House of Representatives

Explanatory Memorandum

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

Glossary

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

General outline and financial impact

Schedule 1 - Deductible gift recipients

Schedule 1 to the Bill amends the ITAA 1997 to require a fund, authority or institution to, as a precondition for DGR endorsement, be:

•

a registered charity; or

•

an Australian government agency; or

•

operated by a registered charity or an Australian government agency.

Date of effect: This Schedule generally applies to funds, authorities and institutions three months after the Bill receives Royal Assent. However, existing DGRs and existing DGR applicants will have an additional 12 months (and in some cases, four years) after that time before the amendments in this Schedule apply.

Proposal announced: This Schedule partially implements the measure 'Deductible Gift Recipient Reform - strengthening governance and integrity and reducing complexity' from the 2017-18 Mid-Year Economic and Fiscal Outlook.

Financial impact: This Schedule is estimated to have a negligible impact on revenue over the forward estimates.

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 3.

Compliance cost impact: Affected entities will need to register as a charity with the ACNC and comply with reporting obligations and governance requirements. The amendments in this Schedule form one part of the measure 'Deductible Gift Recipient Reform - strengthening governance and integrity and reducing complexity' from the 2017-18 Mid-Year Economic and Fiscal Outlook. The estimated compliance cost for the entire measure, including the amendments in this Schedule, is $0.2 million per annum.

For the purposes of the Government decision to implement this measure, Treasury has certified a number of documents as meeting the requirements of a Regulation Impact Statement.[1]

Schedule 2 - Offshore banking units

The Bill amends Australia's OBU regime to:

•

remove the concessional tax treatment for OBUs;

•

remove the interest withholding tax exemption; and

•

close the regime to new entrants by removing the Minister's ability to declare or determine an entity to be an OBU.

Date of effect: The changes to the concessional tax treatment is removed from the 2023-24 income year and the withholding tax changes apply from 1 January 2024.

The changes to the Minister's ability to make a declaration or determination regarding new OBUs apply from the day after the amendments receive Royal Assent. These changes apply to all applications, irrespective of when they were made.

Proposal announced: Amendments to the OBU regime were announced by the Treasurer, the Hon Josh Frydenberg MP on 26 October 2018.

Financial impact: This measure is estimated to have the following impact on the underlying cash balance over the forward estimates period ($m):

Human rights implications: The Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 3.

Compliance cost impact: Removing the preferential tax treatment for OBUs is likely to result in an initial minor regulatory burden as OBUs transition to the new arrangements. In the longer term, there are likely to be regulatory savings as OBUs will no longer utilise the regime and therefore will not need to comply with the regime's requirements.

Chapter 1 - Deductible gift recipients

Outline of chapter

1.1 Schedule 1 amends the ITAA 1997 to require a fund, authority or institution to, as a precondition for DGR endorsement, be:

•

a registered charity; or

•

an Australian government agency; or

•

operated by a registered charity or an Australian government agency.

1.2 This requirement already applies to the majority of the general DGR categories in Subdivision 30-B of the ITAA 1997. The amendments extend this requirement to the remaining general DGR categories.

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

Context of amendments

1.4 Subdivision 30-A allows taxpayers to deduct a gift or contribution they have made to certain recipients. Generally, for a gift or contribution to be deductible, the recipient must be:

•

a fund, authority or institution covered by a table item in Subdivision 30-B; or

•

an ancillary fund established and maintained under a will or instrument of trust for a fund, authority or institution covered by a table item in Subdivision 30-B.

1.5 Subdivision 30-B specifically lists funds, authorities and institutions by name that are DGRs.

1.6 Subdivision 30-B also sets out tables containing general DGR categories. If a fund, authority or institution is not specifically listed by name as a DGR, it must satisfy the special conditions for the relevant general DGR category to be entitled to DGR endorsement.

1.7 The majority of the general DGR categories in Subdivision 30-B currently have a special condition requiring that the fund, authority or institution be:

•

a registered charity; or

•

an Australian government agency; or

•

operated by a registered charity or an Australian government agency.

