as Australia's has already made the payments required to acquire these earlier shares.

4.13 With the exception of section 9, every other provision in the IMA Act 1947 includes a standing appropriation to facilitate payments that Australia is required to make in respect of agreements covered by the Act. Appropriations in these contexts are appropriate because they ensure that Australia is able to comply with any international obligations it has under an agreements to make payments of a particular kind. Importantly, any agreements that impose obligations of this kind constitute treaty actions that are subject to scrutiny through the JSCOT process.

4.14 Other provisions of the IMA Act 1947 also explicitly authorise the Minister to enter into agreements that involve Australia providing financial assistance or payments, and provide appropriations for such payments. For example, subsections 8C and 8CA(1) of the Act authorises the Minister to enter into certain agreements for Australia to lend money to a country, or enter into a currency swap with the country, at the request of the International Monetary Fund, or under a program of the World Bank or the Asian Development Bank. Subsections 8C(3) and 8CA(4) provide that the Consolidated Revenue Fund is appropriated for the purposes of payments by Australia under, or in connection with, such agreements.

4.15 Legislative amendments to the IFC Act 1955 are also required to authorise payments to facilitate additional subscriptions to the IFC .

4.16 The IFC Act 1955 approves Australia's acceptance of membership in the IFC, and provides for the appropriation of moneys for Australia to subscribe to the capital stock of the IFC (see section 5 of the IFC Act 1955). In contrast to section 9 of the IMA Act 1947 (which authorises the last additional share subscription), section 5 of the IFC Act 1955 currently authorises the total number of shares in the IFC that Australia has subscribed to.

4.17 This is achieved by reference to Australia's subscription to the capital stock of the IFC set out in the 'Articles of Agreement of the IFC', which are incorporated into the Act through the definition of Agreement in section 3 and the Schedules to the Act. Under the Agreement, Australia's initial share subscription was 2,215 shares for a total of US$2,215,000 (as per paragraph (a) of section 3 if Article II of the Agreement, by reference to Schedule A to the Articles of Agreement). The definition of Agreement in section 3 also facilities amendments to the Articles of Agreement through resolutions set out in the other Schedules to the Act.

4.18 Unlike the definition of 'Agreement' in section 3 of the IFC Act 1955, the definitions of 'Bank Agreement', 'Fund Agreement' and 'IMF loan agreement 2016' in the IMA Act 1947 provide for those agreements to be amended from time to time. Amendments to the IMF loan agreement are implemented through the Treasurer providing notice of the amendment through a legislative instrument (see subsection 8CAA(3)). Such legislative instruments cannot commence until the end of the disallowance period for the instrument (see subsection 8CAA(4)).

4.19 In contrast, the Bank Agreement and Fund Agreement do not require a legislative instrument to amend their terms. However, the Treasurer is required to table annual reports in Parliament about the operation of the Act, and the operation of the Bank Agreement and Fund Agreement, under section 10 of the IMA Act 1947.

Summary of new law

4.20 Schedule 4 to the Bill updates the IMA Act 1947 and IFC Act 1955 to establish clear legislative frameworks under which Australia may enter into agreements with the IBRD or IFC to buy additional shares of their respective capital stocks. The amendments also authorise appropriations from the Consolidated Revenue Fund for the purposes of payments that Australia is required to make under any such agreements.

4.21 Schedule 4 to the Bill also updates the IFC Act 1955 to revise the way that the 'Articles of Agreement' of the IFC are incorporated into the Act. As part of these changes, the amendments authorise future amendments to the Articles of Agreement to be specified in a legislative instrument. The amendments also authorise appropriations from the Consolidated Revenue Fund for the purposes of payments for additional subscriptions of shares in the IFC that Australia is obliged to make under the Articles of Agreement.

4.22 As a result of these changes, further amendments to either Act will not be required to facilitate future capital increases to the IBRD or the IFC. This approach is consistent with all other agreements, and their related appropriations, covered by the IMA Act 1947.

Comparison of key features of new law and current law

Detailed explanation of new law

Amendments to facilitate capital increases to the IBRD

4.23 The amendments in Schedule 4 to the Bill facilitate Australia making additional capital contributions to the IBRD and IFC. This is achieved by introducing clear legislative frameworks under which the Minister, on behalf of Australia, may enter into agreements with the IBRD or IFC to buy additional shares of their respective capital stocks. [Schedule 4, items 2 and 8, paragraph 5B(1)(a) of the IFC Act 1955 and paragraph 9(1)(a) of the IMA Act 1947]

4.24 Under these frameworks, an agreement may contain any terms and conditions that are determined by the Minister. [Schedule 4, items 2 and 8, paragraph 5B(1)(b) of the IFC Act 1955 and paragraph 9(1)(b) of the IMA Act 1947]

4.25 Pursuant to section 19 of the Acts Interpretation Act 1901, the reference to the 'Minister' includes the Treasurer and any other Minister in the Treasury portfolio who administers the IMA Act 1947 or IFC Act 1955.

