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 - Australian Screen Production Incentive Reforms

Schedule 1 to the Bill amends Division 376 of the ITAA 1997 to increase the producer offset for films that are not feature films released in cinemas to 30 per cent of total qualifying Australian production expenditure, and to make various threshold and integrity amendments across the three screen tax offsets.

Date of effect: The amendments made in this Schedule apply to:

•

films commencing principal photography on or after 1 July 2021 in respect of the amendments to the location offset and producer offset; and

•

films commencing post, digital and visual effects production on or after 1 July 2021 in respect of the PDV offset.

Proposal announced: This Schedule implements the reforms to the Australian Screen Production Incentive contained in the 'Media Reforms Package - Screen Sector Support' from the 2020-21 Budget.

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

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 4.

Compliance cost impact: This measure has a minor compliance cost saving for each company.

Schedule 1 - Summary of regulation impact statement

Regulation impact on business

Impact: Compliance cost saving of $191,391 for each affected company.

Main points:

•

The ASPI, as the Australian Government's primary mechanism for providing support to the screen industry, provides tax incentives for film, television and other screen production in Australia and is available in three streams: the producer offset, the location offset and the PDV Offset.

•

The ASPI was designed to suit pre-2007 industry settings. Various reviews and inquiries that have taken place since 2017 have all found that the current policy settings for supporting the production of Australian screen content were fit for purpose when they were designed and have generally served domestic audiences and the Australian screen production sector well.

•

These processes also found that with a need for Australian producers to consistently create Australian stories that resonate with local and international audiences, the policy settings need to be modernised to support the creation of quality Australian content and for it to be made available across all platforms from traditional television to online services.

•

Government policies need to be set so that our industry focuses on the creation of content that can compete for audiences in this market by producing quality, engaging stories with high production values this is available to audiences on the right distribution platform.

•

Under the option that is implemented in this Schedule, regulatory savings will be achieved as a result of changes to the eligibility criteria for the producer and PDV offsets.

•

Other changes under that option will have no regulatory impact.

•

The full Regulatory Impact Statement has been included at Attachment A.

Schedule 2 - Consequential and transitional matters arising from corporate insolvency reforms

On 1 January 2021, the Australian Government's corporate insolvency reforms - Corporations Amendment (Corporate Insolvency Reforms) Act 2020 and Corporations Amendment (Corporate Insolvency Reforms) Regulations 2020 - commenced. The reforms established new debt restructuring and simplified liquidation processes for eligible incorporated small businesses, which reduce the complexity, time and costs of external administration and the compliance burden for insolvency practitioners. These processes enable more Australian small businesses to quickly restructure and keep trading or, where restructure is not possible, the intent is to support businesses to wind up faster, enabling greater returns for creditors.

Schedule 2 to the Bill makes consequential amendments to integrate the corporate insolvency reforms across the Commonwealth statute book.

Date of effect: Schedule 2 to the Bill commences on the day after this Bill receives Royal Assent.

Proposal announced: Schedule 2 to the Bill partially implements the measure JobMaker Plan - supporting small business and responsible lending from the 2020-21 Budget.

Financial impact: Nil.

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 4.

Compliance cost impact: The Government's corporate insolvency reforms as a whole are expected to deliver significant regulatory savings for impacted businesses and individuals.

Summary of regulation impact statement

Impact: The Government's corporate insolvency reforms as a whole are expected to deliver significant regulatory savings for impacted businesses and individuals.

Main points:

•

Schedule 2 to the Bill makes consequential amendments to integrate the corporate insolvency reforms across the Commonwealth statute book.

•

A Regulation Impact Statement was prepared and included in the explanatory statement accompanying the related Corporations Amendment (Corporate Insolvency Reforms) Regulations 2020.

•

This Regulation Impact Statement also covers the consequential amendments in Schedule 2 and has been included at Attachment B.

Schedule 3 - Miscellaneous and technical amendments

Schedule 3 to the Bill makes a number of miscellaneous and technical amendments to various laws in the Treasury portfolio to improve these laws and ensure they operate as intended.

Date of effect: Part 1 of Schedule 3 commences the day after receives Royal Assent.

Part 2 of Schedule 3 commences on the first 1 January, 1 April, 1 July or 1 October after Royal Assent.

If the Bill receives Royal Assent in 2021, Division 1 of Part 3 of Schedule 3 commences on 1 January 2022. Otherwise, it commences on the later of the first 1 January, 1 April, 1 July or 1 October after Royal Assent.

Division 2 of Part 3 of Schedule 3 commences on the later of the day the Bill receives Royal Assent or immediately after the commencement of Part 1 of Schedule 2 to the Treasury Laws Amendment (2020 Measures No. 5) Act 2020.

Division 3 of Part 3 of Schedule 3 commences immediately after the commencement of section 2 of the Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020.

Division 4 of Part 3 of Schedule 3 commences immediately after the commencement of section 2 of the Treasury Laws Amendment (2020 Measures No. 6) Act 2020.

Proposal announced: This measure was announced on 5 May 2021.

Financial impact: These amendments are estimated to have a small but unquantifiable impact on receipts over the forward estimates period.

Human rights implications: Schedule 3 to this Bill does not raise any human rights issues - Chapter 4.

Compliance cost impact: The amendments are unlikely to have more than a minor impact on compliance costs.

Chapter 1 - Australian Screen Production Incentive Reforms

Outline of chapter

1.1 Schedule 1 to the Bill makes amendments to Division 376 of the ITAA 1997 to increase the producer offset for films that are not feature films released in cinemas to 30 per cent of total qualifying Australian production expenditure and to make various threshold and integrity amendments across the three screen tax offsets.

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

Context of amendments

1.3 The Australian Screen Production Incentive is the Government's primary mechanism for supporting the Australian screen industry. It provides a tax offset for expenditure on Australian feature films, television production and other screen programs, post, digital and visual effects activity in the screen industry, as well as large budget international productions filmed in Australia.

1.4 These amendments seek to revise the Australian Screen Production Incentive to ensure that the tax offsets effectively target areas that require support to encourage production and commercial distribution of quality Australian screen content. The amendments apply to productions that start principal photography or PDV activity on or after 1 July 2021.

1.5 The three film tax offsets are the producer offset, the location offset, and the PDV offset. Companies may only claim one of these refundable tax offsets in relation to expenditure incurred on goods and services provided or located in Australia in the making of the film.

1.6 The amount of the income tax offset that a company can claim is calculated as a percentage of the eligible film's total eligible qualifying Australian production expenditure. A film's total qualifying Australian production expenditure is determined by either the film authority, Screen Australia, (for the producer offset) or the Arts Minister (for the location and PDV offsets).

1.7 Generally, a company's qualifying Australian production expenditure on a film is the company's production expenditure, to the extent it is reasonably attributable to goods and services provided in Australia, the use of land in Australia, or the use of goods and services located in Australia at the time they are used in making the film. Production expenditure is expenditure that a company incurs to the extent the expenditure is incurred, or reasonably attributable to, making the film.

1.8 The rules for calculating production expenditure and qualifying Australian production expenditure are set out in Subdivision 376-C.

Summary of new law

1.9 The amendments reform the Australian Screen Production Incentive to increase the producer offset rebate rate to 30 per cent for eligible screen content for television and other production, and make various threshold, eligibility, and integrity amendments across the three screen tax offsets.

Comparison of key features of new law and current law

Detailed explanation of new law

Producer offset rate

1.10 The amendments change the producer offset so that a company that produces a feature film that is commercially released for exhibition to the public in cinemas can claim 40 per cent of the total qualifying Australian production expenditure for the film as an income tax offset.

1.11 A company that produces any other type of film is eligible for the 30 per cent producer offset rate. Prior to the amendments a company that produced a film that was not a feature film could claim a 20 per cent offset. This means that companies can claim a higher income tax offset in relation to qualifying Australian production expenditure for single episode television shows, a television series, a documentary, or any other film production that is not released in cinemas but is otherwise distributed to the Australian public. [Schedule 1, items 1 and 5, sections 376-2(3)(a) and 376-60(a) and (b)]

1.12 To be eligible for the 40 per cent producer offset, the feature film must be commercially distributed in Australian cinemas. This is to ensure that the 40 per cent producer offset rate is provided to productions released in cinemas on genuine commercial terms. The commercial release is expected to be the primary release of the film in Australia. This change ensures feature films claiming the higher rate of offset have a genuinely wide, commercial, and public release. Characteristics of a 'commercial' release include a distribution agreement outlining a distribution advance or guarantee commensurate with the budget of the film with a theatrical distributor, the existence of a marketing campaign in relation to the film, and an intention to release the film to as wide an audience as possible. These films should plan to earn a meaningful proportion of the project's revenue from the Australian theatrical box office. [Schedule 1, item 6, section 375-65(2)(b)(i]

Minimum qualifying threshold for producer and PDV offsets

1.13 Prior to the amendments the minimum qualifying Australian production expenditure threshold in relation to a feature film that enabled a company to claim the producer offset in respect of that film was $500,000.

1.14 The amendments increase this threshold for all feature length content. The new term feature length content covers any screen production, including a documentary that is more than 60 minutes in length or a production that is at least 45 minutes in length and in a large format (productions made for IMAX cinemas). This includes feature films and feature length documentaries. [Schedule 1, items 26 and 27, section 995-1]

1.15 For feature length content, the minimum qualifying Australian production expenditure in order to claim the producer offset is increased to $1 million. For non-feature length content (for example, a single episode program that is 60 minutes or less in length), the minimum qualifying Australian production expenditure in order to claim the producer offset remains unchanged. [Schedule 1, items 9, 10 and 11, section 376-65(6)]

1.16 The minimum qualifying Australian production expenditure as it relates to post, digital and visual effects for the purposes of eligibility for the PDV offset is also increased from $500,000 to $1 million. [Schedule 1, item 2, Section 376-45(5)(a)]

Commercial hour cap for a drama series and seasons of a drama series

1.17 Prior to the amendments, a television drama series, or a season of a drama series, was considered complete for the purposes of calculating the producer offset when it was either in a state where it was ready to distribute and screen or when the episode that contained the 65th commercial hour was in that state. This meant that a company's production expenditure on a television show past the 65^th commercial hour could not be counted as qualifying Australian production expenditure for the purposes of calculating the producer offset.

1.18 The amendments remove the 65 commercial hour cap on qualifying Australian production expenditure for a drama series and seasons of a television drama series. This means that a company can claim the producer offset on a drama series or season on the whole run of the series or season, not just the first 65 commercial hours. If a drama season of a series has already reached the 65 commercial hour cap, a new season may be eligible for the producer offset if it commences principal photography on or after 1 July 2021. This change encourages greater investment in longer drama series.

1.19 A consequential change has also been made to remove the requirement for a drama series, or season of a series, to demonstrate a new creative concept in order to attract a producer offset. Prior to the amendments, if a company producing a drama series, which had already reached the 65 hour cap, could demonstrate that a new season of a series exhibited a new creative concept, the 65 commercial hour cap would restart for that season and subsequent seasons with the same creative concept. Since the 65 hour commercial cap has been removed for a drama series, this requirement is subsequently also removed for a drama series. [Schedule 1, items 3, 4, 7, 8 and 24, sections 376-55(2), 376-65(5)(a)(iii) and 376-170(4)(c)]

General business overheads

1.20 The general business overheads of a company that are not incurred in, or in relation to, the making of a film are specifically excluded as production expenditure of the company. However, prior to these amendments part of those overheads could be counted as qualifying Australian production expenditure under the specific rules for the location offset, PDV offset and producer offset.

1.21 The amendments remove the ability of companies to include general business overheads as qualifying Australian production expenditure for the purposes of calculating an offset. General business overheads are removed as qualifying Australian production expenditure as this expenditure is not directly incurred in the making of a film and this ensures that the incentive more directly supports core production expenditure. The amendments confirm that expenditure incurred on general business overheads, that are not incurred in or in relation to making a film, or are not reasonably attributable to any equipment used or activities undertaken in making the film, is not production expenditure for the purposes of calculating qualifying Australian production expenditure. [Schedule 1, items 12, 15, 16, 17, 18 sections 376-135, 376-165 and 376-170(2)]

Copyright expenditure

1.22 Expenditure incurred in acquiring Australian copyright, or an Australian licence in relation to copyright, in a pre-existing work for use in a film is qualifying Australian production expenditure on a film. Prior to the amendments, all expenditure in relation to this type of copyright or licence acquisition could be counted as qualifying Australian production expenditure for the purposes of calculating an income tax offset if used in the film.

1.23 The amendments cap the amount of this expenditure that can be counted towards qualifying Australian production expenditure, in relation to acquiring Australian copyright or an Australian licence in relation to copyright in a pre-existing work for use in the film, to 30 per cent of the total of the company's production expenditure on the film. [Schedule 1, items 13 and 14, section 376-150]

1.24 This means that when calculating qualifying Australian production expenditure for the purposes of an income tax offset, a company can only attribute qualifying Australian production expenditure in relation to that type of Australian copyright acquisition expenditure up to 30 per cent of the total production expenditure of the film. For the producer offset, this cap is not intended to cover expenditure on acquisition material such as story rights or fees for the assignment of copyright in literary works. Expenditure towards this type of rights acquisition is already capped under the above the line (development) expenditure cap (see paragraph 1.27 to 1.29).

Expenditure incurred overseas

1.25 Prior to the amendments, if a film was required to shoot scenes outside of Australia because the subject matter of the film reasonably requires it, expenditure on goods and services that a company incurred outside Australia, where the goods and services were provided by Australian residents, was counted as qualifying Australian production expenditure.

1.26 The amendments remove the ability for expenditure incurred by a company overseas to count as qualifying Australian production expenditure. This ensures that the income tax offsets support and encourage expenditure directly in Australia. This restriction applies regardless of whether the goods and services provided overseas are provided by an Australian resident or not. [Schedule 1, items 19, 20 and 22, sections 376-170(2) item 4 in the table and 376-170(3A)]

Development expenditure

1.27 Development expenditure on a film is expenditure incurred in meeting the development costs for a film and includes expenditure such as research, storyboarding, casting, budgeting and developing a shooting schedule.

1.28 Expenditure incurred as development expenditure on a film and remuneration provided to the writer, director, producers and principal cast can be counted as qualifying Australian production expenditure up to an amount equal to 20 per cent of the company's total film expenditure on a film. Prior to the amendments, this limit did not apply where the film was a documentary.

1.29 The amendments harmonise the treatment of development expenditure across all films by applying the limit on counting above the line expenditure and director, producer and principal cast remuneration as qualifying Australian production expenditure to films that are documentaries for the purposes of the producer offset. [Schedule 1, items 23 and 25, sections 376-170(4)(b) and 376-170(4A)]

Re-versioning

1.30 The current producer offset rules allow expenditure incurred by a company in delivering or distributing unlimited revisions of the first version of the film to be counted as qualifying Australian production expenditure for the purposes of calculating a producer offset, provided it is incurred prior to the end of the income year in which the film is completed.

1.31 A re-version of a film is most commonly understood as a director's cut, a foreign or international version or an alternative length version for different distribution markets. Prior to the amendments, a company could incur expenditure that was able to be counted as qualifying Australian production expenditure for the purposes of calculating the producer offset, on unlimited re-versions of the first version of the film provided it was incurred prior to the end of the income year in which the film was complete.

1.32 The amendments limit the number of re-versions of the first version of a film where expenditure on those revisions can be counted as qualifying Australian production expenditure, to one re-version of the first version of the film provided it is considered a re-version of the film and not a new film and incurred prior to the end of the income year in which the film is completed. [Schedule 1, item 21, item 7 in the table in section 376-170(2)]

Application and transitional provisions

1.33 The Schedule commences on the first 1 January, 1 April, 1 July or 1 October after Royal Assent.

1.34 The amendments making changes to the producer offset apply to a film that commences principal photography on or after 1 July 2021. [Schedule 1, item 28(a)]

1.35 The amendments making changes to the PDV offset apply to films that commence post, digital and visual effect activity on or after 1 July 2021. [Schedule 1, item 28(b)]

1.36 As the amendments are not expected to be enacted prior to 1 July 2021, they would have retrospective application. The amendments to increase the producer offset for films that are not feature films are wholly beneficial to affected companies in the Australian screen industry. The amendments to increase various eligibility thresholds and create limitations on what a company can count as a film's qualifying Australian production expenditure remove or reduce an entitlement that existed prior to the application date of the amendments.

1.37 The Government publicly announced reforms to the producer offset on 30 September 2020 and stated that the reforms would apply to films that commence principal photography or PDV activities on or after 1 July 2021. A further reform to the treatment of additional versions of films was not announced on 30 September 2020 but industry was made aware of this change when public consultation was undertaken on exposure draft material commencing on 21 May 2021. The industry has been aware that these changes would affect their film production activities from these dates and it is expected that affected companies have taken the increased eligibility thresholds and limits on the scope of qualifying Australian production expenditure into account in making decisions concerning eligibility for the film incentives for the 2021-22 income year and later income years.

Chapter 2 - Consequential and transitional matters arising from corporate insolvency reforms

Outline of chapter

2.1 Schedule 2 to the Bill makes consequential amendments to integrate the corporate insolvency reforms across the Commonwealth statute book.

Context of amendments

2.2 On 1 January 2021, the Australian Government's corporate insolvency reforms - Corporations Amendment (Corporate Insolvency Reforms) Act 2020 and Corporations Amendment (Corporate Insolvency Reforms) Regulations 2020 - commenced.

2.3 The reforms established a new debt restructuring process and a simplified liquidation process for eligible incorporated small businesses. These reduce the complexity, time and costs of external administration and the compliance burden for insolvency practitioners. The intent is to enable more Australian small businesses to quickly restructure and keep trading. Where restructure is not possible, the intent is to support businesses to wind up faster, enabling greater returns for creditors.

2.4 The new debt restructuring process enables distressed small businesses to access a single, streamlined process to restructure their debts, while allowing the owners to remain in control of their business. The intent is to maximise the ability of the company to survive and to go on trading.

2.5 The new simplified liquidation process enables eligible companies to undertake a faster and lower cost liquidation, increasing returns for both creditors and employees. The process simplifies regulatory obligations to maximise creditor returns and allow assets to be quickly reallocated elsewhere in the economy, supporting productivity and growth.

2.6 Schedule 2 to the Bill makes consequential amendments to integrate the corporate insolvency reforms across the Commonwealth statute book to support the integration of the new insolvency processes with relevant legislation.

Summary of new law

Clarifying eligibility to access the debt restructuring and simplified liquidation processes

2.7 To target small businesses, the corporate insolvency reforms specify that an eligible company must have total liabilities which do not exceed $1 million on the day the company enters debt restructuring or simplified liquidation.

2.8 To further clarify that the reforms are intended for small businesses, Schedule 2 to the Bill prevents prudentially regulated entities, such as financial institutions, from accessing debt restructuring and simplified liquidation.

2.9 This clarification reflects that prudentially regulated entities, such as banks and other financial institutions, are generally large companies with complex affairs. Prudential regulation establishes special regimes to manage prudentially regulated entities that are in acute distress, including where such entities are insolvent or near insolvent.

Updating Commonwealth legislation to add debt restructuring as a type of external administration

2.10 The Government's corporate insolvency reforms added debt restructuring and simplified liquidation to the set of processes available for insolvent incorporated small businesses and established a new 'class' of registered liquidator, the small business restructuring practitioner.

2.11 Schedule 2 to the Bill updates Commonwealth legislation to integrate debt restructuring into the existing regulatory regimes in the following Acts: Customs Act 1901, Excise Act 1901, Export Control Act 2020, Fair Entitlements Guarantee Act, ITAA 1997 and Superannuation Industry Supervision Act.

2.12 These consequential amendments are generally minor and technical in nature and do not alter the existing policy intent of the affected provisions.

Updates concerning the role of the restructuring practitioner

2.13 Schedule 2 to the Bill updates the Corporations Act to ensure that appropriate protections apply for restructuring practitioners in performing their role, as well as appropriate protections for any person dealing with a restructuring practitioner who is acting as an agent of the company. These protections are consistent with those applying in relation to the role of an external administrator for a company under voluntary administration.