1.8 For the remaining 11 general DGR categories, these requirements do not need to be satisfied for the fund, authority or institution to be entitled to DGR endorsement. These categories are:

•

Health-public fund for hospitals (item 1.1.3 in section 30-20);

•

Health-public fund for public ambulance services (item 1.1.8 in section 30-20);

•

Education-public fund for religious instruction in government schools (item 2.1.8 in section 30-25);

•

Education-Roman Catholic public fund for religious instruction in government schools (item 2.1.9 in section 30-25);

•

Education-school building fund (item 2.1.10 in section 30-25);

•

Education-public fund for rural school hostel building (item 2.1.11 in section 30-25);

•

Research-approved research institute (item 3.1.1 in section 30-40);

•

Welfare and rights-public fund for persons in necessitous circumstances (item 4.1.3 in section 30-45);

•

Environment-public fund on the Register of Environmental Organisations (item 6.1.1 in section 30-55);

•

Cultural organisations-public fund on the Register of Cultural Organisations (item 12.1.1 in section 30-100); and

•

Fire and emergency services-fire and emergency services fund (item 12A.1.3 in section 30-102).

1.9 As charity registration is not a precondition for DGR endorsement for these categories, there can be inconsistent governance and reporting requirements for these DGRs. Making charity registration a precondition for DGR endorsement across the general DGR categories in Subdivision 30-B will improve the consistency of regulation, governance and oversight of DGRs, while also reducing unnecessary compliance costs.

Summary of new law

1.10 Schedule 1 amends the special conditions for 11 general DGR categories in Subdivision 30-B (listed in paragraph 1.8). Under these amendments, a fund, authority or institution seeking to rely (or relying) on any of these categories for DGR endorsement must be:

•

a registered charity; or

•

an Australian government agency; or

•

operated by a registered charity or an Australian government agency.

1.11 Charity registration is not required for Australian government agencies as government entities are excluded from being a charity under the Charities Act 2013.

1.12 Schedule 1 also includes transitional provisions to give existing DGRs and existing DGR applicants an additional 12 months (and in some cases, four years) to comply with the new requirements.

1.13 These amendments do not affect ancillary funds or funds specifically listed by name as DGRs.

Comparison of key features of new law and current law

Detailed explanation of new law

1.14 The amendments in Schedule 1 provide that for a fund, authority or institution to be entitled to DGR endorsement, it must be:

•

a registered charity; or

•

an Australian government agency; or

•

operated by a registered charity or an Australian government agency.

1.15 To give effect to these changes, Schedule 1 amends the special conditions for 11 general DGR categories in Subdivision 30-B (set out in paragraph 1.8) to require that such a fund, authority or institution be a registered charity or an Australian government agency, or be operated by a registered charity or an Australian government agency. [Schedule 1, item 1, table item 1.1.3 of subsection 30-20(1); item 2, table item 1.1.8 of subsection 30-20(1); items 3 to 6, table items 2.1.8, 2.1.9, 2.1.10 and 2.1.11 of subsection 30-25(1); item 7, table item 3.1.1 of subsection 30-40(1); item 8, table item 4.1.3 of subsection 30-45(1), and item 9, table item 12A.1.3 of section 30-102]

1.16 Schedule 1 also amends the definition of environmental organisation and cultural organisation in section 30-260 and subsection 30-300(1) respectively. These amendments provide that a fund, authority or institution must be a registered charity or an Australian government agency, or be operated by a registered charity or an Australian government agency, to be listed on the Register of Environmental Organisations or the Register of Cultural Organisations (covered under table items 6.1.1 and 12.1.1 in subsections 30-55(1) and 30-100(1) respectively). [Schedule 1, items 10 and 11, section 30-260 and subsection 30-300(1)]

1.17 When these amendments take effect, DGR applicants generally must register as a charity with the ACNC before applying for DGR endorsement.

1.18 In practice, there will be a streamlined process to allow DGR applicants to lodge a single application with the ACNC seeking charity registration and indicating their intention to be endorsed as a DGR (or as a DGR for the operation of a fund, authority or institution). Once the ACNC is satisfied that the applicant is entitled to be registered as a charity, the ACNC will pass on the necessary information to the ATO to assess the applicant's entitlement to DGR endorsement.