4.26 The new provisions reflect the process that has been followed in respect of previous agreements under which Australia has acquired additional shares in the capital stock of the IBRD. In this sense, they codify rather than change existing practice.

4.27 The approach is also consistent with other provisions in the IMA Act 1947 relating to agreements that the Minister is authorised to enter in to. As noted above, sections 8C and 8CA also authorise the Minister to enter into certain agreements that provides for Australia to lend money to a country, or enter into a currency swap with the country, at the request of the International Monetary Fund or under a program of the World Bank or the Asian Development Bank.

4.28 The amendments also authorise appropriations from the Consolidated Revenue Fund for the purposes of payments that Australia is required to make under any such agreements. [Schedule 4, items 2 and 8, subsection 5B(2) of the IFC Act 1955 and subsection 9(2) of the IMA Act 1947]

4.29 This approach is consistent with all other appropriations covered by the IMA Act 1947 (including but not limited to the appropriations in relation to sections 8C and 8CA). Appropriations of this kind ensure that Australia is able to comply with any international obligations that it has to make payments under existing agreements, or any new agreements that the IMA Act 1947 or IFC Act 1955 authorise the Minister to enter into on Australia's behalf

4.30 Importantly the new appropriation is only applicable after Minister actually enters into an agreement to acquire additional shares in the capital stock of the IBRD or IFC. The capital increases for the IBRD and IFC that Australia voted in favour of, and that were subsequently endorsed, are not the same as the agreements that Australia must enter into to facilitate the payments to acquire the respective shares. The agreements will both be 'Instruments of Subscription' that Australia must deposit with the IBRD and IFC in order to subscribe to the additional shares.

4.31 As the entering into of such agreements constitute treaty actions, the decisions to enter into those agreements are subject to Australia's domestic treaty making procedures. This means that before the Minster is able to enter into an agreement, the agreement would need to be tabled in Parliament with a National Interest Analysis for consideration by JSCOT. Following JSCOT's consideration of the agreement, the Governor-General must also approve Australia's signing of the agreement.

4.32 These processes will apply to the current share subscription that these amendments are specifically intended to facilitate, as well as any future subscriptions proposed by the IBRD or IFC that Australia chooses to adopt. The processes ensure there is appropriate Parliamentary scrutiny of any decision of the Government to enter into agreements to subscribe to additional shares in the capital stock of the IBRD and IFC.

4.33 In addition to the standard JSCOT processes, the Minister is required to provide details about any payments to the IBRD through the annual reporting requirements in section 10 of the IMAA 1947.

4.34 The amendments also repeal the previous appropriation that facilitated the last subscription to additional shares in the capital stock of the IBRD. [Schedule 4, item 8, section 9 of the IMA Act 1947]

4.35 That appropriation is now redundant as Australia has already acquired the additional shares to which it related.

Amendments to facilitate capital increases to the IFC

4.36 The amendments in Schedule 4 to the Bill also facilitate revisions to the 'Articles of Agreement' of the IFC that are incorporated into the Act.

4.37 Under the revised approach, the Agreement is defined by reference to the original Articles of Agreement and the four amendments to it that are currently in force. [Schedule 4, item 1, section 3 (definition of 'the Agreement') of the IFC Act 1955]

4.38 The amendments in Schedule 4 to the Bill also repeal the Schedules to the IFC Act 1955 that previously contained the Articles of Agreement and its related amendments. [Schedule 4, items 3 to 7, Schedules 1 to 4 to the IFC Act 1955]

4.39 This updates the previous approach in the Act under which the Articles of Agreement and related amendments were replicated in full in the Schedules to the Act. Consistent with modern drafting approaches, these are now incorporated by reference. The revised definition provides full details of the Agreement and the related amendments, as well as where they can be publically accessed on-line through the Australian Treaties Library on the AustLII website ( http://austlii.edu.au ).

4.40 The revised definition also corrects two inadvertent omissions in the previous definition of 'Agreement' in the IFC Act 1955. The previous definition did not refer to the amendments to the Articles of Agreement that were done on 28 December 1992. The IFC Act 1955 also made provision for uncommenced amendments that were enacted with contingent commencement in 2010. Those amendments actually commenced in 2012 but were not listed as being incorporated into the Act.