2.14 Schedule 2 to the Bill also updates Commonwealth legislation to integrate the role of restructuring practitioner into the existing regulatory regimes in the following Acts: Education Services for Overseas Students Act 2000 and Crimes (Taxation Offences) Act 1980.

Integrating debt restructuring and simplified liquidation into the special administration process for Aboriginal and Torres Strait Islander corporations

2.15 The CATSI Act establishes a 'special administration process', which is a unique form of external administration tailored to the needs of registered Aboriginal and Torres Strait Islander corporations. Schedule 2 to the Bill makes consequential amendments to the CATSI Act to accommodate the new debt restructuring and simplified liquidation processes within the special administration process.

2.16 Some modifications to the CATSI Act special administration framework are made to preserve the arrangements made through a restructuring plan and give creditors certainty that their rights under the plan are not affected by the commencement of a special administration.

Clarifications concerning simplified liquidation and other minor and technical amendments

2.17 Schedule 2 to the Bill amends the Corporations Act to clarify the operation of the simplified liquidation process: ensuring that a liquidator's report which identifies potential offences is exempt from public disclosure and that ASIC is able to investigate those offences; and enabling a resolution to be passed without a meeting of creditors.

2.18 Schedule 2 to the Bill includes additional minor and technical amendments to the Corporations Act and the Tax Agent Services Act 2009.

Comparison of key features of new law and current law

Detailed explanation of new law

Clarifying eligibility to access the debt restructuring and simplified liquidation processes

2.19 The intent of the corporate insolvency reforms is to ensure Australia's insolvency framework can better serve small businesses, their creditors and employees. To achieve this, the reforms established new debt restructuring and simplified liquidation processes targeted at the needs of small businesses.

2.20 To be eligible to access these new processes, companies must have total liabilities which do not exceed $1 million on the day the company enters debt restructuring or simplified liquidation.

2.21 Schedule 2 to the Bill further clarifies that the reforms are only intended for small businesses with non-complex liabilities. Entities subject to prudential regulation by APRA are not eligible to access small business restructuring processes. [Schedule 2, items 3-4, 27, 30, and 57-60, section 5(1) of the Banking Act 1959, sections 453B(2)(aa) and 500A(2)(aa) of the Corporations Act, section 3(1) of the Insurance Act, and the Dictionary of the Life Insurance Act]

2.22 Prudentially regulated entities, such as banks, are generally large companies with complex affairs; the corporate insolvency reforms were never intended for such entities. Further, prudential regulation already provides fit-for-purpose statutory and judicial management regimes to deal with prudentially regulated entities in acute distress, including where such entities are insolvent or near insolvent.

Updating Commonwealth legislation to add debt restructuring as a type of external administration

2.23 Commonwealth corporate insolvency laws - the Corporations Act including Schedule 2, and the rules, and the Corporations Regulations - provide a number of processes that ensure that the assets of an insolvent company can be reallocated to its creditors in an equal, fair, efficient and orderly way.

2.24 A necessary part of corporate insolvency processes is informing creditors that the insolvency has occurred. For government, it is standard practice in many regulatory regimes that companies must notify the government if they become insolvent. The solvency of a company may be relevant to its ability to hold a government licence, participate in a government program, or receive a government grant.

2.25 Schedule 2 to the Bill amends the following Commonwealth legislation to integrate debt restructuring into existing regulatory regimes: Customs Act 1901, Excise Act 1901, Export Control Act 2020, Fair Entitlements Guarantee Act, ITAA 1997 and Superannuation Industry Supervision Act.

2.26 The amendments maintain the integrity of existing approval, licencing and registration regimes by ensuring that: (a) a decision maker considers whether a company is under restructuring when considering whether to approve an arrangement, register a company, or issue a company a relevant licence; and (b) a company is required to notify the relevant decision maker if they enter restructuring. [Schedule 2, items 37 to 45, 47 to 52, sections 67EB(4)(e)-(ea), 67H(3)(e)-(ea), 77K(3)(f)-(fa), 77N(2)(c)(v)-(vi), 81(3)(d)-(da), 82(1)(ba)(iva)-(ivb), 102BA(2)(e)-(f), 183CC(4A)(d)-(da) and 183CG(1)(c)(iiia)-(iiib) of the Customs Act 1901, sections 39C(f), 39C(fa)-(fb) and 39D(1)(f)(va)-(vb) of the Excise Act 1901, sections 146(1)(c)(ia), 186(1)(c)(ia) and 219(1)(c)(ia) of the Export Control Act 2020]

2.27 The appointment of a restructuring practitioner is an insolvency event that triggers the disqualification of a corporate trustee, custodian or investment manager of a superannuation entity from managing a superannuation entity. [Schedule 2, item 61, section 120(2)(ca) of the Superannuation Industry Supervision Act]

2.28 The Commissioner of Taxation has the power to disallow an entity's deductions for tax losses in specified circumstances, including where the company is insolvent and in some form of external administration. Schedule 2 to the Bill extends the Commissioner's power to companies under restructuring. [Schedule 2, item 56, section 175-100(b) of the ITAA 1997]

2.29 These consequential amendments are generally minor and technical in nature and do not alter the existing policy intent of the affected provisions.

Updating the Fair Entitlements Guarantee Act

2.30 The Fair Entitlements Guarantee provides financial assistance to workers in respect of unpaid employee entitlements where the employee loses their job due to the liquidation or bankruptcy of their employer. Schedule 2 to the Bill updates the definition of insolvency practitioner to include a restructuring practitioner for a company. [Schedule 2, item 53, section 5(ba) of the Fair Entitlements Guarantee Act]

2.31 This amendment enables eligible employees to access the Fair Entitlements Guarantee scheme where their employer had been under restructuring prior to being wound up. Further, the amendment provides consistent treatment of employees' eligibility for Fair Entitlements Guarantee advances, where there is sufficient nexus between the end of their employment and the commencement of any form of external administration to deal with the employer's financial difficulties.

2.32 Notably, the update to the definition of insolvency practitioner to include the appointment of a restructuring practitioner has been expressly disapplied in relation to the determination of the wages entitlement period under the Fair Entitlements Guarantee Act.

2.33 Generally, the wages entitlement period for an employee whose employment has ended means the 13 weeks ending at the earlier of:

•

the time the person's employment ended; or

•

the first time an insolvency practitioner is appointed to control or manage employment by the employer.

[Schedule 2, item 54, section 5 of the Fair Entitlements Guarantee Act]

2.34 However, the nature of debt restructuring means that the time a person's employment ended could be much later than the appointment of a restructuring practitioner. Specifically, in debt restructuring, a business can keep trading under the control of its owners after the appointment of a restructuring practitioner, while the owners develop a debt restructuring plan and beyond, if creditors accept the plan.

2.35 Schedule 2 carves out the appointment of a restructuring practitioner from the determination of the wages entitlement period under the Fair Entitlements Guarantee Act. This change avoids a gap in the coverage of the Fair Entitlements Guarantee scheme where an employee's employment ended after the appointment of a restructuring practitioner. Further, the change ensures the wage entitlement period for an employee whose employer entered restructuring is consistent with the policy intent to advance employee entitlements for the last 13 weeks of an employee's employment where the employer was liable for unpaid wages.

2.36 This change reflects the advisory and support role of the small business restructuring practitioner, compared with the role and functions of administrators during other external administration processes.

2.37 The express exclusion of the appointment of a restructuring practitioner from the calculation of a wages entitlement period means that, where a company had been under restructuring or subject to a restructuring plan prior to being wound up, an employee's wages entitlement period would be anchored to the appointment of another type of insolvency practitioner such as a registered liquidator or an administrator.

2.38 To ensure the access of such employees to the Fair Entitlements Guarantee scheme, this change applies in relation to an employer that appoints a restructuring practitioner before, on or after the commencement of Schedule 2 on the day after the Bill receives Royal Assent [Schedule 2, item 55, Fair Entitlements Guarantee Act]

Updates concerning the role of a restructuring practitioner

2.39 A restructuring practitioner can be appointed to a company under restructuring, or to a restructuring plan in force for a company. In this section (paragraphs 2.39 to 2.44) a reference to a restructuring practitioner is a reference to both a restructuring practitioner of a company and a restructuring practitioner of a plan.

2.40 Schedule 2 clarifies that the rules in the Act requiring a restructuring practitioner to declare relevant relationships only apply to a restructuring practitioner appointed to a company. Similar rules already exist in the Corporations Regulations in relation to a restructuring practitioner appointed to administer a restructuring plan. [Schedule 2, item 28, section 453D(1) of the Corporations Act]

2.41 A restructuring practitioner has qualified privilege for statements they make in performing their functions. Protection from liability is an important safeguard to ensure that practitioners are able to undertake their functions. These protections for restructuring practitioners are currently provided in the Corporations Regulations. They are being relocated to the Corporations Act, as it is more appropriate for such protections to be provided in primary legislation. [Schedule 2, item 29, section 456LA of the Corporations Act]

2.42 Where any person deals with a restructuring practitioner who is acting as an agent of the company, they are entitled to the same protections that arise if they were dealing with the company itself. These protections for a person who deals with a restructuring practitioner are consistent with the existing protections in place for persons dealing with administrators in a voluntary administration. [Schedule 2, item 29, section 456LB of the Corporations Act]

To ensure that all restructuring practitioners and persons dealing with restructuring practitioners will benefit from these protections, these amendments apply in relation to a restructuring practitioner appointed before, on or after the commencement of Schedule 2 on the day after the Bill receives Royal Assent. [Schedule 2, item 35, sections 1686A and 1686B of the Corporations Act]

2.43 Under the Education Services for Overseas Students Act 2000, certain Education Services for Overseas Students agencies (ESOS agencies) and the Tuition Protection Scheme Director (i.e. the statutory office holder appointed as such under Part 5A of the Education Services for Overseas Students Act 2000) are given the power to require a relevant individual of the registered provider to hand over information or documents that are relevant to a monitoring purpose. The definition of relevant individual includes administrators and liquidators. Schedule 2 extends the definition of relevant individual to include a restructuring practitioner, so that the ESOS agencies (or the Tuition Protection Scheme Director) can continue to monitor a registered provider if they enter restructuring. [Schedule 2, item 46, section 5(e) of Education Services for Overseas Students Act 2000]

2.44 The Crimes (Taxation Offences) Act 1980 establishes an offence for where a trustee enters an arrangement to avoid paying tax. This offence extends to restructuring practitioners. [Schedule 2, item 35, section 3(1)(a) of Crimes (Taxation Offences) Act 1980]

Integrating debt restructuring and simplified liquidation into the special administration process for Aboriginal and Torres Strait Islander corporations

Restructuring of an Aboriginal and Torres Strait Islander corporation

2.45 The CATSI Act is a special measure for the benefit of Aboriginal and Torres Strait Islander people. Corporations registered under the CATSI Act are regulated by the Registrar. The CATSI Act provisions are modelled on Corporations Act provisions but maintain special powers (including modification powers) to ensure the Corporations Act provisions are appropriate for Aboriginal and Torres Strait Islander people and take account of the special risks and requirements of the Indigenous corporate sector.

2.46 A unique aspect of the CATSI Act as a special measure intended to benefit Aboriginal and Torres Strait Islander corporations is a form of external administration known as 'special administration'. Where governance failures or financial difficulties are identified, a 'special administrator' is appointed by the Registrar to take control of and administer the Aboriginal and Torres Strait Islander corporation.

2.47 The amendments ensure that, in addition to special administration, voluntary administration, receivership, and winding up, an Aboriginal and Torres Strait Islander corporation may utilise the new debt restructuring process.

2.48 Consistent with the CATSI Act legislative framework, the amendments apply the Corporations Act restructuring provisions to Aboriginal and Torres Strait Islander corporations with certain modifications to ensure the two frameworks interact seamlessly. [Schedule 2, items 14 and 19, new section 522-1 and section 700-1 of the CATSI Act]

2.49 Importantly, the amendments prohibit any modifications made by the CATSI Regulations from increasing the maximum penalty for, or widening the scope of any offence under, the Corporations Act restructuring provisions. [Schedule 2, item 13, new section 522-1(3) of the CATSI Act] Appointing a small business restructuring practitioner

2.50 For Aboriginal and Torres Strait Islander corporations, the special administration regime generally takes priority over the debt restructuring process up until a plan is made. Accordingly:

•

the Registrar may determine that Aboriginal and Torres Strait Islander corporations be put under special administration even if that corporation is under restructuring;

•

a registered Aboriginal and Torres Strait Islander corporation cannot appoint a small business restructuring practitioner if the corporation is under special administration or the Registrar has issued the corporation a show cause notice (unless the Registrar has consented in writing to the appointment of the small business restructuring practitioner); and

•

if a small business restructuring practitioner has been appointed for an Aboriginal and Torres Strait Islander corporation, and a special administrator is subsequently appointed, then the restructuring of the corporation ends if a restructuring plan is not in place.

[Schedule 2, items 10 and 14, section 487-1(3)(b), and new sections 522-2 and 522-3 of the CATSI Act]

Appointing a special administrator while under a restructuring plan

2.51 If an Aboriginal and Torres Strait Islander corporation is subject to a restructuring plan when a special administrator is appointed, the plan continues to operate until it terminates in accordance with the plan, the law or by an order of the Court. Once in control of an Aboriginal and Torres Strait Islander corporation, a special administrator can choose to continue with the restructuring plan or apply to the Court to terminate the plan. The special administrator is bound by the restructuring plan until the plan terminates in accordance with the Corporations Regulations, or the Court, on application, orders that the plan is terminated. [Schedule 2, item 14, new section 522-4 of the CATSI Act]

2.52 This change applies in relation to a restructuring plan made on or after the commencement of Schedule 2 to the Bill. [Schedule 2, item 23 of Schedule 2 to the Bill]

2.53 The change, and its application, are intended to preserve the arrangements made through a restructuring plan and give creditors certainty that their rights under the plan are not affected by the commencement of a special administration.

2.54 In line with this intent, Schedule 2 to the Bill ensures that, should a special administrator be appointed to administer an Aboriginal and Torres Strait Islander corporation that is subject to a restructuring plan, the restructuring practitioner for a plan can exercise their statutory powers and functions as an officer of the corporation.

2.55 Ordinarily, under special administration, an officer of an Aboriginal and Torres Strait Islander corporation is prohibited from exercising their statutory functions and powers unless they obtain consent from the special administrator. However, Schedule 2 to the Bill provides an exception to this offence. In that there is no requirement for a restructuring practitioner to seek written approval from the special administrator to undertake their role and perform functions in relation to a restructuring plan made by the corporation. This is a codified exception in which the person relying on the exception has the evidential burden of proving it. The reversal of the evidential burden is acceptable in this instance as it is limited to reliance on the codified exception, and not the proving of innocence in and of itself. [Schedule 2, items 11 and 16, new sections 496-10(2A) and 683-1(3)(d)(iiia) of the CATSI Act]

2.56 The main incompatibility between the functions of a special administrator and a restructuring practitioner for a plan concerns transactions or dealings affecting the property of an Aboriginal and Torres Strait Islander corporation. Typically, under the CATSI Act, only a special administrator can enter into, or give consent for others to enter into, transactions or dealings affecting property of an Aboriginal and Torres Strait Islander corporation. Transactions concerning property entered into by persons other than the special administrator are void.

2.57 Schedule 2 to the Bill departs from the existing framework to allow the small business restructuring practitioner to deal with property in accordance with a restructuring plan. [Schedule 2, items 12 and 13, section 496-15(3A) and the note in section 496-15(6) of the CATSI Act]

2.58 This gives creditors certainty that transactions or dealings concerning the property of an Aboriginal and Torres Strait Islander corporation that are specified in a plan would not be overturned by a special administrator.

Other amendments

2.59 Other amendments have been made to fully integrate the debt restructuring process into the CATSI Act. This includes:

•

inserting or amending definitions;

•

ensuring that lists of insolvency practitioners refer to small business restructuring practitioners in relation to Court appeals, relief from liability and the serving of notices, summons and other documents; and

•

minor and technical amendments such as updating a Chapter overview.

[Schedule 2, items 5, 6, 8-9, 15, 17-18, 20-22, sections 120-1(1)(fa), 386-60(3)(a)(ia), 482-1, 576-10(1)(da)-(db), 700-1(j)(iva)-(ivb) and 700-1(k)(va)-(vb) of the definition of affairs, 700-1(a) of the definition of examinable affairs, 700-1(ca)-(cb) of the definition of remuneration, and 700-1 (adds new definitions of restructuring plan and restructuring practitioner) of the CATSI Act]

Simplified liquidation for an Aboriginal and Torres Strait Islander corporation

2.60 Amendments to the CATSI Regulations are required to enable Aboriginal and Torres Strait Islander corporations to access the simplified liquidation process by passing a special resolution under the CATSI Act.

2.61 Otherwise, the existing liquidation process in the CATSI Act largely accommodates simplified liquidation.

2.62 Schedule 2 to the Bill makes minor and technical amendments to ensure the simplified liquidation process is seamlessly integrated into the CATSI framework. This includes ensuring that certain documents made by a liquidator (of an Aboriginal and Torres Strait Islander corporation) are afforded protection from public inspection, consistent with the treatment of similar reports in the Corporations Act. [Schedule 2, item 6, section 421-1(4)(b)(iii) of the CATSI Act]

Clarifications concerning simplified liquidation

Eligibility criteria

2.63 The eligibility criteria for accessing simplified liquidation includes that the company must be up to date with all tax lodgements as required by taxation laws. Schedule 2 to the Bill clarifies that this eligibility criteria:

•

relates to tax lodgements that the company was responsible for prior to the appointment of the liquidator; and

•

requires the company to have substantially complied with each tax lodgement requirement (consistent with the eligibility criteria for restructuring).

[Schedule 2, item 31, section 500AA(1)(g) of the Corporations Act]

2.64 To ensure that liquidation processes already underway can benefit from these clarifications, the amendments apply in relation to a company if a triggering event occurs before, on or after the commencement of Schedule 2 on the day after the Bill receives Royal Assent. [Schedule 2, item 35, section 1686C of the Corporations Act]

Reports by the liquidator

2.65 Simplified liquidation provides a quicker and cheaper pathway for less complex small business liquidations. For this reason, the corporate insolvency reforms replaced the section 533 report (an obligation under the full liquidation process) with a fit-for-purpose reporting process under section 5.5.05 of the Corporations Regulations.

2.66 Schedule 2 to the Bill clarifies that ASIC may investigate offences identified in a report made under section 5.5.05 of the Corporations Regulations, and that this report is exempt from public disclosure. [Schedule 2, items 1 and 34, section 15 of the ASIC Act and section 1274(2)(a)(iv) of the Corporations Act]

2.67 To ensure that ASIC can investigate all potential offences, this amendment applies in relation to reports lodged before, on or after the commencement of Schedule 2 on the day after the Bill receives Royal Assent. [Schedule 2, item 2, section 336 of the ASIC Act]

Powers of the liquidator for a company under simplified liquidation

2.68 Section 477 of the Corporations Act allows a liquidator appointed to a company to compromise debts existing between a company and a contributory or other debtor. If a debt is over $100,000, the liquidator cannot compromise the debt unless they obtain approval of the Court, or of the committee of inspection, or a resolution of the creditors is passed, which all involve meetings.

2.69 Section 477 of the Corporations Act also allows a liquidator to enter into an agreement on the company's behalf (for example, a lease agreement). If the agreement is for a duration longer than three months, the liquidator cannot enter that agreement unless they obtain approval of the Court, or of the committee of inspection, or a resolution of the creditors is passed, which all involve meetings.

2.70 These methods are unsuitable in the case of a simplified liquidation process because meetings of creditors are not held in a simplified liquidation process.