Application and transitional provisions

1.19 The amendments made by this Schedule generally apply to a fund, authority or institution on or after the application date, which is three months after the day the Bill receives Royal Assent. [Schedule 1, items 12 and 13]

Transitional rules for existing DGRs

1.20 There are transitional rules that apply to existing DGRs to give them a longer period to comply with the new requirements.

1.21 These transitional rules apply where gifts or contributions to a fund, authority or institution were deductible under Division 30 before the application date, but are no longer deductible on or after the application date because of the amendments made by this Schedule. In other words, these transitional rules apply to existing DGRs that are neither a registered charity nor operated by a registered charity on the application date.

1.22 Under these transitional rules, the amendments do not apply to these existing DGRs until after the earlier of the following:

•

when gifts or contributions to the fund, authority or institution become deductible under Division 30 as amended by Schedule 1 (that is, when the existing DGR becomes a registered charity or operated by a registered charity); and

•

the transitional application date, which is 12 months after the application date.

[Schedule 1, item 14]

1.23 However, if an existing DGR needs additional time to become a registered charity or operated by a registered charity, it can request an extended application date. If the Commissioner either agrees to or does not refuse the request, the amendments do not apply to the DGR until after the earlier of the following:

•

the day the Commissioner refuses the request for an extended application date (if relevant); and

•

the extended application date, which is three years after the transitional application date.

[Schedule 1, subitems 14(2) and 16(1) and (5)]

1.24 These transitional rules give existing DGRs at least 12 months after the application date to become a registered charity or operated by a registered charity before the amendments in this Schedule affect their entitlement to DGR endorsement. Entities that need a longer period to satisfy the new requirements will need to apply to the Commissioner for an extended application date. Further information on the extended application date is set out in paragraphs 1.33 to 1.40.

1.25 If an endorsed DGR does not become a registered charity or operated by a registered charity by the required time, it must give the Commissioner written notice that it has ceased to be entitled to DGR endorsement. This reflects the existing obligation under section 426-45 of Schedule 1 to the TAA 1953, which requires an endorsed entity to give the Commissioner written notice if it ceases to be entitled to endorsement. A failure to comply with this requirement is an offence under the TAA 1953.

Transitional rules for DGR applicants

1.26 There are also transitional rules that apply to certain applicants for DGR endorsement.

1.27 These transitional rules apply if, before the application date (which is three months after the Bill receives Royal Assent):

•

the fund, authority or institution has applied for endorsement as a DGR (or the operating entity has applied for endorsement as a DGR for the operation of the fund, authority or institution); and

•

a decision has not been made on that application.

1.28 Under these transitional rules, the amendments do not apply to these DGR applicants until after the earlier of the following:

•

the day the Commissioner refuses the application for DGR endorsement (if relevant); and

•

the transitional application date, which is 12 months after the application date.

[Schedule 1, subitem 15(2)]

1.29 However, if the DGR applicant requests an extended application date and the Commissioner either agrees to or does not refuse the request, the amendments do not apply until after the earlier of the following:

•

the day the Commissioner refuses the application for an extended application date (if relevant); and

•

the extended application date, which is three years after the transitional application date.

[Schedule 1, subitems 15(2) and 16(1) and (5)]

1.30 If a fund, authority or institution (or the operating entity) is dissatisfied with the Commissioner's refusal to endorse it as a DGR, it may object in the manner set out in Part IVC of the TAA 1953. Part IVC applies to taxation objections, reviews and appeals.

When the transitional rules do not apply

1.31 If the Commissioner revokes a DGR's endorsement after the application date (through compliance action by the ATO or as a result of a request by the DGR itself), any subsequent application seeking re-endorsement will be treated as a new application for DGR endorsement.

1.32 In these circumstances, no transitional relief would apply as the fund, authority or institution (or the operating entity) will be seeking DGR endorsement after the application date. Therefore, the relevant fund, authority or institution will need to be a registered charity or operated by a registered charity to be entitled to DGR endorsement.

Application for extended application date

1.33 The amendments allow a fund, authority or institution (or the operating entity) to apply to the Commissioner for an extended application date, which is three years after the transitional application date. [Schedule 1, subitem 16(3)]

1.34 If the Commissioner agrees to the request for an extended application date, the amendments made by Schedule 1 do not apply to that fund, authority or institution until the extended application date has passed. [Schedule 1, subitem 16(1)]

1.35 However, before the Commissioner can consider a request for an extended application date:

•

the fund, authority or institution (or the operating entity) must apply to the Commissioner for an extended application date;

•

the application must be made in the approved form; and

•

the application must be made before the transitional application date.