4.41 The amendments also authorise future amendments to the Articles of Agreement to be specified in a legislative instrument. Where amendments of this kind are made, the Treasurer may, by legislative instrument, update the Articles of Agreement incorporated into IFC Act 1955 by providing notification of the amendment. [Schedule 4, items 1 and 2, section 3 (paragraph (b) of the definition of 'the Agreement') and subsection 5A(1) of the IFC Act 1955]

4.42 This approach for updating the Articles of Agreement consistent with the mechanism for updating Australia's legislated version of the 'IMF loan agreement 2016' under subsection 8CAA(3) of the IMA Act 1947. Amendments to the Articles of Agreement are subject to the voting procedures set out in Article VII of the Articles of Agreement. While Australia is entitled to vote on any such amendments, they can be made despite a vote by Australia to the contrary.

4.43 Allowing the updates to be specified through a legislative instrument means that the Parliament is not required to enact amendments to the IFC Act 1947 to ensure alignment between Australia's legislated version of the Articles of Agreement, and the Articles of Agreement that are actually in force.

4.44 However, any legislative instrument that is made to update the Articles of Agreement cannot commence until after the disallowance period for the instrument has passed. [Schedule 4, item 2, subsection 5A(2) of the IFC Act 1955]

4.45 This deferred commencement ensures that the Parliament can consider and deal with any amendment to Australia's legislated version of the Articles of Agreement before they take effect.

4.46 The amendments to the IFC Act 1955 also authorise appropriations from the Consolidated Revenue Fund for the purposes of payments that Australia is required to make under the Articles of Agreement. [Schedule 4, item 2, section5 of the IFC Act 1955]

4.47 Australia may be required to make such payments because of an amendment to the Articles of Agreement. Appropriations of this kind ensure that Australia is able to comply with any international obligations that it has to make payments under existing agreements.

4.48 However, the deferred commencement rule for legislative instrument to update Australia's legislated version of the Articles of Agreement ensures that the Parliament is able to disallow any amendment to the Articles of Agreement before it can authorise an appropriation. In conjunction with this disallowance process, any amendment to the Articles of Agreement would also constitute a treaty action that is subject to Australia's domestic treaty making procedures. This means that before the Minster makes an instrument to update the Articles of Agreement, the amendments would need to be tabled in Parliament for consideration by JSCOT.

Application and transitional provisions

4.49 The amendments commence the day after they receive the Royal Assent.

Chapter 5 - Deductible gift recipients

Outline of chapter

5.1 Schedule 5 to the Bill amends the ITAA 1997 to allow the following entities to be deductible gift recipients under the income tax law:

•

Governor Phillip International Scholarship Trust;

•

High Resolves;

•

Australian Academy of Law;

•

Superannuation Consumers' Centre Ltd.;

•

Motherless Daughters Australia Limited;

•

The Headstone Project (Tas) Inc.;

•

Foundation Broken Hill Limited;

•

C E W Bean Foundation.

Context of amendments

5.2 The income tax law allows income tax deductions for taxpayers who make gifts of $2 or more to a deductible gift recipient. Deductible gift recipients are entities that fall within one of the general categories set out in Division 30 of the ITAA 1997 or are specifically listed by name in that Division.

5.3 Deductible gift recipient status helps eligible organisations attract public financial support for their activities.

5.4 The Governor Phillip International Scholarship Trust is a registered charity that provides scholarships to master's degree students. Scholarships cover students' university and college fees, and student accommodation costs.

5.5 High Resolves is a registered charity that designs and delivers citizenship and leadership learning experiences for young people.

5.6 The Australian Academy of Law is a registered charity that promotes legal scholarship, legal research, legal education, legal practice, and the administration of justice. The Academy provides scholarships and research grants that advance legal education and the discipline of law, and promote ethical conduct and professional responsibility.

5.7 Superannuation Consumers' Centre Ltd is a registered charity that supports Australian consumers to access quality superannuation advice and manage their retirement savings.

5.8 Motherless Daughters Australia Limited is a registered charity that provides support to girls and women whose mothers have died.

5.9 The Headstone Project (Tas) Inc. is a registered charity that locates the unmarked graves of Tasmanian veterans of the First World War and installs headstones.

5.10 Foundation Broken Hill Limited is a registered charity that provides loans and grants to support employment opportunities and social development in Broken Hill and the surrounding region.