2.71 Schedule 2 to the Bill therefore enables a resolution to be passed without a meeting of creditors, by way of a proposal to creditors and contributories (in the circumstances prescribed in Schedule 2 of the Corporations Act), in a simplified liquidation. [Schedule 2, item 32, section 506(1A)(c) of the Corporations Act]

2.72 To ensure that simplified liquidation processes already underway can benefit from these amendments, they apply in relation to a liquidator appointed before, on or after the commencement of Schedule 2 on the day after the Bill receives Royal Assent. [Schedule 2, item 35, section 1686D of the Corporations Act]

Other minor and technical amendments

2.73 The corporate insolvency reforms made key parts of external administration processes 'technology neutral' to improve efficiency and reduce costs. Schedule 2 to the Bill clarifies where an electronic communication may be taken to have been sent from and received. [Schedule 2, items 25 and 26, sections 105B(2)(ba) and 105B(3)(ba) of the Corporations Act]

2.74 The Corporations Act entitles a bidder to withdraw an unaccepted takeover offer if the company that is the target of the offer becomes insolvent. An unaccepted takeover offer can be withdrawn if the target company enters restructuring. [Schedule 2, item 33, section 652C(2)(da)(db) of the Corporations Act]

2.75 To ensure that takeover processes already underway can benefit from this amendment, it applies in relation to a restructuring practitioner appointed before, on or after the commencement of Schedule 2 on the day after the Bill receives Royal Assent. [Schedule 2, item 35, sections 1686E of the Corporations Act]

2.76 The Tax Agent Services Act 2009 uses the concept of external administration but does not define it. Schedule 2 to the Bill inserts a definition commonly used in other legislation - including the ITAA 1997 - to refer to all types of external administration as provided in Chapter 5 of the Corporation Act. [Schedule 2, item 62, section 90-1(1) of the Tax Agent Services Act 2009]

2.77 A duplicative reference in the section 91 table in the Corporations Act is removed. [Schedule 2, item 24, section 91 (table item 15) of the Corporations Act]

2.78 The application provisions described in this Chapter are inserted into Chapter 10 of the Corporations Act. Schedule 2 to the Bill provides that amending Schedule means Schedule 1 to the Treasury Laws Amendment (2021 Measures No. 5) Act 2021. [Schedule 2, item 35, sections 1686 (Definitions) of the Corporations Act]

Chapter 3 - Miscellaneous and technical amendments

Outline of chapter

3.1 Schedule 3 makes a number of miscellaneous and technical amendments to various laws in the Treasury portfolio. These amendments are part of the Government's ongoing commitment to the care and maintenance of Treasury portfolio legislation.

3.2 These amendments make minor and technical changes to correct typographical and numbering errors, repeal inoperative provisions, remove administrative inefficiencies, address unintended outcomes, and ensure that the law gives effect to the original policy intent.

Context of amendments

3.3 Minor and technical amendments are periodically made to Treasury legislation to remove anomalies, correct unintended outcomes and generally improve the quality of laws. Making such amendments gives priority to the care and maintenance of Treasury portfolio legislation.

3.4 The process was first supported by a recommendation of the 2008 Tax Design Review Panel, which was appointed to examine how to reduce delays in the enactment of tax legislation and improve the quality of tax law changes. It has since been expanded to all Treasury portfolio legislation.

Summary of new law

3.5 These miscellaneous and technical amendments address technical deficiencies and legislative uncertainties in various Treasury laws by:

•

correcting spelling and typographical errors;

•

fixing incorrect legislative references;

•

addressing unintended outcomes;

•

adopting modern drafting practices;

•

enhancing readability and administrative efficiency; and

•

repealing redundant and inoperative provisions.

Detailed explanation of new law

Part 1 - Amendments commencing the day after Royal Assent

New Zealand auditors

3.6 Sections 324BB(5), 1280(4) and 1292(1)(a)(iii) of the Corporations Act 2001 are amended so that a firm is able to be appointed as auditor of a company or registered scheme if at least one member of the firm is a registered company auditor who is ordinarily resident in New Zealand in addition to being ordinarily resident in Australia. [Schedule 3, items 1 and 2, sections 324BB(5), 1280(4) and 1292(1)(a)(ii) of the Corporations Act 2001]

3.7 Currently a firm can only be appointed as auditor if at least one member of the firm is ordinarily resident in Australia. This change is in line with the policy intent of the Trans-Tasman Mutual Recognition Act 1997 which harmonises regulation in regards to goods and occupations between Australia and New Zealand.

Country by country reporting

3.8 Section 815-355(3)(a)(ii) of the Income Tax Assessment Act 1997 is amended to clarify the country by country reporting rules. A statement under these rules must contain details on the operations of entities that are members of the relevant country by country reporting group for the whole or part of the current income year. [Schedule 3, items 3 and 4, section 815-355(3)(a)(ii) of the Income Tax Assessment Act 1997]

3.9 This amendment applies to statements required to be provided to the Commissioner in relation to income years starting on or after 1 July 2020. [Schedule 3, item 5]

Recovery of overpayments

3.10 Section 24NAA is inserted into Part 4B of the Superannuation (Unclaimed Money and Lost Members) Act 1999. The section allows the Commissioner of Taxation to, in certain circumstances, recover amounts overpaid under Part 4B. [Schedule 3, item 6, section 24NAA of the Superannuation (Unclaimed Money and Lost Members) Act 1999]

3.11 For example, the Commissioner may make a payment under Part 4B and then discover that the amount paid exceeds the amount properly payable. In this situation the Commissioner may recover the excess from the superannuation provider to whom the payment was made or, in the case where the payment was transferred to another fund, the superannuation provider for the other fund.

3.12 However, the Commissioner cannot recover the excess from the superannuation provider for a fund if the fund does not hold an amount attributable to the overpayment.

3.13 Section 24NAA applies in relation to the recovery of overpayments on or after the commencement of these amendments, whether the overpayment occurred before, on or after that commencement. [Schedule 3, item 7]

3.14 Section 24NAA(8) makes apparent that the notice in section 24NAA(4)(a) is not a legislative instrument within the meaning of section 8(1) of the Legislation Act 2003.

Consumer protections

3.15 Sections 12DE and 12DN of the Australian Securities and Investments Commission Act 2001 are amended to substitute references to 'sale or grant, or the possible sale or grant' with 'supply, or the possible supply.' These sections relate to consumer protections on offers of rebates, gifts and prizes, and where the consumer protection provisions do not apply. These changes make the terminology consistent with other consumer protection provisions in the Australian Securities and Investments Commission Act 2001 and prevents the scope of sections 12DE and 12DN from being unintentionally narrowed. [Schedule 3, items 8, 9, 10, 11, 12, 13, 14, and 15 sections 12DE(1)(b)(iii), 12DE(2A)(b)(iii), 12DE(3A) 12DN(4), and 12DN(4A) of the Australian Securities and Investments Commission Act 2001]

Civil penalties

3.16 Amendments are made to correct drafting errors which misdescribed the payment period for infringement notices. The amendment provides that the payment period begins on the day after the infringement notice is given, rather than the day on which the infringement notice is given. [Schedule 3, items 16, 20, 24 and 28, section 12GXB(1)(h) of the Australian Securities and Investments Commission Act 2001, section 1317DAP(1)(h) of the Corporations Act 2001, section 75Y(1)(h) of the Insurance Contracts Act 1984 and section 288L(1)(h) of the National Consumer Credit Protection Act 2009]

3.17 Amendments are made to correct provisions affected by drafting errors misdescribing the payment period for infringement notices where the Australian and Securities Investment Commission refuses to make an arrangement for the notice to be paid in instalments and grammatical errors. The amendment ensures the payment period ends on the latest of the options. [Schedule 3, items 17, 18, 19, 21, 22, 23, 25, 26, 27, 29, 30 and 31 section 12GXC of the Australian Securities and Investments Commission Act 2001, section 1317DAQ of the Corporations Act 2001, section 75Z of the Insurance Contracts Act 1984 and section 288M of the National Consumer Credit Protection Act 2009]

Loss carry back choice

3.18 Section 160-16 is inserted into Division 160 of the Income Tax Assessment Act 1997 to clarify the mechanism through which an entity may change its loss carry back choice. Ensuring there is a clear mechanism through which entities may change their loss carry back choice is consistent with the broader intention of the regime which is designed to ensure entities have greater flexibility in utilising tax losses. [Schedule 3, item 33, section 160-16 of the Income Tax Assessment Act 1997]

3.19 A change of a loss carry back choice must be given to the Commissioner of Taxation in the approved form within the limited amendment period (as defined in section 170 of the Income Tax Assessment Act 1936) for an assessment for an income year.

3.20 A changed loss carry back choice applies as if it was always the entity's choice. That is, it takes effect from the day the original choice was made.

3.21 The Commissioner of Taxation may amend an assessment at any time for the purposes of giving effect to a changed loss carry back choice. This includes, for example, amending the assessment for the income year for which the choice relates as well as any assessment for any subsequent income years that are affected. Such changes may be required to give effect to a change in loss carry back choice as the change of choice may involve changes to the utilisation of a tax loss in the relevant income year, as well as the subsequent utilisation of these tax losses. [Schedule 3, item 32, section 170(10AA) of the Income Tax Assessment Act 1936]

Franking account balance

3.22 Sections 205-15(1) and 219-15(2) of the Income Tax Assessment Act 1997 are amended to ensure that a franking credit arises in circumstances where:

•

a franking debit arises because the entity or company receives a tax offset refund;

•

the entity or company's tax offset refund is subsequently reduced and the entity or company is liable to pay the Commonwealth the amount of the excess mentioned in section 172A(2) of the Income Tax Assessment Act 1936; and

•

the entity or company pays the amount of the excess.

[Schedule 3, item 34 and 35, table item 4A of section 205-15(1) and table item 6A of section 219-15(2) of the Income Tax Assessment Act 1997]

3.23 In these circumstances, the amount of the franking credit is the difference (if any) between the amount of the franking debit and the amount the franking debit would have been if the tax offset refund were reduced by the amount of the excess. The credit arises on the day on which the amount of the excess is paid.

3.24 Because the amendments require the amount of the franking credit to be calculated by reference to the operation of the relevant franking debit provision (sections 205-30 and 219-30 of the Income Tax Assessment Act 1997), the rules in the relevant franking debit provision effectively apply to the calculation of the franking credit (to the extent that those rules are relevant). These rules include limiting the amount of the franking debit to the shareholder's share of the income tax liability of the company for the relevant income year (see the table in section 219-30(2) of the Income Tax Assessment Act 1997) and ensuring no debit arises on the part of a refund that is attributable a tax offset that is subject to the refundable tax offset rules because of section 67-30 of the Income Tax Assessment Act 1997 (see section 205-30(2) of the Income Tax Assessment Act 1997).

3.25 The purpose of the amendments is to ensure the entity or company's franking account balance is restored to the amount it would be if the entity or company had received the correct amount of tax offset refund in the first instance.

Protected information

3.26 Division 3 of Part 7 of the Foreign Acquisitions and Takeovers Act 1975 deals with confidentiality of information.

3.27 Protected information is defined in section 120 of the Foreign Acquisitions and Takeovers Act 1975 to mean information obtained under and in accordance with that Act (with certain exceptions). Section 130 of the Foreign Acquisitions and Takeovers Act 1975 provides that a person does not have to disclose information to a court, tribunal, authority or person having power to require the production of documents or answering of questions, except for the purposes of the Foreign Acquisitions and Takeovers Act 1975.

3.28 Amendments are made to clarify that a person cannot be required to share protected information (rather than any information) to a court, tribunal, authority or person having power to require the production of documents or answering of questions, except where the information is required for the purposes of the Foreign Acquisitions and Takeovers Act 1975. The unauthorised release of protected information could cause significant harm, particularly if it contains commercially sensitive information. Therefore it is appropriate that such information should be limited in its ability to be shared. [Schedule 3, item 36, section 130 of the Foreign Acquisitions and Takeovers Act 1975]

Extension of decision period

3.29 Section 61 of the Foreign Acquisitions and Takeovers Act 1975 prescribes a time limit for making decisions on exemption certificates. Currently, the Treasurer must make a decision before the end of a period prescribed by regulations (currently 30 days) or before a date the person has requested and the Treasurer has agreed to.

3.30 An additional limb is added to allow the Treasurer to extend or further extend the decision period for making decisions on exemption certificates by up to 90 days. This aligns the provision with section 77A of the Foreign Acquisitions and Takeovers Act 1975 that allows the Treasurer to extend the decision period for up to 90 days in relation to no objection notifications. [Schedule 3, item 37, section 61(1)(b) of the Foreign Acquisitions and Takeovers Act 1975]

3.31 The total period by which the Treasurer can extend the decision period is 90 days. However, multiple extensions may be granted which in aggregate must not exceed the maximum extension period of 90 days. For example the Treasurer can extend the time period three times, each for 30 days before making a decision. [Schedule 3, item 38, section 61A of the Foreign Acquisitions and Takeovers Act 1975]

3.32 The Treasurer must provide a reason to the applicant for the extension.

3.33 The amendments provide the Treasurer with the flexibility to extend the decision period where he considers that more time is required to consider the application for an exemption certificate. This is not uncommon in cases that are sensitive or significant, and a longer decision period may be necessary to allow time to consult with Commonwealth, State or Territory bodies, to consider their expert input or develop bespoke conditions. Additionally, the issues considered when assessing applications are often complex and may require a longer assessment period to ensure that any application made in relation to foreign investment are not contrary to Australia's national interest, which is a critical objective of the Foreign Acquisitions and Takeovers Act 1975.

3.34 The amendments do not allow for merits review of the decision to extend the time period. Furthermore, the natural justice hearing rule will not apply to decisions by the Treasurer to use this power. This is appropriate, as it allows the Treasurer to balance the needs of the applicant with the potential harm to the national interest of rushing consideration of the application for an exemption certificate.

3.35 The decision to grant a time extension is procedural in nature and it is not expected to affect substantive rights. Review mechanisms continue to apply to the substantive decision on an exemption certificate. The amendments also provide a safeguard in the absence of merits review and the natural justice hearing rule, particularly the requirement to give reasons in writing for the Treasurer's decision to extend the time period.

3.36 While the Treasurer is not required to consult with the applicant before extending the decision period, the applicant will still be afforded natural justice in respect of the substantive decision making process, including in relation to decisions by the Treasurer about whether to apply conditions to the exemption certificate.

3.37 The amendments apply in relation to an application for an exemption certificate made on or after the day of commencement. [Schedule 3, item 39]

Temporary full expensing

3.38 Existing section 40-157 of the Income Tax (Transitional Provisions) Act 1997 is amended to clarify that, in working out the cost of a depreciating asset that is capital works for the purpose of calculating an entity's total cost of investment for the 2016-17 to 2018-19 income years, sections 40-45 and 40-215 of the Income Tax Assessment Act 1997 are disregarded. This clarification ensures the investment test interacts appropriately with the existing provisions in Division 40 of the Income Tax Assessment Act 1997. [Schedule 3, item 40, section 40-157 of the Income Tax (Transitional Provisions) Act 1997]

3.39 The amendment applies to taxpayers who rely on sections 40-160 and 40-170 of the Income Tax (Transitional Provisions) Act 1997 when working out the decline in value of an asset at or after 2020 budget time (consistently with the temporary full expensing regime). [Schedule 3, item 41]

Part 2 - Amendments commencing first day of the next quarter

Repeal of redundant provisions

3.40 The following sections are repealed as these provisions are now redundant, due to the passage of time:

•

sections 293-115(6) and (7) and 293-145(2) and (2A) of the Income Tax Assessment Act 1997; and

•

section 133-130(3) and (4) of Schedule 1 to the Taxation Administration Act 1953.

[Schedule 3, items 42 and 43, sections 293-115 and 293-145 of the Income Tax Assessment Act 1997 and section 133-130 of Schedule 1 to the Taxation Administration Act 1953]

GST free cars

3.41 Section 38-510(1)(a) of A New Tax System (Goods and Services Tax) Act 1999 requires that a person with a specific type of disability holds a current medical eligibility certificate issued by the Managing Director of the 'nominated company' in order to access the GST-free supply of a vehicle. That company no longer issues certificates.

3.42 Section 38-510(1)(a) is amended to allow medical practitioners to issue medical eligibility certificates for the purposes of section 38-510. [Schedule 3, item 44, section 38-510 of the A New Tax System (Goods and Services Tax) Act 1999]

3.43 The amendment ensures that medical eligibility certificates can continue to be issued, allowing the supply of GST-free vehicles to those who meet the other eligibility requirements.

3.44 A consequential amendment is made to the definition of disabled person in the A New Tax System (Luxury Car Tax) Act 1999. [Schedule 3, item 46, sections 27-1 of the A New Tax System (Luxury Car Tax) Act 1999]

3.45 The definition of officer in section 195-1 is amended because it is redundant as a result of the amendment to section 38-510(1)(a). [Schedule 3, item 45, section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999]

Agents of covered entities

3.46 Division 355 of Schedule 1 to the Taxation Administration Act 1953 contains provisions to protect the confidentiality of taxpayer information. Section 355-25 provides that it is an offence for a tax officer to make a record of information or disclose protected information either to another entity (other than the primary entity or an entity specified in section 355-25(2)) or to a court or tribunal.

3.47 Entities specified in section 355-25(2) include:

•

a representative of an incapacitated entity where the taxpayer is the incapacitated entity;

•

a legal personal representative (which includes an executor or administrator of a taxpayer that has died, the trustee of an estate of a taxpayer under a legal disability, or a person who holds a general power of attorney granted by the taxpayer); and

•

a guardian, where the taxpayer is a minor or suffers from mental incapacity.

3.48 Under the current provisions, a tax officer is unable to directly disclose protected information about the taxpayer to a tax agent, a BAS agent or a legal practitioner of an entity listed above who represents the taxpayer.

3.49 Section 355-25(2) is amended to add provisions that provide that a covered entity to whom protected information can be disclosed to includes the registered tax agent or BAS agent of another covered entity mentioned in sections 355-25(2)(c) to (e) or the legal practitioner representing those entities in relation to the affairs of the taxpayer. [Schedule 3, item 47, section 355-25 of Schedule 1 to the Tax Administration Act 1953]

3.50 The amendment of section 355-25 applies in relation to the making of a record or the disclosure of information occurring on or after the commencement of the amendment, whether the information was acquired before, on or after that commencement. [Schedule 3, item 48]

Deductible gift recipient

3.51 Item 6.2.9 of section 30-55(2) is amended to update the former entity name of 'the Nature Foundation SA Incorporated' with 'the Nature Foundation Limited'. A consequential amendment has been made to table item 77A in section 30-315 [Schedule 3, items 49 and 50, section 30-55 of the Income Tax Assessment Act 1997]

3.52 These amendments apply in relation to gifts or contributions made on or after 12 December 2019. This amendment will allow the entity to continue to receive tax deductible gifts. [Schedule 3, item 51]

Expired deductible gift recipient

3.53 A number of amendments have been made to repeal deductable gift recipient listings that have expired. [Schedule 3, items 52, 53, 54, 55, 56, 57, 58 and 59, sections 30-25, 30-40, 30-50, 30-80, 30-105 and 30-315 of the Income Tax Assessment Act 1997]

Deductible gift recipient

3.54 Item 12.2.2 of Section 30-100(2) is amended to reflect the change in the entity name from Australian Business Arts Foundation Ltd to Creative Partnerships Australia Ltd. [Schedule 3, item 60, section 30-100 of the Income Tax Assessment Act 1997]

3.55 This amendment will allow the entity to continue to receive tax deductible gifts. Consequential amendments have been made to the index in section 30-315 to update the entity's name. [Schedule 3, items 61 and 62, section 30-315 of the Income Tax Assessment Act 1997]

3.56 These amendments apply in relation to gifts or contributions made on or after 5 October 2020. [Schedule 3, item 63]

Approved economic infrastructure facility exception

3.57 Section 12-439(4) of the Taxation Administration Act 1953 is amended to correct a referencing error and clarify that the Treasurer may approve a facility if an application is made under section 12-439(3) rather than section 12-439(2). [Schedule 3, item 64, section 12-439 of the Tax Administration Act 1953]

Finance leases

3.58 Existing section 705-56(1) of the Income Tax Assessment Act 1997 modifies the operation of the consolidation tax cost setting rules when an entity that is the lessor or lessee under a lease of a depreciating asset joins a consolidated group, and the entity treats the lease as a finance lease under the accounting standards. Section 711-45(2A) of the Income Tax Assessment Act 1997 makes a corresponding modification if the entity subsequently leaves the consolidated group.