[Schedule 1, subitems 16(3) and (4)]

1.36 Additionally, before the Commissioner can grant an extended application date, the Commissioner must:

•

be satisfied that the prescribed criteria in relation to the application are met; and

•

have regard to the prescribed matters in relation to the application.

[Schedule 1, subitem 16(6)]

1.37 The Minister may, by legislative instrument, prescribe the criteria and matters that the Commissioner must be satisfied of and have regard to respectively when assessing a request for an extended application date. This flexibility is necessary to ensure the relevant criteria and matters remain fit for purpose, as it will allow the Government to respond quickly to evolving industry practices and needs as required. Any such legislative instrument would be subject to disallowance and parliamentary scrutiny. [Schedule 1, subitem 16(7)]

1.38 If the Commissioner does not determine whether a fund, authority or institution should be granted an extended application date before the transitional application date, the fund, authority or institution continues to have the benefit of transitional relief until the earlier of the Commissioner's refusal of the application (if relevant) and the extended application date. This may occur if the application for an extended application date is made close to the transitional application date. [Schedule 1, subitem 16(5)]

1.39 A determination made by the Commissioner to grant an extended application date is not a legislative instrument as it is an administrative action of the Commissioner. [Schedule 1, subitem 16(2)]

1.40 The fund, authority or institution (or the operating entity) may object in the manner set out in Part IVC of the TAA 1953 if it is dissatisfied with the Commissioner's refusal to grant an extended application date. [Schedule 1, subitem 16(8)]

Chapter 2 - Offshore banking units

Outline of chapter

2.1 Schedule 2 to the Bill amends Australia's OBU regime to:

•

remove the concessional tax treatment for OBUs;

•

remove the interest withholding tax exemption; and

•

close the regime to new entrants by removing the Minister's ability to declare or determine an entity to be an OBU.

2.2 All legislative references in this Chapter are to the Income Tax Assessment Act 1936 unless otherwise stated.

Context of amendments

2.3 The OBU regime was introduced in 1987 to assist the Australian financial services sector compete with financial services providers located in low tax jurisdictions in the Asia Pacific region. This was initially done by providing a withholding tax exemption on interest paid on eligible foreign borrowings by an OBU. When introducing the interest withholding tax exemption for OBUs in 1987, the then Treasurer stated that the exemption was 'intended to encourage offshore transactions and in particular on lending to non-residents'.^[1]

2.4 In 1992, the regime was expanded to introduce an effective concessional tax rate in respect of taxable income derived by an OBU from eligible OB activities.

2.5 Under this regime, assessable income from eligible OB activities is effectively subject to a tax rate of 10 per cent, rather than the general corporate tax rate of 30 per cent. This is achieved by only bringing to account an 'eligible fraction' of income from OB activities and associated expenses (see section 121EG of the Act).

2.6 In October 2018, the OECD Forum for Harmful Tax Practices determined Australia's OBU regime to be a harmful preferential tax regime, on the grounds that it provides a concessional tax rate, and is ring-fenced to exclude domestic transactions from its scope (meaning the concession is only available in relation to transactions between parties that are foreign residents).

2.7 To address the Forum's concerns, the Government has taken a decision to remove the preferential tax treatment and close the regime to new entrants.

2.8 Under the rules of the OECD Forum for Harmful Tax Practices, grandfathering provisions must cease from the beginning of an OBU's 2023-24 income year.

Summary of new law

2.9 Schedule 2 to the Bill amends the tax law to remove the effective concessional tax treatment for OBUs in respect of OB activities. From the 2023-24 income year, the taxable income of an OBU on its OB activities will be subject to the relevant corporate tax rate.

2.10 Schedule 2 to the Bill also removes the withholding tax exemption for OBUs for interest paid on or after 1 January 2024.

2.11 Schedule 2 to the Bill also amends the tax law to remove the ability of the Minister to issue determinations or declarations that a person or entity is an OBU.