5.11 The C E W Bean Foundation is a registered charity that honours war correspondents, photographers and artists that captured and recorded Australian activities in war.

Summary of new law

5.12 Schedule 5 to the Bill amends the ITAA 1997 to allow the following entities to be deductible gift recipients under the income tax law:

•

Governor Phillip International Scholarship Trust;

•

High Resolves;

•

Australian Academy of Law;

•

Superannuation Consumers' Centre Ltd;

•

Motherless Daughters Australia Limited;

•

The Headstone Project (Tas) Inc.;

•

Foundation Broken Hill Limited;

•

C E W Bean Foundation.

Detailed explanation of new law

5.13 Taxpayers may claim an income tax deduction for gifts made to the Governor Phillip International Scholarship Trust provided the gift complies with the existing requirements of the income tax law. This amendment ensures that the Governor Phillip International Scholarship Trust receives appropriate support through the Commonwealth tax system for supporting students' education. [Schedule 5, item 1, table item 2.2.47 in the table in subsection 30-25(2)]

5.14 Taxpayers may claim an income tax deduction for gifts made to High Resolves provided the gift complies with the existing requirements of the income tax law. This amendment ensures that High Resolves receives appropriate support through the Commonwealth tax system for providing citizenship and leadership learning experiences. [Schedule 5, item 1, table item 2.2.48 in the table in subsection 30-25(2)]

5.15 Taxpayers may claim an income tax deduction for gifts made to the Australian Academy of Law provided the gift complies with the existing requirements of the income tax law. This amendment ensures that the Australian Academy of Law receives appropriate support through the Commonwealth tax system for promoting legal scholarship and research. [Schedule 5, item 1, table item 2.2.49 in the table in subsection 30-25(2)]

5.16 Taxpayers may claim an income tax deduction for gifts made to Superannuation Consumers' Centre Ltd provided the gift complies with the existing requirements of the income tax law. This amendment ensures that Superannuation Consumers' Centre Ltd receives appropriate support through the Commonwealth tax system for assisting consumers to manage their retirement savings. [Schedule 5, item 1, table item 2.2.50 in the table in subsection 30-25(2)]

5.17 Taxpayers may claim an income tax deduction for gifts made to Motherless Daughters Australia Limited provided the gift complies with the existing requirements of the income tax law. This amendment ensures that Motherless Daughters Australia Limited receives appropriate support through the Commonwealth tax system for assisting girls and women whose mothers have died. [Schedule 5, item 2, table item 4.2.47 in the table in subsection 30-45(2)]

5.18 Taxpayers may claim an income tax deduction for gifts made to The Headstone Project (Tas) Inc. provided the gift complies with the existing requirements of the income tax law. This amendment ensures that The Headstone Project (Tas) Inc. receives appropriate support through the Commonwealth tax system for its work in identifying the graves of returned servicemen. [Schedule 5, item 3, table item 5.2.35 in the table in subsection 30-50(2)]

5.19 Taxpayers may claim an income tax deduction for gifts made to Foundation Broken Hill Limited provided the gift complies with the existing requirements of the income tax law. This amendment ensures that Foundation Broken Hill Limited receives appropriate support through the Commonwealth tax system for assisting communities in Broken Hill and surrounding regions. [Schedule 5, item 4, table item 11.2.13 in the table in section 30-95]

5.20 Taxpayers may claim an income tax deduction for gifts made to the C E W Bean Foundation provided the gift complies with the existing requirements of the income tax law. This amendment ensures that the C E W Bean Foundation receives appropriate support through the Commonwealth tax system for honouring war correspondents. [Schedule 5, item 5, table item 12.2.6 in the table in subsection 30-100(2)]

Consequential amendments

5.21 Schedule 5 also amends the index for Division 30 of the ITAA 1997 to reflect the new listings. [Schedule 5, items 6 to 13, table items 9C, 30AA, 49D, 52AA, 53C, 56A, 72BA and 112AG in the table in section 30-315]

Application and transitional provisions

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

5.23 The following listings apply to gifts made between 1 July 2018 and 30 June 2025 (inclusive):

•

Governor Phillip International Scholarship Trust;

•

High Resolves;

•

C E W Bean Foundation.

[Schedule 5, items 1 and 5, row 3 of table items 2.2.47 and 2.2.48 of subsection 30-25(2) and row 3 of table item 12.2.6 of subsection 30-100(2)]

5.24 The following listings apply to gifts made between 1 July 2019 and 30 June 2025 (inclusive):

•

Australian Academy of Law;

•

Superannuation Consumers' Centre Ltd;

•

Motherless Daughters Australia Limited;

•

The Headstone Project (Tas) Inc.;

•

Foundation Broken Hill Limited.