3.59 From 1 January 2019, the new Accounting Standard for Leases (AASB 16) applies to introduce a single accounting model for lessees. The new standard requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee no longer classifies leased assets or liabilities as an operating lease or a finance lease.

3.60 Amendments have been made to section 705-56(1) of the Income Tax Assessment Act 1997 to expand the operation of the modified tax cost setting rule so that it is not limited to finance leases but applies to all leases where the joining entity is the lessor or lessee under a lease of a depreciating asset to which Divisions 40 applies. [Schedule 3, items 65, 66 and 67, sections 705-25(5) (note 2), 705-56 (heading) and 705-56(1) of the Income Tax Assessment Act 1997]

3.61 This change ensures there is consistency with the changes to AASB 16 to ensure that the provisions are not limited to finance leases.

3.62 Amendments have been made to section 711-45(2A) of the Income Tax Assessment Act 1997 to reflect the corresponding modified tax cost setting rule if the entity subsequently leaves the consolidated group. [Schedule 3, item 68, section 711-45(2A) (heading) of the Income Tax Assessment Act 1997]

3.63 The amendments to expand the operation of the modified tax cost setting rules to all leases apply in relation to an entity that becomes a subsidiary member of a tax consolidated group or a multiple entry consolidated group on or after 1 January 2019. [Schedule 3, item 69]

Low pool value

3.64 Section 328-180 (6) of the Income Tax (Transitional Provisions) Act 1997 is amended to correct a typographical error and ensure the law refers to "low pool value" (rather than "low value pool"). [Schedule 3, item 70, section 328-180 of the Income Tax (Transitional Provisions) Act 1997]

Refund of excess low balance fees

3.65 Section 291-25 of the Income Tax Assessment Act 1997 outlines an individual's concessional contributions for a financial year.

3.66 The amendments clarify that a fee refund paid by a trustee to a member's superannuation account is not a concessional contribution. This means the amount refunded does not count towards the member's concessional contribution cap. A fee must be refunded to the member under the Superannuation Industry (Supervision) Act 1993 if the account is a low balance account, and the total fees for the year are above the maximum level. [Schedule 3, item 71, section 291-25 of the Income Tax Assessment Act 1997]

3.67 The amendment applies from the 2021-22 financial year. [Schedule 3, item 72]

Part 3 - Other amendments

Delegation of powers related to unclaimed money

3.68 The Life Insurance Act 1995 is amended to allow the Treasurer to delegate any of his or her powers and functions relating to reuniting unclaimed money payable in respect of life insurance policies. Specifically, the amendment provides that the Treasurer can delegate any of his or her functions and powers to either a non-corporate Commonwealth entity for which the Treasurer is the responsible Minister or to a member or staff member of such an entity. [Schedule 3, items 73 and 74, section 216 of the Life Insurance Act 1995]

3.69 Currently, the Treasurer would need to authorise the Australian Securities and Investments Commission to exercise these powers and functions, as there is no ability for them to be delegated.

3.70 The amendment will allow the Treasurer to delegate these powers and functions to the Australian Securities and Investments Commission. This will provide administrative efficiencies and ensure that unclaimed money claims can continually be assessed and resolved without significant delays.

3.71 The powers and functions that can be delegated are not of an enforcement or exemptions nature, or ones that could materially affect a person's rights. Given their administrative nature, it is appropriate for them to be delegated to staff members who are lower than Senior Executive Service level. This will improve efficiencies and avoid delays in dealing with unclaimed money claims.

KiwiSaver scheme

3.72 Various amendments are made to the Superannuation (Unclaimed Money and Lost Members) Act 1999 to ensure that New Zealand-sourced amounts held under that Act are treated consistently with the rules in Part 12A of the Superannuation Industry (Supervision) Regulations 1994. Part 12A sets out matters to implement the Arrangement between the Government of Australia and the Government of New Zealand on Trans-Tasman Retirement Savings Portability. [Schedule 3, items 78, 79, 80, 81, 82, 83, 84, 85, 95, 96, and 97, sections 8, 17, 20H, 20QF, 21E, 24G and 24NA of the Superannuation (Unclaimed Money and Lost Members) Act 1999]

3.73 The effect of the amendments is that amounts held by the Commissioner of Taxation under the Superannuation (Unclaimed Money and Lost Members) Act 1999 which include a New Zealand-sourced amount cannot be paid out under that Act to self-managed superannuation funds, funds which have not notified the Commissioner they accept New Zealand-sourced amounts or, in certain circumstances, persons who do not satisfy the New Zealand eligibility age.

3.74 The amendments also ensure that amounts held by the Commissioner under Part 3D of that Act can, consistent with amendments provided by Schedule 2 to the Treasury Laws Amendment (2020 Measures No. 5) Act 2020, be paid to New Zealand KiwiSaver scheme providers. [Schedule 3, items 86, 87, 88, 89, 90, 91, 92, 93 and 94, sections 22B, 22E and 22F of the Superannuation (Unclaimed Money and Lost Members) Act 1999]

3.75 The amendments apply in relation to payments of amounts made by the Commissioner on or after the commencement of Division 2 of Part 3 of Schedule 3 to the Bill, regardless of when the amounts were received by the Commissioner. [Schedule 3, item 99]

3.76 The amendments also require the Commissioner to administer any money paid to them under the Superannuation (Unclaimed Money and Lost Members) Act 1999 in a way that allows any New Zealand-sourced amount to be identified separately. This requirement applies in relation to money paid to the Commissioner under that Act on or after the commencement of Division 2 of Part 3 of Schedule 3 to the Bill. [Schedule 3, items 98 and 99, section 49AA of the Superannuation (Unclaimed Money and Lost Members) Act 1999]

3.77 Amendments are also made to ensure the guide material in section 7 of the Superannuation (Unclaimed Money and Lost Members) Act 1999 is accurate. The amendments ensure the guide material indicates that the Commissioner can pay amounts to KiwiSaver scheme providers. [Schedule 3, items 75, 76 and 77, section 7 of the Superannuation (Unclaimed Money and Lost Members) Act 1999]

Amendments to the Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020

3.78 The Modernising Business Registers program transfers various registers from ASIC to the Registrar and is implemented largely by the Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020. The Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020 amends various other Acts which establish the registers and registry regimes. The need to stagger the transfer of the registers was not anticipated in the commencement, application, and transitional provisions of the Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020. This Bill amends such provisions to enable the staggered transfer.

3.79 The commencement date for item 1261 of Schedule 1 of the Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020 is amended to be the day after this Bill receives Royal Assent. [Schedule 3, items 100 and 102, item 1261 of Schedule 1 to the Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020]

3.80 The application and transitional provisions relating to Schedule 1 to the Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020 which are being inserted into various Acts by the Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020 are amended so that they operate as needed for the staggered transfer. [Schedule 3, items 101, 103, 104, 105 and 106, items 359, 1345, 1414, and 1465-1467 of Schedule 1 to the Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020]

3.81 As part of this amendment, item 3 of Schedule 3 to the Business Names Registration (Transitional and Consequential Provisions) Act 2011 would have been added by item 359 of Schedule 1 to the Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020 is omitted. This item is not necessary due to the staggered transfer.

3.82 Division 3 of Part 3 of Schedule 1 to this Bill has a retrospective commencement to ensure that the provisions being amended operate as intended at times appropriate for the staggered transfer. To provide certainty to all stakeholders and simplify the operation of the commencement provisions, a fixed commencement time immediately after the initial commencement of section 2 of the Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020 is appropriate. The retrospective commencement of Division 3 is unlikely to adversely affect any persons because it is preventing the retrospective operation of the affected provisions (which, if unamended, may have detrimental effects). [Section 2]

3.83 The commencement provisions for various items in Schedule 4 to the Treasury Laws Amendment (2020 Measures No. 6) Act 2020 relating to the Modernising Business Registers program are amended to ensure the items achieve their intended outcomes despite the staggered transfer. [Schedule 3, items 107 and 108, section 2(1) of the Treasury Laws Amendment (2020 Measures No. 6) Act 2020]

3.84 Setting the commencement of items 115 to 120 and 127 to 142 (which amend the Corporations Act 2001, the Superannuation Industry (Supervision) Act 1993 and the Taxation Administration Act 1953 to reflect the transfer of registry functions) to be on a day or days to be fixed by Proclamation allows the flexibility necessary to align them with the staggered transfer. The final dates specified for the commencement of these items reflect the latest advice about the schedule for transferring registers.

3.85 The commencement of items 143 and 144 (which amend the Taxation Administration Act 1953 to enable the disclosure of protected information to the Registrar) is retrospective and set to the date on which the Registrars were created. These items were intended to commence at the time the Registrars were created, however their commencement provisions did not operate as intended.

3.86 Division 4 of Part 3 of Schedule 1 to this Bill has a retrospective commencement to ensure that the relevant items in Schedule 4 to the Treasury Laws Amendment (2020 Measures No. 6) Act 2020 operate as intended. The reasons for retrospective commencement of items 143 and 144 are set out above. Items 115 to 120 and 127-142 need to commence before registry functions are transferred from the Australian Securities and Investments Commission to the Registrar by the commencement of various items in the Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020. To provide certainty to all stakeholders and to significantly simplify the operation of the commencement provisions, a fixed commencement time immediately after the initial commencement of section 2 of the Treasury Laws Amendment (2020 Measures No. 6) Act 2020 is appropriate. The retrospective commencement of Division 4 is unlikely to adversely affect any persons because it is preventing the retrospective operation of provisions which, if unamended, may have detrimental effects. [Section 2]

Chapter 4 - Statement of Compatibility with Human Rights

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

Schedule 1 - Australian Screen Production Incentive Reforms

4.1 Schedule 1 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

4.2 Schedule 1 makes amendments to Division 376 of the ITAA 1997 to increase the producer offset for films that are not feature films released in cinemas to 30 per cent of total qualifying Australian production expenditure, and to make various threshold and integrity amendments across the three screen tax offsets.

Human rights implications

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

Conclusion

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

Schedule 2 - Consequential and transitional matters arising from corporate insolvency reforms

4.5 Schedule 2 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

4.6 Schedule 2 makes consequential amendments to integrate the corporate insolvency reforms across the Commonwealth statute book.

4.7 These amendments come under the following categories:

•

Clarifying eligibility to participate in the debt restructuring and simplified liquidation processes

•

Updates concerning the role of the restructuring practitioner

•

Updating Commonwealth legislation to add debt restructuring as a type of external administration

•

Integrating debt restructuring and simplified liquidation into the special administration process for Aboriginal and Torres Strait Islander corporations

•

Other technical amendments which provide clarity to the corporate insolvency regime

Human rights implications

Reversal of evidential burden of proof

4.8 Schedule 2 to the Bill engages the right to a fair trial in Article 14(2) of the ICCPR.

4.9 Subsection 496-10(1) of the CATSI Act prohibits an officer of the Aboriginal and Torres Strait Islander corporation from performing or exercising a power or function as an officer during a special administration. An exception to this is where a person performs or exercises a function or power as a small business restructuring practitioner for a restructuring plan (in new subsection 496-10(2A)). A person who wishes to rely on the exception contained in subsection 496-10(2A) bears the evidential burden of proving the exception.

4.10 Under subsection 13.3(3) of the Criminal Code Act 1995 a defendant who wishes to rely on any exception, provided by the law creating an offence, bears an evidential burden in relation to that matter; the exception need not accompany the description of the offence. The reversal of the evidential burden is acceptable in this instance as it is limited to reliance on the codified exception, and not the proving of innocence in and of itself.

4.11 Accordingly, to the extent that Schedule 2 to the Bill engages the rights under Article 14 of the ICCPR, it is compatible with human rights as the limitations are appropriate and proportionate.

Conclusion

4.12 Schedule 2 to the Bill is compatible with human rights because the reverse burden of proof is limited to the exception in new subsection 496-10(2A) of the CATSI Act and not the offence provision (subsection 496-10(1)), and therefore is consistent with article 14(2) of the ICCPR. To the extent that Schedule 2 to the Bill may limit human rights, those limitations are reasonable, necessary and proportionate.

Schedule 3 - Miscellaneous and technical amendments

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

Overview

4.14 Schedule 3 to the Bill makes a number of miscellaneous and technical amendments to various laws in the Treasury portfolio. These amendments are part of the Government's ongoing commitment to the care and maintenance of Treasury portfolio legislation.

4.15 These amendments make minor and technical changes to correct typographical and number errors, repeal inoperative provisions, remove administrative inefficiencies, address unintended outcomes, and ensure that the law gives effect to the original policy intent.

Human rights implications

4.16 Schedule 3 to the Bill engages the following human rights and freedoms:

•

the right to justice under Article 14 of the International Covenant on Civil and Political Rights (ICCPR);

•

the right to protection from arbitrary or unlawful interference with privacy under Article 17 of the ICCPR; and

•

the right for person's with disabilities to have access to transport, information, communications and other public facilities under Article 9 of the Convention of the Rights of Persons with Disabilities.

Right to a fair and public hearing and right to appeal

4.17 The power of the Treasurer to extend the decision period engages the right to justice under Article 14 of the ICCPR because the Treasurer is not required to consult with the affected person before deciding to extent the decision period, the decision to extend the decision period is not subject to merits review and the decision making process is not subject to the natural justice hearing rule. Previously the Treasurer was required to make a decision before the end of a period prescribed by regulations (currently 30 days) or before the end of that period, the person requests in writing that the treasurer extends the period.

4.18 The amendments clarify that the decision period can also be extended if, the Treasurer extends the decision period using a new power to extend the decision period up to 90 days.

4.19 The total period by which the Treasurer can extend the decision period is 90 days. However, multiple extensions may be made to reach the maximum 90 days.

4.20 The rules of natural justice are expressly excluded when making a decision on the extension. Article 14 of the ICCPR states that all persons are entitled for a fair and public hearing in the determination of their legal rights and obligations.

4.21 In this case, excluding the rules of natural justice in making an extension decision are appropriate and proportionate in light of the role the foreign investment framework plays in protecting Australia's national interest, including Australia's national security. The ability to extend a decision period allows the Treasurer sufficient time to determine whether the relevant action being considered is contrary to the national interest.

4.22 Removing the rules of natural justice facilitates the processing of sensitive or significant exemption certificate applications by allowing the time necessary for the Treasurer to consider all input that informs these exemption certificate applications. In some cases, a longer decision period may be required to allow consultation partners sufficient time to provide their input including where they are developing bespoke conditions. It deters unnecessary challenges to an interim decision that does not fundamentally affect a person's rights.

4.23 While the Treasurer is not required to consult with a person before extending the decision period, the person will still be afforded natural justice and other review mechanisms as part of the substantive decision making process.

Right to privacy

4.24 Division 3 of Part 7 of the Foreign Acquisitions and Takeovers Act 1975 deals with the confidentiality of information and authorises the disclosure of protected information in a range of specified circumstances.

4.25 Protected information is information obtained under the Foreign Acquisitions and Takeovers Act 1975. Section 130 of the Foreign Acquisitions and Takeovers Act 1975 provides that a person does not have to disclose information to a court, tribunal, authority or person having power to require the production of documents or answering of questions, except for the purposes of the Act.

4.26 Amendments are made to clarify that a person cannot be required to share protected information to a court, tribunal, authority or person having power to require the production of documents or answering of questions, except where the information is required for the purposes of the Foreign Acquisitions and Takeovers Act 1975.

4.27 Article 17 of the ICCPR prohibits unlawful or arbitrary interferences with an individual's privacy, family, home or correspondence. Schedule 3 to the Bill promotes this right by providing stronger protection for protected information by limiting the ability of courts, tribunals, authorities or people from requiring a person to disclose information obtained under the Foreign Acquisitions and Takeovers Act 1975, unless such disclosure is authorised by the Foreign Acquisitions and Takeovers Act 1975.

4.28 Division 355 in Schedule 1 to the Taxation Administration Act 1953 protects the confidentiality of taxpayer information. Section 355-25 provides that it is an offence for a tax officer to make a record of information or disclose protected information either to another entity or to a court or tribunal, other than the primary entity or a 'covered entity' specified in section 355-25(2).

4.29 Under the previous provisions, a tax officer is unable to directly disclose confidential information about the taxpayer to a tax agent, a BAS agent or a legal practitioner of an entity listed above who represents the taxpayer.

4.30 Section 355-25(2) is amended to add provisions that provide that a covered entity to whom confidential information can be disclosed to includes the registered tax agent or BAS agent of another covered entity mentioned in sections 355-25(2)(c) to (e) or the legal practitioner representing those entities in relation to the affairs of the taxpayer.

4.31 Article 17 of the ICCPR is engaged because the provision expands the range of persons to whom a tax officer can disclose protected information. The amendments allow a tax officer to disclose information to the legal practitioner, tax or BAS agent of the covered entities mentioned in section 355-25(2)(c) to (e). This permits disclosure to entities that may not directly represent the taxpayer to whom the information relates but nonetheless need access to this information in their capacity assisting the relevant covered entities in managing the taxpayer's affairs.

4.32 The amendments ensure that disclosure is proportionate to enabling the efficient management of a taxpayer's affairs. Disclosure can only be made to those who currently deal with similar protected information and who are adequately licenced or registered with oversight from a governing body (such as the Tax Practitioner's Board or a Law Society).

Right for a person with disability to have access to transport

4.33 Section 38-510 of the GST Act provides that the supply of a car to a person with a disability is GST-free if that person holds a current disability certificate issued by the Managing Director of the 'nominated company.'

4.34 The amendments allow a medical practitioner to issue a medical eligibility certificate for the purposes of access the GST-free supply of a car.

4.35 Article 9 of the Convention of the Rights of Persons with Disabilities states appropriate measures to ensure equal access to transportation for persons with disabilities.

4.36 The amendment engages and promotes this right by enabling medical practitioners to issue certificates that grant access to GST-free supplies of cars. This ensures the continuity of the scheme that is providing a favourable tax treatment to the supply of vehicles for people with disabilities.

Attachment A - Regulation impact statement - Australian Screen Production Incentive Reforms

The problem

The industry has evolved so government support needs to as well

The Australian Government supports the production of Australian screen content because it is considered culturally beneficial to the nation. With the introduction of online streaming services, the screen industry has gone global. Audiences now have access to more content from all over the world than ever before. With Australian audiences consuming views, products, ideas and other aspects of culture from around the world every day it is important that quality film and television content shaped by Australian life experiences that contributes to and strengthens Australian culture and identity is available.

In order to effectively compete in this new digital global environment for audiences, Australian content must be of high quality. However, for Australian producers, the call for record levels of content creation brings with it increased competition for financing. Further, broadcasters, online services and film studios are all competing for fracturing audience share and revenue. The financing available from traditional sources is reducing just when the demand from audiences for higher quality content is increasing.

The Australian Screen Production Incentive (ASPI), as the Australian Government's primary mechanism for providing support to the screen industry, provides tax incentives for film, television and other screen production in Australia and is available in three streams:

•

The Producer Offset, administered by Screen Australia, entitles a production company to a 40 per cent rebate on qualifying Australian production expenditure on eligible feature films and 20 per cent on other formats (TV, online, DVD) for productions with significant Australian content.

•

The Location Offset, administered by the Department of Communications and the Arts (the Department), provides a 16.5 per cent rebate on qualifying Australian production expenditure for eligible productions with a minimum Australian spend of $15 million.

•

The Post, Digital and Visual Effects (PDV) Offset, administered by the Department, provides a 30 per cent rebate on qualifying expenditure for productions undertaking PDV production in Australia. The expenditure threshold for eligibility is $500,000 expenditure on activities reasonably required to perform the PDV production in Australia.