Comparison of key features of new law and current law

Detailed explanation of new law

Removing the concessional tax treatment for OBUs

2.12 The amendments repeal the provision of the Act which provides for a reduction of an OBU's assessable OB income, allowable OB deductions and foreign income tax paid. [Schedule 2, item 6, section 121EG]

2.13 Repealing this provision means that OBUs will not receive any special taxation arrangements and will be subject to the applicable corporate tax rate.

2.14 To ensure that OBUs engaged principally in the business activities to which the concessional tax rate applied, the Act provides they will lose the concessional tax treatment where more than 10 per cent of the assessable OB income of the OBU is derived from the use of non-OB money (see section 121EH).

2.15 Schedule 2 to the Bill repeals this provision as it is no longer relevant with the repeal of the effective concessional tax treatment for OBUs. [Schedule 2, item 7, section 121EH]

2.16 The amendments removing the concessional tax treatment for OB activities apply in relation to assessments for the 2023-24 income year, and later income years. [Schedule 2, item 13]

Withholding tax exemption

2.17 Schedule 2 to the Bill also amends the Act to provide that interest payments (including interest consisting of gold paid) paid on or after 1 January 2024 on offshore borrowings by OBUs will no longer be exempt from withholding tax. [Schedule 2, item 15, subsection 128GB(1A)]

2.18 This means for interest paid on or after 1 January 2024, OBUs will be subject to withholding tax on eligible income.

Closing the OBU regime to new entrants

2.19 The amendments remove the ability for the Minister to make a declaration or determination that a person or company is an OBU. This change applies from the day after the amendments receive Royal Assent. Schedule 2, item 14, subsection 128AE(1A)]

2.20 Australia's OBU regime has been effectively closed since October 2018. No new OBU applications have been approved since that time. Once the amendment takes effect, the power for the Minister to approve OBU applications will be removed. This means that any outstanding applications made to the Minister before the amendments apply (being the day after they received Royal Assent) are not able to be approved from that time and will, in effect, lapse. This is consistent with the intention that the OBU regime be closed to new entrants, and that the applicable grandfathering arrangement be limited to existing OBUs. To ensure that Australia addresses the OECD Forum for Harmful Tax Practices' concerns about the OBU regime, the Government does not intend that any applications be granted by the Minister before the amendments apply.

Consequential amendments

2.21 Schedule 2 to the Bill makes a number of consequential amendments to remove references to the effective concessional tax treatment for OBUs. [Schedule 2, items 2 and 8 to 12, , paragraphs 121B(3)(a) and (b), section 10-5 of the ITAA 1997 (table item headed "banking"), section 11-55 of the ITAA 1997 (table item headed "offshore banking units"), section 12-5 of the ITAA 1997 (table item headed "offshore banking units"), subsection 118-20(4) of the ITAA 1997 (note) and subsection 770-10(1) of the ITAA 1997 (note 3)]

2.22 The object of the Division relating to OBUs is also repealed, and references to this object in other provisions have been removed. [Schedule 2, items 3 to 5, paragraphs 121EAA(5)(e) and (f) and subsection 121EAA(6)]

2.23 This change reflects that the regime is primarily concerned with providing concessional tax arrangements for OBUs. This objective is no longer relevant given the removal of those arrangements.

Chapter 3 - Statement of Compatibility with Human Rights

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

Schedule 1 - Deductible gift recipients

3.1 Schedule 1 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

3.2 This Schedule amends the ITAA 1997 to require a fund, authority or institution to be a registered charity or an Australian government agency, or be operated by a registered charity or an Australian government agency, to be entitled to DGR endorsement.

3.3 This requirement already applies to the majority of the general DGR categories in Subdivision 30-B of the ITAA 1997. The amendments extend this requirement to the remaining general DGR categories and will improve the consistency of regulation, governance and oversight of DGRs, while also reducing unnecessary compliance costs.

Human rights implications

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

Conclusion

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

Schedule 2 - Offshore banking units

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

Overview

3.7 Schedule 2 to the Bill amends Australia's OBU scheme to:

•

remove the concessional tax arrangements currently available to OBUs;

•

remove the Minister's ability to declare or determine an entity to be an OBU.

Human rights implications

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

Conclusion

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