[Schedule 5, items 1, 2, 3 and 4, row 3 of table items 2.2.49 and 2.2.50 of subsection 30-25(2), row 3 of table item 4.2.47 of subsection 30-45(2), row 3 of table item 5.2.35 of subsection 30-50(2) and row 3 of table item 11.2.13 of section 30-95]

5.25 The amendments apply retrospectively. This ensures that gifts made to the entities from the above application dates qualify for income tax deductions provided the gifts comply with all requirements of the income tax law. The changes are wholly beneficial both to taxpayers making gifts of $2 or more to these entities and to the entities that receive these gifts.

Chapter 6 - Tax secrecy

Outline of chapter

6.1 Schedule 6 to the Bill makes amendments to the tax secrecy provisions in the TAA to allow protected information relating to the JobKeeper scheme to be disclosed to the Fair Work Commission and the Fair Work Ombudsman for the purposes of the administration of the Fair Work Act 2009.

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

Context of amendments

6.3 Section 355-25 makes it an offence for a taxation officer to make a record of, or disclose, protected information. Protected information is generally information that relates to the affairs of an entity and identifies, or is reasonably capable of being used to identify, that entity, where that information was disclosed or obtained under or for the purposes of a taxation law.

6.4 An exception to the offence is contained in section 355-65. That section permits a taxation officer to make a disclosure of protected information if an item in a table in the section covers the making of the disclosure.

6.5 Existing circumstances in which disclosure is permitted include disclosing information to the Fair Work Ombudsman about an entity's non-compliance with a taxation law that is to be used for the purpose of ensuring the entity's compliance with the Fair Work Act 2009.

Summary of new law

6.6 Schedule 6 to the Bill makes amendments to subsection 355-65(8) to provide an additional circumstance in which protected information can be disclosed.

6.7 As a result of the amendments, a taxation officer is permitted to disclose protected information to the Fair Work Commission or the Fair Work Ombudsman where the information relates to the JobKeeper scheme and is for the purposes of the administration of the Fair Work Act 2009.

Comparison of key features of new law and current law

Detailed explanation of new law

6.8 Schedule 6 to the Bill inserts a new table item into the table in subsection 355-65(8) to include an additional circumstance in which protected information can be disclosed without the offence in section 355-25 applying. [Schedule #, item 1, item 5AB of the table in subsection 355-65(8)]

6.9 The amendments to the table in subsection 355-65(8) allows protected information related to the JobKeeper scheme to be disclosed to the Fair Work Commission and the Fair Work Ombudsman for the purposes of the administration of the Fair Work Act 2009. This allows these entities to receive information from the Commissioner of Taxation relating to the JobKeeper scheme that is required to appropriately address issues concerning compliance with obligations under the Fair Work Act 2009 (including instruments made under that Act).

6.10 Consistent with other exceptions to the tax secrecy offence in section 355-25, a defendant bears the evidential burden in relation to establishing that the exception applies. The reversal of the burden of proof is consistent with the Attorney-General's Department's A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, September 2011 edition.

6.11 It is appropriate that the evidential burden be reversed in this situation. Matters relating to the disclosure of protected information and for which purposes (such as what information is being disclosed and for what purpose the disclosure is being made) are peculiarly within the knowledge of the person making the disclosure and can be raised in making their defence. It would be significantly more difficult and costly for the prosecution to disprove these facts.

Application and transitional provisions

6.12 Schedule 6 to the Bill commences on the day after the Bill receives Royal Assent. [Clause 2

6.13 The amendments made by Schedule 6 apply to information disclosed or records made on or after the day of commencement. It does not matter whether the information recorded or disclosed was obtained before, on or after this day. [Schedule 6, item 2]

6.14 The amendments only permit the sharing of information relating to the JobKeeper scheme for the purposes of administering the Fair Work Act 2009.

6.15 However, while the JobKeeper scheme only operates for a limited period, information sharing is not restricted to this period. Instead, the amendments allow the sharing of protected information in relation to the JobKeeper scheme with the Fair Work Commission and the Fair Work Ombudsman after the final payments are made under the JobKeeper scheme.

6.16 This flexibility allows for effective administration in relation to disputes, investigations and other outstanding matters regarding the JobKeeper scheme that may continue after all payments have been made.