In 2018-19, 257 certificates were issued under the ASPI.

The ASPI was designed to suit pre-2007 industry settings. Various reviews and inquiries that have taken place since 2017 have all found that the current policy settings for supporting the production of Australian screen content were fit for purpose when they were designed and have generally served domestic audiences and the Australian screen production sector well. However these processes also found that with a need for Australian producers to consistently create Australian stories that resonate with local and international audiences, the policy settings need to be modernised to support the creation of quality Australian content and for it to be made available across all platforms from traditional television to online services.

The Australian screen production industry is a significant contributor in terms of economic benefit and jobs. The screen industry employs approximately 25,000 FTE and contributes $3 billion in value add to the economy annually. Since its introduction in 2007 the ASPI has had significant positive impacts in supporting Australian film, television and documentary content and attracting footloose productions. As at 30 June 2020, the ASPI has provided over $2.9 billion in support to the Australian screen industry since its introduction.

Government policies need to be set so that our industry focuses on the creation of content that can compete for audiences in this market by producing quality, engaging stories with high production values this is available to audiences on the right distribution platform. This presents the strongest opportunity for commercial return for each production. With effective, modernised, targeted mechanisms our industry can capitalise on the opportunities now presenting themselves and be a significant contributor to the economy and provider of jobs.

In 2018-19 drama expenditure in Australia was over $1.1. billion; 65% of this related to Australian titles, including $95 million on Australian children's television, $334 million on Australian TV drama and $299 million on Australian feature films. Screen Australia estimates that $144 million of documentary programs are produced annually. Noting the significant cultural and economic dividend that the screen sector provides, the Australian Government has a prominent role to play in ensuring that quality content is available for Australian and international audiences.

Inquiries and reviews

There have been a number of reviews and inquiries have taken place that examine the support settings for the industry.

The House of Representatives Standing Committee on Communications and the Arts has conducted an inquiry (the Inquiry) into factors contributing to the growth and sustainability of the Australian film and television industry. A report table on 7 December 2017 contained 13 recommendations proposing changes to the current tax incentives for screen production; content regulation; direct funding arrangements; international screen engagement; and for Government and industry to discuss ways to address health and safety concerns.

Concurrent to the Inquiry, the Department of Communications and the Arts, the Australian Communications and Media Authority (ACMA) and Screen Australia jointly undertook a review of Australian and children's screen content (the Review). The Review was undertaken to develop policy options on the most effective policy settings for the Australian screen production sector. Findings from the Review were delivered to the former Minister for Communications and the Arts in December 2017.

On 18 October 2017 the Senate tasked the Environment and Communications References Committee to undertake an inquiry into the economic and cultural value of Australian content on broadcast, radio and streaming services. The Committee released its report on 26 March 2019. The Committee concluded that it is imperative that the correct policy settings are in place to support the growth and future of the Australian screen industry but was unable to agree on any specific recommendations.

On 26 July 2019 the Australian Competition and Consumer Commission (ACCC) published its final Digital Platforms Inquiry report. Among its 23 recommendations the ACCC recommends a new platform-neutral regulatory framework be developed and implemented to ensure effective and consistent regulatory oversight of all entities involved in content production or delivery in Australia, including media businesses, publishers, broadcasters and digital platforms.

On 12 December 2019 the Government released its response and implementation roadmap to the Australian Competition and Consumer Commission's (ACCC) Digital Platforms Inquiry.

As part of the response, ACMA and Screen Australia prepared an options paper looking at how to best support Australian stories on our screens in a modern, multi-platform environment. The paper has formed the basis for industry consultation on policy settings that will best support the Australian screen industry into the future. The consultation phase closed on 3 July 2020 with over 300 submissions received.

Findings from these processes

A key finding of the review and inquiry processes was that there is an ongoing and vital role for Government to foster and support quality Australian and children's content. Without support Australia would not produce the quantity, quality and variety of screen content expected by Australian audiences.

These processes found that the marketplace for content is now truly global. Audiences are consuming content through a range of platforms, with online content accessed through multiple devices becoming more prevalent. Subscription video on demand services are proving increasingly popular with audiences. To remain relevant, producers, broadcasters and distributors must now think globally as well as domestically. Quality, discoverability and promotion of Australian content has become more important than ever as productions from all over the world are seeking the attention of audiences.

The most recent process of the options paper proposed four options for reform and sought views from the sector. The majority of stakeholders supported changes to the screen production incentives to enable them to create quality content, make this content available across a range of platforms and compete in a global environment.

The need for government action

Australian Government support

The Australian Government supports the production of Australian screen content because it is considered culturally beneficial to the nation. Support provided by the Australian Government to the screen industry is essential to ensure Australian stories are available at our cinemas, on television and now online. The strong cultural imperative for the Australian Government to invest in the screen industry also extends to attracting international productions to Australia. The foreign investment, skills development opportunities and infrastructure that international productions bring are invaluable for strengthening the local industry.

A viable domestic screen production sector is essential if audiences are to have access to quality Australian content. Given the small size of the Australian market for screen content, and the sheer quantities of screen content production in larger English-language markets such as the United States, United Kingdom and Canada, Australia would not produce the quantity, quality and variety of Australian content required to achieve cultural benefits without significant funding incentives and regulation by government.

Support from the Australian Government for the production of Australian screen content enables a diverse range of quality Australian film and television productions that reflect a sense of Australian identity, character and cultural diversity and promote the development of a sustainable independent production sector.

Screen Australia's Screen Currency: valuing our screen industry report found that cultural value is not easily measured in numbers or dollars but screen content can regularly contribute to national pride, social cohesion and points of connection. For example, lines from classic films and television series like The Castle, Muriel's Wedding and Kath & Kim have become part of our national dialogue.

The Olsberg•SPI Measuring the cultural value of Australia's screen sector report found there is a minor bias towards favouring Australian content when making viewing decisions helping to maximise the cultural value of such productions, and highlights the importance of self-recognition on screen. The report also found that screen production has helped Aboriginal and Torres Strait Islander communities influence audiences here and abroad. The availability of productions like Redfern Now, which showed strong ratings in both Indigenous and non-Indigenous communities, provides anecdotal evidence that this and other productions are helping to build a greater understanding of Indigenous Australia.

Further, What are our stories worth? Measuring the economic and cultural value of Australia's screen sector, found that 44 per cent of respondents to a Deloitte Access Economics survey about the cultural value of Australian content said Australian film and television are a key part of Australian cultural identity.

It is important that quality Australian content is available for our audiences as it remains popular. Screen Australia's Screen Currency: valuing our screen industry report found that there is a general preference for local content over imported content, even amongst the YouTube and Netflix generations. Despite the vast amounts of imported programs on Australian screens (large and small), and their large production and marketing budgets, Australians expressed a preference for local content. Only 2 per cent said that they do not watch Australian content, 64 per cent said that local content accounted for up to half of their media diet, and 22 per cent reported that most or all of their viewing was Australian. And while the majority of people said that it makes no difference to them where content comes from, there was an inherent preference for domestic content with less than 14 per cent saying that they were less likely to watch a program if it's Australian, compared to 35 per cent who said they were more likely to watch a program if it's Australian.

The general preference for local over imported was evident even amongst the most avid online viewers who have the greatest choice of content from around the world. Their views on the distinctiveness of Australian content and their likelihood of engaging with it were comparable with the wider group.

COVID-19

COVID-19 has exacerbated many of the commercial pressures and trends already underway in Australia and overseas. Lockdowns have paused the production of new content and a reduction in consumer spending has driven a substantial drop-off in advertising expenditure.

As part of announcing the release of the options paper on 15 April 2020, the Minister also announced a package of measures to help sustain Australian media businesses as they do their vital work of keeping the community informed during the COVID-19 pandemic. The measures included an emergency suspension of quotas in relation to Australian drama, children's and documentary content obligations on free-to-air and subscription television for 2020.

The challenges of COVID-19 have amplified the importance of having stable effective support for our screen production sector.

Policy options considered

To address the issues identified with ensuring that the ASPI policy settings are effectively supporting our industry to produce quality Australian content that can compete in a global environment and recover from the impact of COVID-19, the below options are explored.

Option one

This option seeks to make amendments to Division 376 of the Income Tax Assessment Act 1997 that underpins the ASPI to standardise the Producer Offset rebate rate at 30 per cent for eligible film and television content, and to make complementary threshold and integrity amendments across the three film tax offsets. The proposed changes are:

Table 1.1 Option one - proposed changes

It is also proposed to implement a number of integrity amendments that will clarify for applicants distribution, re-versioning and related party expenditure requirements.

Option two

This option would see the status quo retained and no changes made to the content production support settings.

Option three

This option seeks to make minimal amendments to Division 376 of the Income Tax Assessment Act 1997 that underpins the ASPI. Changes will be made to the Producer Offset to recognise audience viewing of feature films across new platforms, increase support for children's drama and support long-running, successful titles. The proposed changes are:

Table 1.2 Option three - proposed changes

The current 20 per cent Producer Offset for other content would continue for all other eligible productions. There would be no changes to the PDV and Location Offsets.

Regulatory impacts

Option one

These measures are expected to result in minimal regulatory impact. Many of the amendments proposed will result in no or very limited regulatory impact on businesses as the changes will increase support for productions already applying to the Offsets and will clarify ambiguities for applicants assist in internal administration and target qualifying expenditure. A summary of the impacts is below:

Table 1.3 Option one - summary impacts

Overall the outcome from these proposed reforms will rebalance support to ensure that the Australian screen production industry can produce higher quality and higher budget productions, which have a more resonating cultural value and greater audience appeal, and maintain the industry's important economic contribution. It is therefore expected that the economic and employment contribution of the sector will be maintained as larger budget, higher quality productions will also require bigger crews. Proposed changes will incentivise international producers and platforms to engage with the Australian screen production sector, offering the opportunity to grow foreign investment in our industry, which represented over $138 million in 2018-19.

Option two

This option would see no amendments made to the support mechanisms; levels of support and eligibility criteria would all remain the same. Regulatory impacts on businesses applying to the offsets would remain unchanged.

Retaining the status quo was one of the models explored during the options paper process. Stakeholders overwhelmingly dismissed this option stating it would effectively see our industry go backwards over the longer term as it struggles to keep pace with the evolving nature of the industry and demand for high quality content.

Other policy drawbacks of this option is significant criticism from industry about a lack of Government action following a series of reviews and inquiries and an option paper process that clearly identified changes were being sought by the industry and even which changes were preferred. Producers will be particularly critical that attention is not being put towards strengthening and stabilising our production sector as it looks to undertake reforms in the content regulation space.

If current arrangements are maintained without adjustment, it seems likely that the ecosystem that supports Australian content will contract. Production levels may fall to a new 'floor', cheaper productions may be used to fill broadcast quotas and international distributors may leave the Australian market with a downward impact on sector jobs. Support will continue to not target to the 'new normal' of production or recognise viewing of content on online platforms. At worst, this could ultimately result in less, and lower quality, Australian content for Australian audiences. Meanwhile, the newer and growing content services may continue to make no or comparatively minimal investment in Australian content. Australian users of these services may not have new Australian content to view, while Australian content creators may miss pivotal opportunities for international finance and audiences.

Option three

These measures are expected to result in minimal regulatory impact. The proposed amendments will result in no or very limited regulatory impact on as they impact a small number businesses. The impact on those business will see increase support for productions already applying to the Offsets. A summary of the changes and the impacts is below:

Table 1.4 Option three - summary of impacts

The reform to increase the Producer Offset rate to 40 per cent for feature length content regardless of release platform also addresses the growing unintended effects of the current requirement for a theatrical release. Box office revenue is increasingly flowing to U.S. studio blockbuster films. Independent films often struggle to reach cinema audiences, and local distribution opportunities are very limited. In this environment, some producers are signing unfavourable distribution agreements to secure a release and trigger the higher Offset. While a theatrical release will still be the most appropriate pathway to audiences for many projects, the requirement is out of step with modern financing and viewing, and is discouraging producers from pursuing financing and audience opportunities on online platforms. This change will result in enabling flexible release options for productions via alternative platforms, better targeting audiences and resulting in a better commercial return. This change will also incentivise international producers and platforms to engage with the Australian screen production sector increasing opportunities and foreign investment in our industry. This has the potential to drive increased production of Australian content on these platforms over time as the international market begins to show more confidence in our sector.

As part of the Options Paper process, this minimalistic change model was explored. Consultation and analysis of this model evidenced that it would fail to effect the desired policy outcomes, and could result in industry criticism. Applying this minimalistic approach to the reform of the tax incentives would result in siloed changes that would fail to deliver satisfactory outcomes. Any amendment to the ASPI must be considered holistically and the various elements reformed simultaneously to ensure effective support for the industry going forward.

Regulatory costs/savings

Option one

Between 160 and 220 businesses access the three offsets each year.

In 2018-19, Screen Australia issued 164 final certificates and 138 provisional certificates for the Producer Offset and in 2019-20 the Minister for the Arts issued 128 final certificates and 42 provisional certificates for the Location Offset and PDV Offset. There are several businesses receiving more than one certificate in a year for different productions.

These measures will reset the levels of support for Australian screen content to drive the creation of productions that can compete with globally. It will also provide flexibility to the industry to work with other distribution platforms and provide stability as changes to content regulation are progressed. These changes are expected to sustain more than 25,000 jobs supported by the Australian screen production industry, and boost the quality and reach of Australian film and television production.

The regulatory costs below include the cost of businesses applying to Screen Australia for the Producer Offset and to the Department of Infrastructure, Transport, Regional Development and Communications for the PDV Offset and Location Offset. These costs have been calculated based on one person taking an average time of eight hours for completion of an application for provisional certification and 10 days (75 hours) for completion of an application for final certification. Each cost has been calculated using the economy-wide value for employees of $73.05 per hour.

Minor regulatory impacts on the average compliance cost to businesses in the screen sector will result from measures that are designed to increase support for current content creation. While this is designed to provide increased support to assist in creating projects of scale, it will also see a minor decrease in applications to the offsets. This does not mean there will be a reduction in the level of productions as they will still be able to seek support for their creation from other sources, it just means they will no longer apply to the offsets.

The measures and associated regulatory impact will be:

•

Standardise the level of support at 30 per cent under the Producer Offset (increase support for television content from 20 per cent to 30 per cent). It is estimated that this change will result in around 7 applications currently receiving the PDV Offset migrating over to the Producer Offset and approximately 3 additional productions commissioned by streaming services. This will see an increase of 10 provisional certificate applications and 10 final applications per year. The regulatory impact of this measure will be a compliance cost of $60,631.

•

Standardise the level of support at 30 per cent under the Producer Offset (decrease support for feature film content from 40 per cent to 30 per cent). It is estimated that this will result in no regulatory impact. The levels of applications are not expected to change with this measure but rather this measure will see the distribution methods that producers pursue change.

Regulatory savings will be achieved as a result of changes to the eligibility criteria. These measures and their regulatory impact are:

•

Increasing the PDV Offset threshold to $1 million. It is estimated that this will result in a decrease of 28 final certificates per year. The regulatory impact of this measure will be saving of $153,405.

•

Increasing the Producer Offset threshold for feature length content to $1 million. It is estimated that this will result in a decrease of 18 final certificates per year. The regulatory impact of this measure will be saving of $98,617.50.

The below measures will have no regulatory impacts. These measures alter the total claim values for applicants but will not result in any changes to the number of applicants. These measures standardise settings across the three offsets, provide clarity and put in checks and balances to ensure claims are reasonable. These measures are:

•

Removing the 65 commercial hour cap for drama.

•

Removing the Gallipoli Clause under the Producer Offset.

•

Removing overhead as eligible expenditure across all three tax offsets.

•

Capping 'above the line' expenses for documentary productions under the Producer Offset.

•

Capping claims relating to copyright across all three tax offsets.

Table 1.5 Option 1 - average annual compliance costs (from business as usual)

Option two

Nil costs associated with status quo.

Table 1.6 Option two - average annual compliance costs (from business as usual)

Option three

Overall, the measure to provide a 40 per cent rate to film content regardless of the platform it is released on may result in a small increase in film content being made, dependent on the interest of international streaming services. The measures to increase support to children's content will assist in maintaining existing levels of production helping to fill increasing finance gaps.

Minor regulatory impacts on the average compliance cost to businesses in the screen sector will result from the increase in applications as a result of the measure to provide a 40 per cent rate to film content regardless of the platform it is released on. As a result of increasing support for children's drama through the Producer Offset it is expected some productions will no longer apply to the PDV Offset and seek the Producer Offset. The associated regulatory impacts will be:

•

Increasing the Producer Offset rate from 20 per cent to 40 per cent for feature films regardless of what platform they are released on. This will see an increase of 5 provisional certificate applications and three final applications per year. The regulatory impact of this measure will be a compliance cost of $19,358.25.

•

Increasing the Producer Offset from 20 per cent to 40 per cent for children's drama. It is estimated that this change will result in around 7 applications currently receiving the PDV Offset migrating over to the Producer Offset. This will see an increase of 3 provisional certificate applications and 7 final applications per year. The regulatory impact of this measure will be a compliance cost of $40,104.45.

Removing the 65 commercial hour cap will have no regulatory impacts. This measure will enable productions if they reach this cap to continue to claim the Producer Offset, but will not result in any changes to the number of productions made or applications.

Table 1.7 Option three - average annual compliance costs (from business as usual)

Consultation

The options paper process that has just been undertaken received over 300 written submission. The Minister also held virtual roundtable discussions to talk more in-depth with stakeholders about various issues and models proposed in the options paper. The consultation process elicited interest from a wide range of groups, including the national broadcasters, streaming services, academics, member of the public, filmmakers, the commercial free-to-air broadcasters, and film studios.

As part of the Options Paper consultations it has been made very clear by all those that have contributed that changes are needed and that model three presented in the Options Paper was the preferred way forward, which posited the harmonisation of the Producer Offset at 30 per cent. All stakeholders advocated for increasing support for the production of Australian content, with some pushing for a higher rate of 40 per cent to be adopted. There was also backing for targeted support for genres that are culturally significant and most difficult to make such as drama, documentary and children's content. Many stakeholders indicated that this model of Government support would help the industry to be internationally competitive and open up more export opportunities and encourage greater international investment. In particular:

•

SVODs support standardisation of the Producer, PDV and Location Offset rates at 30 per cent. They advocate for more support to be available at development stage.

•

Netflix supports standardisation of the Producer Offset for film and television production, as well as the Location and PDV offsets. It notes these settings are key to ensuring that quality Australian stories can be made in the widest possible range of formats, and for the delivery platforms that are best suited to telling that story.

•

Stan supports harmonising the Producer Offset for film and television. Stan maintains this reform would reflect the fact that television has evolved to become at least as valuable as film to Australian viewers, producers, as the well the broader economy and national cultural identity.

•

Commercial broadcasters support the Producer Offset for television being increased and proposed 40 per cent as their preferred rate.

•

Seven West Media supports increasing the Producer Offset. It notes that the Producer Offset tax incentive has played a powerful role in incentivising Australian production of feature films, TV drama and documentaries since it was introduced in 2007 and increasing the rebate will encourage greater investment in content production. It also supports the removal of the 65 episode cap.

•

Foxtel supports increasing the Producer Offset for television production but would also like to see the eligible formats expanded to include genres such as reality, lifestyle and infotainment.

•

ABC and SBS advocate for the increase of the Producer Offset for television.

•

The majority of the independent production sector support standardising the Producer Offset. Some advocate for the Producer Offset for television to be increased to 40 per cent and do not support a reduction to the offset rate for feature film. There are differing views across the board in relation to thresholds some advocating for increases and others for decreases. The sector also advocates for more support to be available at development stage.

•

Screen Producers Australia advocates for the Producer Offset to be increased for television content and proposed 40 per cent as their preferred rate. SPA also support the removal of the 65 commercial hour cap under the Producer Offset. It supports maintaining the current thresholds, with some small modifications.

•

Australian Children's Television Foundation supports Producer Offset to be increased for television content. They also support the removal of 65 commercial hour cap under the Producer Offset.