Chapter 7 - Statement of Compatibility with Human Rights

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

Schedule 1 - Hybrid mismatch rules

7.1 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

7.2 Schedule 1 to the Bill amends the hybrid mismatch rules in the ITAA 1997 to:

•

clarify the operation of the hybrid mismatch rules for trusts and partnerships;

•

clarify the circumstances in which an entity is a deducting hybrid;

•

clarify the operation of the dual inclusion income rule;

•

clarify the operation of provisions that refer to corresponding foreign hybrid mismatch rules;

•

clarify that, for the purpose of applying the hybrid mismatch rules, foreign income tax generally does not include foreign municipal or State taxes;

•

clarify that the hybrid mismatch rules apply to MEC groups in the same way as they apply to consolidated groups;

•

ensure that the hybrid mismatch integrity rule can apply appropriately to financing arrangements that have been designed to circumvent the operation of the hybrid mismatch rules; and

•

where distributions made on Additional Tier 1 capital instruments give rise to a foreign income tax deduction:

-

allow franking benefits on those distributions; and

-

include an amount equal to the amount of the deduction in the assessable income of the entity that makes the distribution.

Human rights implications

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

Conclusion

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

Schedule 2 - Single touch payroll reporting - child support information

7.5 Schedule 2 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

7.6 Schedule 2 allows employers who report under the Single Touch Payroll rules to voluntarily report child support deductions and child support garnishee amounts deducted from salary or wages to the Commissioner of Taxation.

7.7 Schedule 2 also broadens the power of the Child Support Registrar to require the Commissioner of Taxation to provide information (including tax file numbers) of particular individuals to the Child Support Registrar, to include information that may come into the possession of the Commissioner after the requirement is made (including information that comes into existence after the requirement is made). This allows for the ongoing exchange of information between the Registrar and the Commissioner to allow for automated near real-time reporting.

Human rights implications

7.8 Schedule 2 engages the right to protection from arbitrary or unlawful interferences with privacy in Article 17 of the International Covenant on Civil and Political Rights (ICCPR) by:

•

allowing certain employers to voluntarily report a range of personal information about their employees to the Commissioner of Taxation; and

•

allowing the Child Support Registrar to request the Commissioner of Taxation to share personal information about particular individuals on an ongoing basis.

7.9 The amendments provide employers with the option to report child support information to the Commissioner of Taxation rather than to the Child Support Registrar. The Commissioner of Taxation will then disclose the information to the Child Support Registrar. The amendments also broaden the power of the Registrar to require the Commissioner to provide information (including tax file numbers) of particular individuals to the Registrar, to include information that may come into the possession of the Commissioner after the requirement is made (including information that comes into existence after the requirement is made). This allows for the ongoing exchange of information between the Registrar and the Commissioner to allow for automated near real-time reporting.

7.10 The right in Article 17 of the ICCPR may be subject to permissible limitations, where these limitations are authorised by law and are not arbitrary. For an interference with the right to privacy to be permissible, the interference must be authorised by law, be for a reason consistent with the ICCPR and be reasonable in the particular circumstances. The UN Human Rights Committee has interpreted the requirement of 'reasonableness' to imply that any interference with privacy must be proportional to the end sought and be necessary in the circumstances of any given case.

7.11 The purpose of the extension to the Single Touch Payroll reporting rules are to leverage the Single Touch Payroll reporting system to:

•

reduce the compliance burden on employers by removing duplicate reporting requirements and manual processes; and

•

ensure more timely reporting in relation to child support deductions which are necessary to support the ongoing payment processes, monitoring, and improved accuracy of the child support payments system.

These are legitimate objectives.

7.12 The amendments give employers the option to report child support deductions and child support garnishee amounts through Single Touch Payroll reporting. Currently, employers can only report this information through manual interactions with Services Australia.

7.13 The information to be reported under these new tax rules would be limited to information employers are already required to report under child support laws. Schedule 2 does not impose any additional reporting requirements and essentially is a simplification process to allow for reporting through one system rather than two.

7.14 The streamlined reporting processes are expected to reduce the need to manually report child support information and will result in a lower administrative burden for employers. The amendments constitute an effective and proportionate means of achieving this objective as the new process simply allows information that would, under existing processes, pass directly between an employer and the Child Support Registrar, to pass through the Commissioner of Taxation.

7.15 The amendments provide an alternative method of reporting and do not affect an employer's choice to continue to report directly to the Child Support Registrar.

7.16 In electing to report under Single Touch Payroll, the child support information is treated as 'tax information', in the same manner as other tax information that is obtained by the ATO under taxation laws. Taxpayers' tax information held by the ATO is protected by strict secrecy and confidentiality rules that prohibit ATO officers from making records or disclosing this information unless a specific legislative exemption applies (see Division 355-B in Schedule 1).

7.17 Under subsection 355-65(2) in Schedule 1, ATO officers are already authorised to disclose the employer reported child support information (which is considered 'tax information') to the Child Support Registrar, as it will be for the purposes of administrating the child support laws.

7.18 The amendments also broaden the power of the Registrar to require the Commissioner to provide information (including tax file numbers) to the Registrar, to include information that may come into the possession of the Commissioner after the requirement is made (including information that comes into existence after the requirement is made). Schedule 2 does not change the type of information that may be required and essentially allows for the existing requirement to be of a standing nature to allow for automation and real-time reporting. The information provided to the Registrar is still subject to protections under existing taxation and child support secrecy laws.

7.19 The standing requirement is required for the exchange of reported child support information under the Single Touch Payroll rules between the Registrar and Commissioner. The amendments constitute an effective and proportionate means of achieving timely reporting in relation to child support deductions, which is necessary to support the ongoing payment processes, monitoring, and improved accuracy of the child support payments system. The new requirement simply allows information that would, under existing processes, pass between the Commissioner and the Registrar under repeatedly issued requests, to be exchanged on an ongoing basis under a standing request. These are legitimate objectives.

Conclusion

7.20 Schedule 2 is consistent with the right to privacy, as the collection and disclosure of information is neither arbitrary nor unlawful. To this extent, the Bill complies with the provisions, aims and objectives of the ICCPR. Schedule 2 is therefore compatible with human rights because to the extent that it may limit the right to privacy, the limitations are reasonable, necessary and proportionate.

Schedule 3 - Deductible gift recipient status for community sheds

7.21 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

7.22 Schedule 3 to the Bill amends the ITAA 1997 to introduce a new general category of DGR for community sheds. The new DGR category applies to public institutions that are registered charities and satisfy the definition of a community shed.

7.23 To be a community shed a public institution must:

•

have the dominant purposes of advancing mental health and preventing or relieving social isolation;

•

principally advance these purposes through providing a physical location at which individuals are supported to work on projects or undertake other activities in the company of others; and

•

have open membership to members of the public.

7.24 The income tax law allows income tax deductions for taxpayers who make gifts of $2 or more to a DGR.

Human rights implications

7.25 This Schedule engages with the following rights and freedoms:

•

the right to the highest attainable standard of physical and mental health under Article 12 of the International Covenant on Economic, Social and Cultural Rights (ICESCR); and

•

the right to equality and non-discrimination under Articles 2, 16 and 26 of the International Covenant on Civil and Political Rights (ICCPR), Article 2 of the ICESCR, Articles 1, 2, 4 and 5 of the International Convention on the Elimination of All Forms of Racial Discrimination and Articles 2, 3, 4 and 15 International Convention on the Elimination of All Forms of Discrimination Against Women.

Physical and mental health

7.26 The Schedule engages the right to the highest attainable standard of physical and mental health under Article 12 of the ICESCR by providing DGR status for organisations that, among other things, have as their dominant purposes, purposes of advancing mental health and addressing social isolation.

7.27 The amendments support the realisation of the right by providing additional Government support for organisations engaged in activities that advance mental health.

Equality and non-discrimination

7.28 The Schedule also engages with the right to equality and non-discrimination under Article 26 of the ICCPR by providing that eligible entities may have membership that is open only to persons of one gender, only open to Indigenous Australians or only open to Indigenous Australians of one gender.

7.29 This engages with the right and restricts the right as it permits Government support to be provided through the tax system to organisations that have membership rules that restrict membership based on gender or Indigenous status.

7.30 However permitting this restriction in some cases is a reasonable and proportionate means of pursing the legitimate objectives of advancing mental health and addressing social isolation. For personal, social and cultural reasons, many isolated people can be best assisted through the provision of a space restricted to those of the same gender. Similarly, the special cultural position and traditions of Australia's Indigenous peoples mean that sometimes issues around mental health and social isolation can be most effectively addressed through the provision of a space shared with others from the same cultural traditions.

7.31 It should also be noted that DGR status is also available for sheds with fully open membership

Conclusion

7.32 This Schedule is compatible with human rights. While it engages with the right to equality and non-discrimination as it permit support to be provided through the tax system to community sheds with restricted membership, it does in a reasonable and proportionate way in order to advance mental health and address social isolation.