While some stakeholders were pushing for a higher Producer Offset rate of 40 per cent, consideration has been given to the level of incentive that will achieve Government objectives within budgetary constraints.

The House Standing Committee Inquiry, the Australian and Children's Screen Content Review, and the Senate Committee Inquiry undertaken across 2017 and 2018 undertook extensive consultation around options to support the production of quality Australian children's content. These processes also found overwhelming support for the modernisation of our support settings to better reflect the digital screen environment.

Preferred option

Option one is the preferred option for achieving the Government's objectives of supporting the production and distribution of quality Australian content.

This option will deliver changes called for by the sector. The measures proposed will also ensure that Australian Government production incentives are effective in supporting the Australian screen industry and achieves the highest quality cultural outcomes.

Implementation and evaluation

The impact of the changes will be monitored via Screen Australia's Drama Report which measures the levels of drama each year. It will identify if higher levels of private investment have been attracted and if more content for online distribution is being created.

Screen Australia also separately monitors levels of documentaries in the same way the drama report looks at drama production. This will also be used to measure the impact of the proposals.

Ongoing consultation and liaison with screen sector the by Screen Australia and the Department will continue through usual channels provided as part of the application process for the ASPI. Further work will take place as part of the Government's media reform agenda and ongoing monitoring will also occur through this work.

Attachment B - Regulation impact statement - Insolvency reforms to support small business

Background

Recent evaluations of the Australian corporate insolvency framework, including by the Productivity Commission in 2015^[1], have confirmed that it performs well on most fundamental indicators, including the time taken during an insolvency process, the proportion of funds recovered, creditor participation and the management of debtor assets.

But significant issues with the framework have still been identified. One issue that has been raised consistently - by government agencies, stakeholder groups and international bodies - is the failure of the Australian system to account for the needs and characteristics of different size businesses during insolvency, particularly small business.

In corporate insolvency, Australia has a one-size-fits-all system, which simultaneously must account for the needs of all business types. In practice, this means that key components of our laws have been designed to respond to the complexity of a large corporation. The Australian Restructuring Insolvency and Turnaround Association (ARITA) has previously advocated for the need to streamline the current insolvency processes for small businesses. In 2020, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) in its Insolvency Inquiry Report also recommended the Government adopt streamlined insolvency processes for small businesses and argued the current regime was not working for small businesses.^[2] The ASBFEO stated:

Small business owners report facing an opaque system, where decisions are taken out of their hands, they feel pushed into outcomes they were not looking for, and their expertise or knowledge of the business they have been running is discounted or ignored.

International organisations have also recognised the issues posed by a one size fits all approach. The Organisation for Economic Co-operation and Development (OECD), for example, found in its Going for Growth report^[3] that:

Small and medium enterprises (SMEs) may warrant a different treatment from other firms in a debt restructuring strategy as complex, lengthy and rigid procedures, as well as required expertise and high costs of insolvency can fail to adequately meet the needs of SMEs.

Special insolvency procedures for SMEs... could ensure that non-viable ones exit and viable ones in temporary distress are restructured without delay.

As a part of the Government's response to COVID-19 temporary relief for financially distressed businesses was introduced through the Coronavirus Economic Response Package Omnibus Act 2020 which received Royal Assent on 24 March 2020. The relief increased the minimum threshold for creditors issuing a statutory demand from $2,000 to $20,000 and increased the time to respond to the statutory demand from 21 days to six months. Directors were also given temporary relief from personal liability if a company trades while insolvent. The Treasurer was also granted instrument-making power to make temporary amendments to the Corporations Act 2001 (the Corporations Act). These temporary changes were scheduled to apply for 6 months, from 25 March 2020 until 24 September 2020. On 7 September 2020, the Treasurer announced that the temporary insolvency measures would be extended until 31 December 2020.

The removal of the temporary insolvency protections will have an impact on the number of companies entering external administration due to the effectiveness of measures in keeping firms out of external administration due to the impacts of COVID-19. This risks a 'wave' of external administrations occurring in the lead up to and immediately following the winding back of temporary support measures. From April to September 2020, there was a decrease in companies entering external administration of 51.2 per cent compared to the same period in 2019 (a decrease from 4,404 to 2,139). Extrapolating this rate to the end of the year results in approximately 3,000 companies that have not entered external administration compared to the corresponding period last year.

Following the implementation of the temporary insolvency measures, Treasury undertook consultation with stakeholders to gauge their impact and effectiveness, and test the case for any further government action. Treasury held regular meetings with stakeholders including ARITA, the Turnaround Management Association (TMA), and other stakeholder groups. These meetings helped Treasury to understand the impact of the temporary measures and the broader effectiveness of the current insolvency framework in light of the impact of COVID-19. Treasury also met with the ASBFEO to discuss the findings of its insolvency practices inquiry in the context of COVID.

In these consultations stakeholders also repeated concerns on the need for a small business regime, and argued that the pressures that COVID-19 has placed on business and the insolvency sector have made the case for permanent reform of the insolvency framework more urgent.

The lack of technological neutrality surrounding the external administration provisions of the Corporations Act has also been a concern for industry due to the resulting regulatory burden. This includes requirements to provide notice documents in hard copy by post, and to hold meetings in physical locations (even if participants would prefer to attend virtually).

On 6 May 2020, the Treasurer made a determination under the temporary instrument-making power that was inserted in the Corporations Act as part of the Government's Coronavirus economic response package. The determination provides temporary relief by allowing companies and insolvency practitioners to virtually or electronically satisfy requirements related to their legal obligations concerning meetings and document execution. This supported them to continue operating while still meeting social distancing requirements imposed as a result of the continuing uncertainty caused by COVID-19.

The temporary relief has also provided an opportunity to test with stakeholders how making these requirements technologically neutral operates in practice to deliver options for companies to meet their obligations under the Corporations Act. This has provided an opportunity to test the reforms and receive feedback on the lived-experience from stakeholders, companies and insolvency practitioners, on how the relief has been operating in practice.

1. What is the policy problem you are trying to solve?

Importance of an insolvency system

An efficient and effective insolvency system is important in generating business dynamism, which is needed to underpin our economic recovery. The system helps the movement of capital and jobs to more productive from less productive firms. It allows the efficient winding up of businesses, ensuring creditors and employees are paid fairly.

Insolvency affects a large number of businesses, with ASIC data showing that 8,105 companies entered external administration^[4] in 2018-19.^[5] Behind these companies sit a larger number of affected creditors, business owners and employees. Of these 8,105 companies, only 1,226 entered voluntary administration. The pool of practitioners to manage these external administrations is also comparatively small: there were only 648 Registered Liquidators in 2018-19.

The effectiveness and efficiency of our insolvency system is very important for small businesses. Most of the companies which interact with the insolvency system are small businesses. According to ASIC data, around 76 per cent of companies entering into external administration in 2018-19 had less than $1 million in liabilities. Of these, around 98 per cent are estimated to be businesses with less than 20 full-time equivalent employees.^[6]

Issues with Australia's insolvency framework

Australia's insolvency framework is failing to fully accommodate the needs of Australian small businesses. The issues include:

•

The need to ensure that regulatory obligations are commensurate with the complexity of the business and the likelihood of misconduct.

•

The need to maximise the opportunity for distressed but viable companies to restructure and survive.

•

The need to maximise returns for creditors in the event that a business is wound up.

Currently, Australian businesses can only access insolvency processes that are the same no matter the size of the business. As outlined below, the current processes are better suited to larger, more complex company failure, which may have greater means to engage in sophisticated forms of misconduct.

However, most companies engaging with these processes are smaller companies who overwhelmingly fail 'honestly'. In these cases, the current requirements are not proportionate to the size and complexity of the company, and to the assets or liabilities that they hold. As ASIC, in its submission to the 2015 Productivity Commission review on Business Set-up, Transfer and Closure^[7], stated:

Current insolvency laws take a, 'one size fits all' approach; with the same duties and obligations imposed on the external administrator [a broad category of insolvency practitioner, including liquidators] regardless of the size and complexity of the external administration.

Industry has argued that the cost of administering small- to medium- size enterprises is high and often the external administrator is required by current law to undertake tasks (investigations and reporting to creditors and ASIC) in circumstances where there are insufficient assets to pay the costs of this work.

This state of affairs has significant repercussions for Australian businesses, especially small business:

•

It imposes costs across all parties involved in dealing with an insolvent business. In most cases, businesses are required to enter an insolvency process once they become insolvent. Inefficiencies in the insolvency processes mean reduced returns for creditors, and less money to reinvest in other activities.

•

High costs, complexity and other factors can discourage businesses, especially small businesses, from entering into insolvency processes early when they have more chance at successful restructure, or more assets to distribute to creditors.

Facilitating restructure

Organisations including the OECD have stated that the first priority of an insolvency system should be to enable companies that are distressed but ultimately viable to restructure.^[8] Doing so allows the company to continue to compete in the market in a more efficient form, preserving business value and employee linkages.

Despite this, there are significant limitations to voluntary administration, the main formal insolvency process aimed at enabling insolvent companies to restructure:

•

Voluntary administration tends to be a high-cost process. It requires an administrator to take on liability for debts incurred by the company, which the administrator must indemnify themselves against.

•

It provides very broad powers to the administrator, who take on the running of the company during voluntary administration. In turn, this means more rigorous registration requirements must be applied for administrators which reflect the complexity of the process.

•

It requires an external administrator to take over the running of a company and the risks of trading (subject to an indemnity), which may discourage use of the process and the continued trading of the business when it is used.

These factors may limit the usefulness of voluntary administration for small businesses especially. For small businesses, the high costs of voluntary administration can also consume most or all of the value of a small business's assets, making successful restructure difficult. The powers and expertise of an administrator for a large firm may not be in line with the needs of a distressed small business (who may simply need an avenue to pay down an outstanding debt). Small and family businesses may be especially reluctant to call in an external administrator to take over the running of a company, reducing the opportunity for a company to restructure early when it is more likely to be viable.

Stakeholders have proposed alternative policies to address the limitations of voluntary administration as a small business restructuring tool. For example, ARITA in 2015 proposed a simplified debt restructuring process for 'micro' companies^[9]. The OECD also encouraged Australia to adopt a debt restructuring strategy for SMEs which applied different treatment for smaller firms, with the intent of reducing the barriers associated with "complex, lengthy and rigid procedures, as well as required expertise and high costs."^[10]

Liquidation

The current requirements imposed during a liquidation can require a stringent process which can be lengthy and expensive. Many of the current requirements imposed are aimed at detecting and addressing any misconduct that might have occurred in the lead up to insolvency. These include investigative requirements (behaviour that the insolvency practitioner must look for), requirements to call meetings (to seek creditor views and input on aspects of the process) and reporting functions (particularly to ASIC). Consequently, according to industry, even non-complex liquidations can take up to a year to complete.^[11]

While these requirements are appropriate for larger, more complex firms, the current requirements do not consider the needs of small business and the circumstances surrounding most small business insolvencies. According to ASIC administrative data, the vast majority of insolvencies in Australia are small businesses. These businesses overwhelmingly 'failed honestly'. That is, most businesses failed because of factors like inadequate cash flow, trading losses or economic conditions, low sales, or increased competition, not because of intentional wrongdoing on the part of their directors. Indeed, ASIC data from 2006-2015 shows that, when accounting for reasons companies have failed (as identified by practitioners), fraud ranks tenth (just above companies that have failed due to natural disasters).^[12]

By imposing the same requirements in every liquidation, our current system therefore risks imposing unnecessarily high regulatory impact on distressed small businesses. This has the effect of depleting their very limited asset base and reducing returns for creditors and employees. It is an efficient means of targeting and preventing misconduct like illegal phoenixing.^[13]

Insolvency sector capacity

These issues are exacerbated given the significant economic impacts of COVID-19, which means their impact will be felt more acutely. The need for efficient processes that effectively meet the needs of companies is increased as a larger number of companies are expected to enter external administration over a short period as temporary support measures are wound back. As mentioned in the Background, from April to September 2020, there was a decrease in companies entering external administration of 51.2 per cent compared to the same period in 2019 (a decrease from 4,404 to 2,139). This decrease has been reasonably consistent across industries. Some notable examples include: construction that had a decrease of 60 per cent, retail trade that had a decrease of 42 per cent and accommodation & food services that had a decrease of 50 per cent. It is expected that the vast majority of these companies are small businesses.

In the absence of reforms, this may place significant pressure on our insolvency system. The approximately 3,000 companies that have deferred entering external administration will likely have to be processed by the insolvency sector following the winding back of temporary support as will other companies that have been severely impacted by COVID-19. There is currently no mechanism that allows for these external administrations to be spread over time.

The number of Registered Liquidators has steadily been decreasing in line with stagnating numbers of external administrations. In March 2017 there was 726 Registered Liquidators, which has now decreased to around 640. This body of practitioners may have been able to respond to market conditions to date. However the impacts of COVID-19 and the temporary insolvency relief, which have deferred a number of insolvencies, means that it is prudent to put in place measures to manage this potential shock.

Furthermore, there are barriers to entry for new or returning insolvency practitioners that will also be reduced by adding flexibility to the legislative requirements that are used by ASIC, through the Insolvency Practitioner Registration and Disciplinary Committees, to assess new applicants. There are currently a range of prescribed conditions including that the insolvency practitioner must have 4,000 hours of relevant employment (which must fit into certain categories) at a senior level during the preceding 5 years. Although there is a provision that allows a Committee to register an insolvency practitioner that does not meet all of the prescribed conditions, it requires them to be registered with conditions specified by the Committee. In practice it may be difficult for the Committee to come up with suitable conditions. These barriers disproportionately impact women who are more likely to take a break in their career.

The lack of technological neutrality surrounding the external administration provisions of the Corporations Act has also been a concern for industry due in part to the resulting regulatory burden. This includes requirements to provide notice documents in hard copy by post, and to hold meetings in physical locations (even if participants would prefer to attend virtually).

2. Why is government action needed?

While many factors impact the efficiency of markets, an insolvency system performs an important function in this regard. The government is responsible for establishing and overseeing the system. In doing so, the government establishes the 'rules of the game' in the event of business failure, providing certainty to investors, and thereby facilitating access to credit.

Because government sets clear rules, creditors can have the confidence to lend to a business, with the certainty that a known process will follow if that business fails. For example, the system provides creditors with the rules that will determine the amount they will recoup if a debtor company fails. Clear and fair rules in this regard apply equal treatment to creditors from the same class, and promote an orderly winding up and distribution of remaining funds in liquidation while identifying and deterring creditor defeating misconduct (such as illegal phoenixing). However, an efficient insolvency system should also provide distressed but viable businesses the opportunity to restructure and to continue to trade to the benefit of the business, its creditors and employees, and the economy more generally.

In setting these rules, governments must carefully balance several objectives, all of which an insolvency framework seeks to achieve. These include:

•

allowing inefficient and poorly performing firms to exit the market in an efficient and orderly manner.

•

providing an opportunity for financially distressed but viable companies to restructure and reorganise their affairs.

•

promoting investor confidence through enabling a system that identifies and deters wrongdoing.

It is important that governments consider how their insolvency frameworks are meeting these objectives, and whether they are appropriately balanced.

Small business restructuring and liquidation

Reforms to the Australian insolvency system would enable it to better meet these objectives, and in doing so, support more Australian business and the broader economy.

Government action is required to meaningfully effect change. The current regulatory settings are imposed by Government legislation and as such Government action is required. Furthermore, Government is well placed to include safeguards to protect against instances of misconduct.

Providing a bespoke process targeted at small business restructure will enable Australia's insolvency framework to better meet the objective of enabling viable companies to turnaround their affairs and to continue to operate in the market. It would address many of the shortcomings of voluntary administration, particularly regarding use of this process by small business. In doing so, it would encourage more small businesses to enter into restructuring early, rather than waiting until liquidation is the only option.

A simplified restructuring process would achieve these objectives by:

•

Providing a process that is simpler and more easily understood.

•

Allowing for lower costs, by reducing complexity and simplifying the role of the insolvency practitioner.

•

Enabling a 'debtor-in-possession' model, which allows the business owners to remain in control of the company during the process (thereby reducing their reluctance to engage with the process and supporting the continued trading of the business during the process).

Likewise, a simplified liquidation process targeted at insolvent small businesses would allow unviable businesses to be wound up efficiently and cost effectively. This would be achieved by removing unnecessary or disproportionate obligations that the current liquidation process imposes on the insolvent business and its liquidator. These obligations relate to the level of investigation and reporting required, the ability to convene meetings and the ability to appoint reviewing liquidators and committees of inspections. Tailoring the liquidation process to the small business will ensure that more of the company's remaining assets are available for distribution to its creditors and employees, rather than being used to fund obligations imposed by the process itself.

Both of the above proposals would ensure our insolvency system could continue to meet the objective of identifying and preventing misconduct through appropriate enforcement. They would include safeguards which, as opposed to blanket obligations, are targeted to enable the processes to be used by honest firms, but prevent their use and reuse to facilitate misconduct like illegal phoenixing.

The safeguards include:

•

The same company or directors using the process would be prohibited from using the process more than once within a prescribed period (proposed at 7 years).

•

Both processes would retain an independent practitioner, who would administer them. They would retain obligations they must fulfil on behalf of creditors, as well as the power to end the process in appropriate circumstances.

•

Related creditors would be unable to vote on a restructuring plan.

Increasing the capacity of the insolvency sector

While the simplified liquidation and restructuring processes will reduce the complexities and costs associated with external administration processes for many businesses, additional measures to ensure adequate capacity in the insolvency sector are needed to fully realise the benefits these processes can deliver. Specifically, it will be important to ensure a functional, competitive insolvency system so that the system can handle an increased number of external administrations and to encourage cost savings from simplified external administrations.

There are also barriers to achieving efficient technological neutral outcomes as result of the Corporations Act requirements in respect of meetings, meeting communications and other communications with creditors. Current barriers include requirements to provide notice documents in hard copy by post, and to hold meetings in physical locations (even if participants would prefer to attend virtually). These barriers reduce the ability of insolvency practitioners to fully utilise electronic means and other alternative technologies to comply with their obligations. This adds to the costs of external administration as more traditional approaches (in-person meetings and posting of hard copy materials) are more expensive, and often slower and unnecessary.

3. What policy options are you considering?

Without law reform, when the temporary relief expires, small incorporated businesses and the insolvency sector will be required to adhere to the requirements of the insolvency framework that were in place prior to the temporary relief. With a view to simplifying and streamlining the liquidation and reorganisation process going forward, the following options are being considered:

1.

Allow the temporary relief to expire (on 31 December 2020) without permanent law reform (maintain the status quo)

2.

Introduce simplified insolvency processes for small businesses (based on a company's liabilities being below $1,000,000 when the process commences)^[14] and improve the capacity of the insolvency sector

3.

Introduce simplified insolvency processes for small businesses (based on small businesses being eligible under a current legislative definitions of small businesses^[15]) and improve the capacity of the insolvency sector

Option 1 - Status quo

The status quo could be maintained by retaining the current framework for liquidation and voluntary administration for businesses of all sizes.

Voluntary administration would remain the primary formal business restructure tool for insolvent businesses, including small businesses. Business owners seeking to use this process would have to assent to have an independent administrator to manage the business during the administration. The owner would have broad powers over the running of the business, and would be required to take on personal liability for the company.

For businesses seeking to wind-up, including small businesses, would have access to one liquidation process. Full investigatory, meeting and reporting requirements would apply to all companies seeking to access the process, regardless of the complexity of the insolvency or the risk that it has engaged in misconduct. For example:

•

A liquidator may convene a meeting of creditors at any time.

•

Creditors of a company in liquidation may decide that there is to be a committee of inspection (described below) to monitor the liquidation and to give assistance to the liquidator.

•

Liquidators can continue to pursue unfair preference payments^[16] against unsecured creditors if the transaction occurred within 6 months prior to the 'relation back day'^[17] (or 4 years prior if the creditor is a related entity of the company), regardless of the size of the payment and its benefit to other creditors.

•

Liquidators would be required to complete and lodge a report to ASIC under Section 533 of the Corporations Act for all companies where there was any suspected wrongdoing (including minor matters that may not indicate intentional misconduct).

As a result of this, insolvency processes will continue to consume the assets of many small businesses in external administration, which can make it harder for the company to restructure if in voluntary administration and decrease the dividend to creditors in liquidation. It remains fairly common for unsecured creditors to get very minimal returns in the liquidation of an incorporated small business.

The high cost of external administration and the loss of control of the company to the insolvency practitioner in voluntary administration will continue to discourage small businesses from engaging with the system. As a result, the assets of the company may continue to be used up and small businesses that have a chance to go on trading will wind up, with a loss of economic activity and employment and lower returns to creditors. This is of particular concern in the aftermath of COVID-19, where many otherwise viable businesses may have ran up significant debts due to the impact of government-ordered lockdowns and other health measures.

The temporary relief currently allowing insolvency practitioners to more easily communicate with creditors electronically and to hold fully virtual meetings would not be extended. This will require creditors to opt into receiving electronic communication and does not allow for full flexibility in how insolvency practitioners hold meetings.

Option 2 - Introduce simplified insolvency processes for small businesses (based on liabilities below $1,000,000) and improve the capacity of the insolvency sector

Small business restructuring and liquidation

Option 2 would introduce new insolvency processes targeted at small businesses. These would target the barriers identified above, to ensure they would be accessed, and provide greater benefits to, small businesses.

A new, simplified debt restructuring process would be introduced for eligible small businesses. Unlike voluntary administration, which provides administrators broad powers to support business turnaround, this process would be targeted simply at restructuring a company's debts. In doing so, it is highly targeted at distressed but viable small businesses, who may simply need 'breathing room' to get back on their feet.

The process would require the debtor company to prepare a plan as to how it will restructure in order to maximise returns to creditors while saving the business.

A small business restructuring practitioner (SBRP) would oversee the development and implementation of the plan. The SBRP would be required to certify the plan and its supporting document, then provide the plan and this certification to the company's creditors.

Creditors would vote to accept or reject the plan. There would be no need for a physical meeting, with the voting able to be completed by circulation (including through electronic means). If creditors reject the plan then the company would return to the full control of its directors, who can consider next steps. An accepted plan would be put into effect and overseen by the SBRP.

The process would adopt a debtor-in-possession model, allowing business owners to retain control of their business during restructuring, provided they act within the ordinary course of business. In doing so, it responds to findings raised by the ASBFEO and others^[18], that the appointment of independent administrators is a major disincentive for small businesses in accessing voluntary administration.

To ensure consistency, key aspects of the process would use parameters and definitions from existing law, including voluntary administration and 'Part IX' debt agreements in personal insolvency^[19]. The moratorium on creditor claims provided during restructuring, for example, would be based on that provided during voluntary administration. The process by which a creditor verifies or disputes their claim would take account of rules applying in relation to debt agreements.

Recognising that not all distressed small businesses will succeed in being turned around, this option would introduce a complementary simplified liquidation process. This would recognise the particular circumstances surrounding small business liquidation, in particular the limited asset pool available to fund the administration and to be distributed to creditors.

The simplified liquidation would mean:

•

Unfair preference payments would be narrowed for unrelated parties and subject to a materiality threshold. Under the simplified liquidation process, the payments to unrelated parties would not be set aside if they were made over three months from the relation back day, or resulted in the creditor receiving from the company less than $30,000 in value. The purpose is to prevent the costly pursuit of unfair preference payments, where these are unlikely to relate to misconduct or lead to meaningful returns for the insolvent company's other creditors.

•

There would be no creditor meetings, including ad hoc meetings.

•

Abolish 'committees of inspection'.^[20]

•

Reporting to ASIC Section 533 report would only be completed where the liquidator has reasonable grounds to believe that misconduct has occurred, with an additional materiality threshold to prevent reporting in relation to insubstantial compliance.

•

Other investigatory and related reporting requirements would be simplified to better reflect the context of a small business liquidation. In particular, the reporting and investigatory requirements associated with the liquidator's three month report would also be streamlined to focus on the liquidator's actions to that time, the likely timeframe for ending the liquidation and the likelihood of creditors receiving a dividend.

Safeguards

The small business debt restructuring process would include a number of safeguards, in order to prevent abuse and to maintain important creditor rights:

•

The role of the SBRP, who would administer the process, remains independent. The practitioner will have important obligations they must fulfil on behalf of creditors (such as certifying the plan and providing this to creditors). The practitioner can also end the process during restructuring, in the event misconduct is identified.

•

Businesses would be unable to act outside of the 'ordinary course of business' (for example, by selling property) during the process, without the approval of the SBRP.

•

Key creditor rights would be preserved. For example, there would be no changes to the rights of secured creditors, and similar types of debts are treated consistently.

•

Directors would be required to declare that the company has not engaged in wrongdoing as part of the processes.

•

Creditors would retain the right to vote on the debtor company's proposed plan and the plan must achieve the requisite majority to be binding.

The simplified liquidation process would also include additional safeguards, including the ability of the liquidator to convert the process to full liquidation where they think this appropriate. The same liquidator could then continue with the full liquidation.

Both processes would only be used once by the same directors or companies within a prescribed period (7 years). There would be an exception for companies who have been unsuccessful in developing a restructuring plan, and then seek to enter simplified liquidation shortly afterwards.

Eligibility

Under Option 2, the new processes would be available to businesses with liabilities below $1,000,000.

Around 76 per cent of companies entering into external administration in 2018-19 had less than $1 million in liabilities. Of these, around 98 per cent are estimated to be businesses with less than 20 full-time equivalent employees.

Under Option 2, the simplified processes will apply to eligible businesses registered under section 601BA of the Corporations Act. It would not apply to incorporated associations (which are regulated by states and territories) or to unincorporated businesses. Unincorporated business insolvencies are generally governed by the Bankruptcy Act 1966 rather than the Corporations Act. The Bankruptcy Act 1966 allows for other forms of restructuring, including Part IX debt agreements.

Increasing the capacity of the insolvency sector

To complement the introduction of new insolvency processes, Option 2 would implement a number of measures to improve the capacity of the insolvency sector.

Increasing the pool of Registered Liquidators

To increase the number of Registered Liquidators to help manage the expected increase in insolvencies Option 2 would include:

•

Allowing the Insolvency Practitioner Registration and Disciplinary Committees^[21] (which are the committees that consider the applications of persons to become Registered Liquidators) to register an applicant without conditions even if they do not satisfy all the prescribed statutory criteria, if the Committee believes the applicant to be suitable overall.

•

Introducing new categories of eligible employment which can be counted toward the 4,000 hours of relevant employment at senior level that an applicant requires to become a registered liquidator. The new categories would capture: the provisions of advice in relation to the temporary safe harbour (the Government's temporary insolvency relief that relates to insolvent trading and statutory demands) and the permanent safe harbour (the 2017 changes that provides protection for directors from insolvent trading if they take a course of action that is reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator or liquidator); and, experience in restructuring companies or giving advice in relation to the restructure of companies.

•

Allowing the 120 hours of continuing professional education (including the 30 hours required to be objectively verified) to be spread over the three years of the registration period. Currently 40 hours (including the 10 hours required to be objectively verified) must be completed in each of the three years.

•

Amending the registration requirements to require only an indirect exposure to or demonstrated knowledge of bankruptcy processes. This is to clarify uncertainty in the law as to whether direct experience with bankruptcy processes at a senior level is required.

•

Temporarily waiving fees associated with registration to increase the number of insolvency practitioners in the market. The $3,500 fee waiver would be in place for around two years so that it could effectively respond to a short-term uptick in insolvencies.

While the provisions mean some registration requirements will be applied in a more flexible way, this is not expected to affect the rigour of the profession. The provisions will be implemented following consultation with industry and there would still remain a requirement that an Insolvency Practitioner Registration and Disciplinary Committee be satisfied that an applicant is suitable to fulfil the functions of a registered liquidator. The additional flexibility provided to the Committees are aimed at ensuring that overly rigid rules that have little benefit in ensuring the integrity of the profession do not prevent suitable persons from becoming a registered liquidator. In addition, the current rigidity may be having negative impacts on the profession. The current continuing professional education requirements, for example, may result in women who have taken maternity leave being no longer eligible to practice, despite their previous experience.

New classification for the SBRP

Option 2 would also create a new classification of insolvency practitioner whose practice would be limited solely to the new simplified restructuring process. Doing so would ensure that the qualifications required of the practitioner working on the new process are in line with the requirements of the role.

The new classification would be a new Registered Liquidator sub-class, as such these practitioners would be assessed by the Insolvency Practitioner Registration and Disciplinary Committees. The Committees would also be responsible for disciplinary action. It would also ensure that capacity constraints around access to the new process can be addressed, as more practitioners will be able to enter the market to meet demand for this work.

The new sub-class is proposed following consultation with a range of stakeholders. Some stakeholders argued that the sub-class should be as broad as possible so as to capture professions with existing relationships among small businesses (such as their regular accountant or financial counsellor). Others opposed the proposition for a new sub-class, arguing that industry does have capacity to manage the expected increase in the number of external administrations or that the new process would benefit from being overseen by a full registered liquidator.

These diverse views were taken into account in setting the requirements for the new sub-class of practitioner. To be eligible for this new sub-class a person must be a fit and proper person and have a public practice certificate (or equivalent) from either CPA Australia, Chartered Accountants Australia and New Zealand (CA ANZ) or the Institute of Public Accountants (IPA). By utilising existing qualifications and membership structures on the part of these professional bodies, the new sub-class will benefit from the use of these bodies' existing processes, including around continuing professional education and disciplinary processes. Importantly, prospective applicants would also need to hold indemnity insurance. In addition, an Insolvency Partitioner Registration and Disciplinary Committee must consider that the applicant is suitable to fulfil the role of a practitioner for the purposes of the new restructuring process.

The criteria for this new subclass of Registered Liquidator has been informed following extensive consultation from a variety of stakeholders. Treasury had bilateral meetings with stakeholders including ARITA, TMA, Law Council, accounting bodies and ASBFEO to discuss the appropriate eligibility requirements. In submissions to the Government's consultations on the exposure draft legislation stakeholders submitted their suggestions for the eligibility requirements.

Temporary relief for company's accessing the new restructuring process

Furthermore, it is anticipated there will be an increase in the number of companies facing insolvency following expiry of the temporary measures due to the impact of COVID-19. For example, as explained above, it can be extrapolated from ASIC data that by the end of the year around 3,000 companies that would have normally gone into external administration will not have. It will be important to manage any potential 'wave' when it is most acute, so that companies who need to access insolvency services can do so. This is particularly important where these involve restructuring, and the possible saving of the company.

As such, a mechanism is proposed to stagger the companies anticipated to access the simplified restructuring process when it becomes available. This would reduce the spike in demand that would otherwise occur when temporary support is withdrawn, and provide industry sufficient time to adapt to administering the new framework. It would use existing and known mechanisms (in the form of the current temporary insolvency relief) to achieve this.

Specifically, how the mechanism would work is that between 1 January and 31 March 2021 a company can announce its intention to access the simplified restructuring process, including by notice through ASIC's published notices website. Once this is announced, the Government's temporary COVID-19 insolvency relief (that relates to insolvent trading liability and to statutory demands) would apply to the company. The company would then have 3 months (from announcement) to consult an SBRP around access to the simplified process. These settings would functionally extend the relief already provided as part of the Government's temporary insolvency measures, where a distressed company must wait to engage an SBRP. As such, the settings would be familiar to both debtor companies and their creditors, helping them to understand the mechanism.

Technology neutrality in insolvency processes

Finally, Option 2 would also help to manage the upcoming wave of insolvencies by modifying insolvency law so that they are technology neutral. It would amend the external administration provisions of the Corporations Act to better enable technologically neutral practices during insolvency processes, namely by making it easier to communicate electronically and by permitting fully virtual meetings of creditors.

Option 3 - Introduce simplified insolvency processes for small (based on small businesses being eligible under a current legislative definitions of small businesses) and improve the capacity of the insolvency sector

Option 3 involves introducing the same new processes as in Option 2 but rather than having an eligibility threshold based on the company's liabilities, the threshold would be based on an existing small business definition in Government legislation.

Treasury has identified over 30 discrete definitions of small business across Commonwealth legislation and instruments. Some definitions are based on the number of employees. For example, the Fair Work Act 2009 defines a 'small business employer' as an employer that employs fewer than 15 employees at the relevant time while the Financial Services Reform (Consequential Provisions) Act 2001 uses fewer than 20 employees unless it is a manufacturing business where a small business is defined at having fewer than 100 employees. Instead of number of employees some legislation uses a definition of aggregate turnover. For example, the Income Tax Assessment Act 1997 includes different turnover thresholds for different small business concessions.

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

Option 1 - Status Quo

If no reforms are progressed and the status quo persists, then small businesses and their creditors and employees will continue to be negatively impacted through reduced returns as the limited assets of small businesses are consumed by the cost of the external administration process, or the businesses are discouraged from using the system.

Under Option 1 the insolvency framework would not fully accommodate the needs of Australian small businesses. These include:

•

The need to ensure that regulatory obligations are commensurate with the complexity of the business and the likelihood of misconduct.

•

The need to maximise the opportunity for distressed but viable companies to restructure and survive.

•

The need to maximise returns for creditors in the event that a business is wound up.

Australian businesses would continue to only be able to access insolvency processes that are the same no matter the size of the business; processes that are better suited to larger, more complex company failures, which may have greater means to engage in sophisticated forms of misconduct.

That said, reforms to address the current inefficiencies may introduce new complexity and would require industry and the insolvency sector to become familiar with any changes. This poses challenges, give that there will likely be a rise in the number of companies entering external administration following the withdrawal of temporary insolvency measures at the end of 2020. Thus, the main benefit of Option 1 is it ensures parties affected by the insolvency system remain familiar with how the system works by not making changes to it.

While maintaining the status quo may provide more certainty, it may also result in some viable companies going out of business or viable companies not being able to access professional support. Small business owners would be required to engage with current processes that have been described by stakeholders that represent both the insolvency industry (ARITA) and the small business sector (ASBFEO) as failing small businesses.

Furthermore, under Option 1 requirements to provide notice documents in hard copy by post, and to hold meetings in physical locations (even if participants would prefer to attend virtually) would remain. These unnecessarily requirements can consume assets possibly lowering the returns to creditors.

There is no impact to the Government's underlying cash balance with this option.

Option 2 - Introduce simplified insolvency processes (liabilities below $1,000,000) and improve the capacity of the insolvency sector (preferred option)

This option would apply the simplified framework to companies with liabilities of up to $1 million. This would cover around 76 per cent of external administrations of which around 98 per cent are estimated to involve companies with less than 20 FTE employees (based on companies entering external administration in 2018-19, for context in 2018-19 there were 8,105 companies that entered external administration). This would deliver substantial regulatory savings and would deliver action in an area stakeholder feedback has consistently identified as high priority. Businesses that are insolvent that can't rely on the safe harbour for protection from insolvent trading have no choice but to access an external administration process. Without the option of simplified restructuring they may be forced into a costly full liquidation.

Small business restructuring and liquidation

The simplified restructuring process would enable a debtor-in-possession model, whereby the directors of the company would remain in control throughout the process. Further, only directors could put forward a reorganisation plan. This differs from the current model used in voluntary administration, where the administrator takes full control of the company and is responsible for trying to work out a way to save either the company or its business.

The benefits of a debtor-in-possession model is that it provides business owners with more control over the process will mean the process is more aligned the needs and preferences of business owners, who will then be more amenable to its use. This will encourage them to engage in restructure when their business may still be viable, increasing the chances of its survival. The ASBFEO in their Insolvency Inquiry Report described how the current external administration processes is not working for small businesses:

Small business owners report facing an opaque system, where decisions are taken out of their hands, they feel pushed into outcomes they were not looking for, and their expertise or knowledge of the business they have been running is discounted or ignored.

On the other hand, some may argue that it may not be appropriate for the small business owner to remain in control of the business particularly if they may have contributed to the business failure through misconduct. Thus transferring control to an administrator may allow for more business to restructure, be transferred to new management, and enhance the ability to identify misconduct. However, this reasoning is not consistent with the evidence stated above and the ability to design a debtor in possession model that appropriately balances and manages risks associated with misconduct.

The simplified liquidation pathway for small businesses will allow faster and lower-cost liquidation, increasing returns for creditors and employees. Under the new process, regulatory obligations will be simplified, so that they are commensurate to the asset base, complexity and risk profile of eligible small businesses. In practice simplified liquidation will reduce investigative requirements, requirements to call meetings and reduce reporting function. This will free up value for creditors and employees, and allow assets to be quickly reallocated elsewhere in the economy, supporting productivity and growth. While a simplified liquidation process aims to increase the returns to creditors this may not be possible in all cases. It is expected a number of simplified liquidations will still result is no returns being distributed to some creditors but even in such cases there will be benefits in terms of lower cost, better access to liquidation services, and a quicker liquidation.

A similar proposal to the simplified liquidation process was previously recommended by the Productivity Commission in its 2015 inquiry into Business Set-Up, Transfer and Closure . The Productivity Commission's simplified liquidation however, had an eligibility of threshold of $250,000 of liabilities to unrelated parties (this was the same threshold recommended by ARITA in their proposed streamlined liquidation).

In the case of this option, the $1 million eligibility threshold was chosen because it allowed for simplicity and broad coverage, while being a good indicator of the complexity of an insolvency. During consultation on this option, the Government heard a broad range of views from stakeholders on the appropriateness of the threshold, including that the $1 million threshold was both too low and too high. This is outlined in more detail at section 5. Upon considering these views, it was decided the $1 million threshold was appropriate.

The benefits of simplified restructuring and liquidation results in regulatory savings for businesses and individuals. Estimated total regulatory savings flowing from the new to restructuring process are estimated to be $23 million per year (based on an average over 10 years). Estimated total regulatory savings for changes to liquidation are estimated to be $105 million per year (based on an average over 10 years).

COVID-19 has exacerbated the impacts of shortfalls with our current system, on creditors, business and the economy. To maximise the benefits of these reforms ideally they should be in place before the expected increase in companies going through external administration occurs following the winding back of temporary support measures. Option 2 also addresses concerns that industry and companies will not be ready for the 1 January 2021 start date. In particular, Option 2 proposes that between 1 January and 31 March 2021, a company can announce its intention to access the simplified restructuring process. Once this is announced, the existing temporary insolvency relief would apply to the company. This helps mitigate the potential risks in making substantial changes during the crisis.

Methodology

This option assumes a baseline of around 4,400 businesses accessing the simplified liquidation process a year. This is based on the assumption that all eligible businesses (businesses with liabilities under $1,000,000) access the simplified process, with the estimated number of eligible businesses based on ASIC data from 2018-19 on external administration. An increase in the number of insolvencies is assumed for the first few years due to the impacts of COVID-19.

For each simplified process, the overall administrative savings (from reduced time spent on meetings, investigations and reporting) would equal around five days. This is based on reduced days the insolvency practitioner spends on investigative functions, preparing and attending meetings and time spent reporting. The regulatory costs imposed on the insolvency practitioners may ultimately be borne by the creditors as the greater the costs of the administration the smaller the ultimate returns to creditors. These creditors can be businesses or individuals. Treasury has estimated that 70 per cent of the creditors are businesses with the rest being individuals. Based on ASIC data an external administration has on average of 20 creditors. To calculate the hourly regulatory burden the standard OBPR rates of $73.05 for businesses and $32 for individuals have been used. Individuals reflects employees seeking owe income (who are typically the single largest group of creditors), as well as customers who have missed out on goods and services purchased in advance. Based on the average cost of remunerating an insolvency practitioner and running processes like meetings, this would produce estimated savings of (on average over 10 years) around $105 million annually, with $75 million annually going to businesses and $30 million annually going to individuals.