Schedule 4-Funding capital increases for the World Bank Group

7.33 Schedule 4 to the Bill 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

7.34 Schedule 4 to the Bill amends the IMA Act 1947 and IFC Act 1955 to facilitate Australia making additional capital contributions to the IBRD, and the IFC of the World Bank Group.

7.35 To achieve this, the amendments streamline the existing legislative processes under which Australia enters into agreements to fund capital increases to the IBRD and revise the way the existing 'Articles of Agreement' of the IFC are incorporated into the IFC Act 1955. The amendments also establish appropriations to facilitate payments that Australia is required to make under an agreement with the IBRD, under the existing Articles of Agreement of the IFC, or under a separate agreement with the IFC.

Human rights implications

7.36 Schedule 4 does not engage any of the applicable rights or freedoms.

Conclusion

7.37 Schedule 4 is compatible with human rights as it does not raise any human rights issues.

Schedule 5 - Deductible gift recipients

7.38 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

7.39 Schedule 5 to the Bill amends the ITAA 1997 to allow the following entities to be deductible gift recipients under the income tax law:

•

Governor Phillip International Scholarship Trust;

•

High Resolves;

•

Australian Academy of Law;

•

Superannuation Consumers' Centre Ltd;

•

Motherless Daughters Australia Limited;

•

The Headstone Project (Tas) Inc.;

•

Foundation Broken Hill Limited;

•

C E W Bean Foundation.

Human rights implications

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

Conclusion

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

Schedule 6 - Tax Secrecy

7.42 Schedule 6 to the Bill 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

7.43 Schedule 6 to the Bill makes amendments to the tax secrecy provisions in the TAA 1953 to allow protected information relating to the JobKeeper scheme to be disclosed to the Fair Work Commission and the Fair Work Ombudsman for the purposes of the administration of the Fair Work Act 2009.

Human rights implications

7.44 The amendments made by Schedule 6 to the Bill engage:

•

the right to be presumed innocent until proven guilty according to the law in Article 14(2) of the International Covenant on Civil and Political Rights; and

•

the prohibition on arbitrary or unlawful interference with privacy contained in Article 17 of the International Covenant on Civil and Political Rights.

Presumption of innocence

7.45 The amendments made by Schedule 6 to the Bill engage Article 14(2) of the International Covenant on Civil and Political Rights as the amendments provide for an exception to the prohibition of a taxation officer disclosing protected information. The prohibition is a criminal offence. A taxation officer wishing to rely on the exception bears the evidential burden in relation to the matters.

7.46 It is appropriate that the evidential burden be reversed in this situation as matters relating to the disclosure and for which purposes (such as what information is being disclosed and for what purpose the disclosure is being made) are peculiarly within the knowledge of the person making the disclosure and can be raised in making their defence. It would be significantly more difficult and costly for the prosecution to disprove these facts.

Privacy

7.47 The amendments made by Schedule 6 to the Bill are compatible with Article 17 of the International Covenant on Civil and Political Rights as its engagement will neither be unlawful or arbitrary.

7.48 In order for an interference with the right to privacy to be permissible, the interference must:

•

be authorised by law;

•

be for a reason consistent with the International Covenant on Civil and Political Rights; and

•

be reasonable in the particular circumstances.

7.49 The United Nations Human Rights Committee has interpreted the requirement of 'reasonableness' to imply that any interference with privacy must be proportional to the end sought and be necessary in the circumstances of any given case.

7.50 The engagement with the prohibition on the interference with privacy is lawful as the amendments authorise the disclosure of information only as it relates to the JobKeeper scheme and only for the purposes of the administration of the Fair Work Act 2009.

7.51 The amendments are not arbitrary as they are aimed at a legitimate objective, and are reasonable and proportionate in achieving that objective. The JobKeeper scheme has involved changes to arrangements under the Fair Work Act 2009, and both the Fair Work Ombudsman and the Fair Work Commission play important roles in relation to compliance and enforcement with, and dispute resolution under, the Fair Work Act 2009 including in relation to those changes. The amendments ensure that both bodies can access the information they need to undertake their important functions under the Fair Work Act 2009 in connection with the JobKeeper scheme.

7.52 The amendments are also proportionate and reasonable. The amendments are limited to information relating to the JobKeeper scheme and will cease to have effect once disputes and investigations relating to the operation of the JobKeeper scheme have concluded. The amendments are further limited to information that is relevant to the administration of the Fair Work Act 2009 (including instruments made under that Act).

Conclusion

7.53 Schedule 6 to the Bill is compatible with human rights as it does not limit any applicable human rights or freedoms.