For restructuring, we assume that around 850 businesses will access the process every year (informed by the number that currently use voluntary administration procedures, which is significantly less than the number which currently enter liquidation). This assumes a time saving of around 2.5 days versus voluntary administration (associated with less time spent on debt processes and investigative function). The same base assumptions as mentioned in the simplified restructuring also apply for the simplified reorganisation process. This would produce estimated total regulatory savings of (on average over 10 years) around $23 million annually, with $17 million annually going to businesses and $6 million annually going to individuals.

While there would be a reduction over time in the number of companies which can utilise the simplified processes, due to the safeguard which means each process can only be used once by the same company/directors every 7 years, this has not been factored into the estimated take-up as we anticipate this to be a negligible number of companies compared to the increase in the number of companies which fail/are financially distressed each year. Also, this number would be offset by companies that are able to access the new simplified process but would not be able to access voluntary administration due to the costs associated with that process.

We have not factored in impacts that the new processes may have in abating unlawful company abandonment (where directors simply leave companies, rather than having them wound up by an insolvency practitioner). As this conduct is unlawful it is not clear whether reduced regulatory burden on company directors and greater returns for creditors will have a meaningful impact on it.

Increasing the capacity of the insolvency sector

In 2018-19, there were 648 Registered Liquidators in Australia, fewer than there were 10 years ago. Currently, it costs around $3,500 to apply and register to become a Registered Liquidator. Temporarily removing this cost would encourage and enable more suitable practitioners to enter (or re-enter) the market. Allowing for more flexibility in the registration of insolvency practitioners and temporarily waiving fees associated with registration as a Registered Liquidator will help to increase the number of Registered Liquidators which will help to manage the expected increase in insolvencies. As well as increasing the number of Registered Liquidators, the new classification of insolvency practitioners whose practice will be limited solely to the new simplified restructuring process will help support the capacity of the system. The new sub-class of Registered Liquidator may have an impact on some already established Registered Liquidators as they may lose some business due to the increased competition in the market. Furthermore, allowing companies to announce their intention to access the simplified restructuring process will help manage an anticipated increase in the number of companies entering external administration. However, becoming a Registered Liquidator and announcing your intention to restructure are optional so these changes are unlikely to have a material impact on regulatory savings.

There may be a risk that given the new conditions the Insolvency Practitioner Registration and Disciplinary Committees may register unsuitable people to become Registered Liquidators. However, this is unlikely given the membership and composition of Committees, and the benefits from giving Committees greater flexibility to perform their role outweighs the risk. Many requirements, such as the applicant being a 'fit and proper person' remain. The new flexibility allows the Committees to better use their expertise and perform their duties.

Option 2 would also help to manage the upcoming wave of insolvencies by modifying insolvency law so that it is more technologically neutral. It would amend the external administration provisions of the Corporations Act to enable technology neutral practices during insolvency processes, namely by:

•

Removing the requirement for creditors to have to opt into receiving electronic communication, thereby allowing insolvency practitioners to send communications electronically if an electronic address is available.

•

Giving insolvency practitioners the option to conduct meetings entirely virtually. Under the current legislation meetings are required to have a physical location and alternate locations can be linked in virtually.

Doing so will ensure that insolvency processes can be carried out as efficiently and as cost effectively as possible, while still maintaining creditors' rights related to notification, participation and attendance. This will ensure that administrators can focus on the substantive requirements of their role, meaning they will be better placed to deal with an increase in demand for their services. Applying the changes to existing and new insolvency processes will ensure broad coverage, while building on the simplicity and cost savings that the new processes will deliver. The regulatory savings for allowing electronic communications and for moving to online meetings are estimated to be around $36 million per year (on average over 10 years).

Methodology

This option assumes a baseline of around 8,100 businesses entering external administration, based on ASIC data from 2018-19. All companies in external administration can utilise the changes to make the external administration technology neutral not just small businesses. Treasury estimates that 40 per cent of external administrations would be held completely virtually and on average an external administration has 2 to 3 meetings.^[22]

Time cost of printing and other mailroom activities involved in sending a letter is assumed to be six minutes. While sending an electronic document takes one minute. The regulatory saving time is calculated using the OBPR work-related labour cost of $73.05 per hour. Printing and postal costs per actual letter are respectively $1.50 and $2.20.

As with the small business processes the average number of creditors is assumed to be 20 and an increase in the number of insolvencies is assumed for the first few years due to the impacts of COVID-19.

Based on these assumptions the regulatory savings for allowing electronic communications are estimated to be around $3 million per year (on average over 10 years) with the regulatory savings for allowing fully virtual creditor meetings to be around $33 million per year (on average over 10 years).

These regulatory savings should allow for greater returns for creditors when a company is liquidated or restructured. The reforms should also help insolvency practitioners manage capacity in the system with the expected increase in work-load from the anticipated rise in insolvencies relating to COVID-19, as well as enabling more small businesses to successfully restructure.

In total the estimated savings for Option 2 (on average over 10 years) is around $165 million annually, with $129 million annually going to businesses and $36 million annually going to individuals.

With regard to the cost to Government, there is a very minor estimated positive impact on underlying cash balance of approximately $0.4 million. This is the net result of a small increase in application fees from registered liquidators across each year of the forward estimates (due to an increase in liquidators being registered) minus the lost revenue from the waiver of registration fees for liquidators entering or re-entering the market in 2020-21 and 2021-22.

Option 3 - Introduce simplified insolvency processes (based on small businesses being eligible under a current legislative definitions of small businesses) and improve the capacity of the insolvency sector

Option 3 uses an alternative threshold for determining which small businesses are eligible but is otherwise the same. An alternative threshold based on a business having less than 20 FTE employees would have captured around 5,500 businesses in liquidation and 1,100 businesses in voluntary administration in 2018-19.

For the purpose of calculations this option uses the definition of having less than 20 full-time equivalent (FTE) employees as it matches available ASIC data.

Capturing a higher number of businesses than in Option 2 results in Option 3 having a higher regulatory saving. Estimated regulatory savings for changes to liquidation are estimated to be $126 million per year (based on an average over 10 years) and for restructuring are estimated to be $29 million per year (based on an average over 10 years). As in Option 2 the regulatory savings for allowing electronic communications are estimated to be around $3 million per year (on average over 10 years) and the regulatory savings for moving to online meetings to be around $33 million per year (on average over 10 years). This equates to total estimated savings of around $192 million annually (on average over 10 years), with $152 million annually going to businesses and $40 million annually going to individuals.

Although regulatory savings may be higher, the number of employees is not considered the most appropriate way to determine eligibility. It is harder to appropriately target these changes to suitable businesses with a threshold based on employees. For example, a large complex business with large liabilities but with a mainly automated process and consequently a low number of employees may qualify under an employee based test. Data from ASIC shows that in 2018-19 there were over 100 companies which entered external administration with over $10 million in liabilities but with less than 5 FTE employees. It poses integrity risks for a debt of this scale to be captured under a simplified process. Having companies with relatively high liabilities (in some cases over $10 million) accessing a process that is designed to be simplified could have a negative impact on creditors. Unlike Option 2, under Option 3 the new simplified processes may not be commensurate to the asset base, complexity and risk profile of eligible small businesses.

There are also problems with the opposite situation. A simple business, with low debt levels but with over 20 FTE employees would miss out on the streamlined process, even when it may be appropriate for them to be included. Data from ASIC shows that in 2018-19 there were over 100 companies which entered external administration with under $1 million in liabilities but with 20 or more FTE employees. In these cases creditors and other affected parties may miss out on better outcomes that may be available to them had the company been able to go through a streamlined process.

Furthermore, the number of employees may not be an accurate indicator for companies near end of life where they may have made staff redundant. In comparison the amount of liabilities is relatively easier to understand and calculate, reflects the indebtedness of the company and creditor exposure to loss, and is difficult to manipulate. In addition, the Productivity Commission and others advocating for small business liquidation have recommended a liabilities test. In consultation the majority of stakeholders preferred a liability threshold over other types of thresholds. Similar arguments can be made for using existing definitions that use aggregate turnover instead of employees. A financially distressed business's turnover may not be reflective of its size (it is likely to be lower than would otherwise be case) or creditor exposure to the failure, and may be difficult to measure or verify.

With regard to the cost to Government, there is a very minor estimated positive impact on underlying cash balance of approximately $0.4 million. This is the net result of a small increase in application fees from registered liquidators across each year of the forward estimates (due to an increase in liquidators being registered) minus the lost revenue from the waiver of registration fees for liquidators entering or re-entering the market in 2020-21 and 2021-22.

5. Who did you consult and how did you incorporate their feedback?

Consultation prior to announcement

On 24 September 2020, the Treasurer announced the broad framework for the insolvency reforms to support small business.

Prior to the announcement, Treasury held regular consultation with key stakeholders following the implementation of the temporary insolvency relief from March 2020. Consultation was held with various stakeholders groups including representatives of insolvency practitioners, turnaround professionals, accountants and other professionals, and small business representatives.

While the purpose of this consultation was to gauge the impact of the insolvency relief and to better understand the state of the market, stakeholders raised broader issues during these meetings. These included broader, systemic issues with Australia's insolvency framework, and the impact of these issues on business (including small businesses) in the context of COVID-19.

Issues raised included:

•

The impact of extensive obligations during insolvency processing on both practitioners and business.

•

How Australia's insolvency system could deal with problem of highly indebted small businesses in the aftermath of COVID-19.

•

Capacity in the insolvency sector.

Feedback from these meetings was used to inform our understanding of the insolvency system, the problems facing the system, options for reform, and approaches to implement those options.

Impact of stakeholder reports and proposals

As well as conducting stakeholder meetings, Treasury analysed existing submissions and reports and used these to inform the reform proposal. These included:

•

The Productivity Commission's 2015 inquiry Business Set-up, Transfer and Closure, proposed that the Government adopt a streamlined liquidation process for small businesses, stating, "... there is considerable scope to streamline insolvency processes for the majority of businesses through the creation of a two stream approach."^[23]

•

ARITA, in its 2015 submission to the Productivity Commission review above, released a discussion paper proposing both a streamlined insolvency process and a new debt restructuring process for micro businesses.^[24] ARITA reiterated its proposal in its submission to ASBFEO's insolvency practices inquiry in January 2020.^[25]

•

The ASBFEO, in its 2020 insolvency practices inquiry, also recommended the Government adopt streamlined insolvency processes for small businesses and argued the current regime was not working for small businesses.^[26]

These proposals, as well as broader feedback on Australia's insolvency framework, where closely considered in the development of the reforms. We also note that both the Productivity Commission and the ASBFEO consulted with a range of stakeholders in undertaking their respective inquiries, meaning their reports reflect the views of a broader group of stakeholders.

Bilateral consultation following the announcement

Following the Government's announcement of the reforms, Treasury met with a variety of stakeholders including ARITA, TMA, ASBFEO, Law Council of Australia, Chartered Accountants Australia & New Zealand (CA ANZ), KPMG, the ABA, the Council of Small Business Organisations Australia (COSBOA) and the Property Council. The purpose of the consultation was to allow stakeholders to communicate their high-level views on the reform process, and to ask questions, before the draft legislation was finalised.

Generally, stakeholders voiced strong support for both the design and objectives of the new simplified insolvency processes for small businesses. Concerns, where these did exist, centred on aspects of the restructuring process, including the rights for creditors, the coverage of the moratorium on creditor claims during the restructuring process, and the potential for debtor companies to take advantage of the process. It was proposed that the coverage of the moratorium and the approach to secured creditor rights would closely reflect those provided during voluntary administration. This approach was endorsed by most stakeholders, and was subsequently reflected in legislation. Stakeholders were also generally supportive of proposed provisions preventing misuse of the process including limitations on its reuse and the need for directors to declare that they had not engaged in creditor defeating conduct.

Consultation on the draft legislation

To maximise flexibility and opportunities for stakeholder feedback, the primary legislation aimed to establish the broad framework, while allowing for key design aspects to be progressed in subordinate legislation (rules and regulations). This included the eligibility criteria to access the new processes, the qualifications for the SBRP, and the more detailed mechanics for the new restructuring process. This approach allowed for two separate periods of public consultation. A shorten time for formal consultation received approval from the Legislative and Governance Forum on Corporations (LGFC).

On 4 October 2020 the exposure draft insolvency reforms Bill was made available to a number of stakeholders with whom Treasury had already consulted on the policy and on 7 October 2020^[27] it was made publicly available on the Treasury website with consultation closing on 12 October 2020. The shortened consultation periods intended to allow for the legislation to be passed and the reforms to commence on 1 January 2020 in line with the expiry of the temporary insolvency relief on 31 December 2020.

The Government received 51 submissions in response to the exposure draft of the primary law amendments, showing strong stakeholder interest and engagement. A log of the submissions is at Annex 1. The vast majority of submissions were supportive of the objectives and the broad parameters of the reform proposal. Stakeholders submitted some policy considerations as well as suggestions on the technical drafting of the legislation.

The major policy issues raised related to the qualification requirements for the new SBRP, the threshold for eligibility to access the new simplified insolvency processes, and suggestions on how the primary law could best implement the announced reforms.

Consultation on the draft subordinate legislation

Following the finalisation of the Bill, exposure draft regulations and rules were released for public consultation from 17 - 24 November, during which time they were available on the Treasury website. Treasury also provided these documents to a number of stakeholders, and met with several stakeholders to discuss the exposure drafts.

As at 25 November, Treasury had received 20 submissions on the draft subordinate legislation. A log of these submissions is at Annex 2. Bilateral consultation was also held with stakeholders including the Law Council, ARITA and the TMA.

Major policy issues raised in response to the draft regulations and rules included the qualification requirements for the new SBRP, which debts could be included under a plan, the terms of a plan (including how long it could last for), and issues related to how a plan is put to creditors and voted on.

Qualifications to register as an SBRP

The proposed qualification requirements for the SBRP have been informed from feedback received during consultation. This was an issue for stakeholders, who expressed their views in both bilateral consultations and in submissions.

Some stakeholders argued that the sub-class should be broad enough to capture appropriate professions with existing relationships among small businesses (such as their regular accountant or financial counsellor). In in its submission on the draft legislation, the TMA stated:

Due to Australia's economic success over generations there is a lack of an SME restructuring profession that is readily identifiable. It needs to be grown. In absence of that and for this reason we believe the best means of expanding the number of qualified persons who are able to perform all steps associated with the small business restructure other than an ordinary or simplified liquidation is to look to the criteria set out below. In short, the best people to help restructure a small business will be local senior accountants and possibly lawyers, particularly in suburban and regional Australia. For businesses in the agricultural sector (including farmers), involvement of rural debt counsellors may also be appropriate.

Others voiced concern around the proposition for a new subcategory. For example, in its submission on the draft legislation, ARITA stated:

We are concerned that a new sub-class of registration for restructuring practitioners with lower qualifications, experience, knowledge or abilities requirements undermines the basis of the 2016 amendments.

This places at risk progress demanded by successive Parliamentary Inquiries into insolvency that demanded higher levels of qualification and skill across all forms of insolvency administration.

Some stakeholders voiced concern that the industry may have capacity to manage the expected increase in the number of external administrations, meaning there is no need to expand the requirement from the current requirements to be a Registered Liquidator. For example, in its submission on the draft legislation, the Business Law Section of the Law Council of Australia (Law Council) stated:

We recommend that before any decision is made to permit some lesser qualified category of practitioner to undertake such a role, some time is taken to see if the current insolvency market is able to provide adequate numbers of suitably qualified registered liquidators to cope with immediate demand that is anticipated after the proposed commencement date of 1 January 2021. Any additional time that current practitioners may need to cope with the immediate demand could be provided by granting, in the regulations, a temporary extension to the proposed restructure periods (say, for the first three months of 2021).

The proposed requirements for registration as an SBRP reflect a balance between these views. As noted, it is proposed that, to be eligible to register as an SBRP, a person must be a fit and proper person, have a public practice certificate from either CPA Australia, Chartered Accountants Australia and New Zealand (CA ANZ) or the Institute of Public Accountants (IPA) and be assessed by a registration committee as suitable. This widens the pool of professionals who can perform these services, a key priority of many stakeholders. At the same time, it addresses stakeholder concerns around preventing unscrupulous or unqualified advisers from being appointed as an SBRP.

Eligibility to access the new simplified insolvency processes

In submissions received on the draft legislation, the Government received a range of feedback on the threshold for eligibility to use the new insolvency processes:

•

The majority of stakeholders preferred a liability threshold of some variety.

•

Some stakeholders requested the liability threshold be coupled with another definition of small business to make sure it was properly targeted.

•

Others suggested eligibility should be linked with already existing small business definitions.

Stakeholders also had divergent views on the amount that the liability thresholds should be set at. Some stakeholders believed that a $1 million threshold was too high. They argued that a $1 million threshold would capture some larger businesses that would not be suited to the processes, and potentially increase the risk of illegal phoenixing. For example, ARITA, in the covering letter to its submission on the draft legislation, stated:

We hold significant concerns with the foreshadowed eligibility liability threshold for both the proposed restructuring and simplified liquidation processes of $1 million. We believe that a liability threshold of $250,000 of unrelated debts is more appropriate and more reflective of the small, non-complex businesses the reforms are aimed at. We believe that a $1 million threshold is too high, capturing a significant proportion of external administrations and enhancing the risk of this framework being used for phoenixing.

However, other stakeholders had a different perspective, requesting consideration be given to increasing the $1 million threshold. The intent behind this view was that a higher threshold would allow more businesses to benefit from the new processes. For example, the TMA, in its submission on the draft legislation, stated:

We note that a cap based on a maximum of $1 million in liabilities would appear to be lower than the caps applicable to small business restructuring processes or small business liquidation proceedings in other jurisdictions...

Consideration should therefore be given to whether a higher threshold would be appropriate either now or at some point in the future to ensure that the restructuring process has utility beyond very small companies.

In addition, some stakeholders also argued the threshold should be different for simplified liquidation as compared to the proposed restructuring process.

On balance after considering the feedback received, a $1 million threshold is considered appropriate. This is because:

•

A liabilities threshold is the simplest and most effective conduit for the complexity of an insolvency, a fact some stakeholders acknowledged. It appropriately focuses on creditor exposure and is relatively transparent, easily measured and difficult to manipulate. For this reason, a liabilities threshold was previously proposed by both ARITA and the Productivity Commission (albeit at a lower value). A liabilities test is used elsewhere to determine access to small business insolvency processes, including under Chapter 11 of the United States Bankruptcy Code.

•

Alternative thresholds linked to existing small business definitions (for example, those based on FTE employees) introduce their own complexity (for example, in requiring companies to calculate how many part-time staff constitute a fixed number of FTE employees). These alternate approaches may be easier to mismeasure or manipulate, and may not accurately represent the complexity of an actual insolvency. Consistency benefits would also be lost if a definition linked to another law was changed.

•

Setting the threshold at $1 million will pick up an appropriate proportion of companies who enter insolvency processes (estimated at around 76 per cent, based on historical insolvency statistics). This responds to a key stakeholder concern, which was to ensure the process is available to as large a number of companies as possible. While the $1 million threshold is higher than that previously proposed by ARITA and the Productivity Commission, some stakeholders argued it should be higher while others supported it. As noted, additional protections already exist to guard against illegal phoenixing.

The provisions setting out eligibility for the process are set out in the regulations.

Length of a restructuring plan

The draft regulations proposed that a restructuring plan could run for a period of up to five years. There were mixed views on whether this was an appropriate timeframe.

The policy intent of the five year period was to provide debtor companies sufficient flexibility to pay off debts under the plan. However, some stakeholders proposed a shorter maximum period, noting that a shorter period would reduce uncertainty around whether creditors would be paid, thereby providing more confidence. Stakeholders also noted that timeframes for repayment under similar regimes, including deeds of company arrangements and Part IX debt agreements, are typically shorter than what was being proposed.

For example, in its submission on the exposure draft regulations and rules, the Australian Banking Association stated:

Under regulation 5.3B.13(4)(b) a restructuring plan may provide for payments to be made for a period of up to 5 years. Given the aim of the restructuring process is to effect an expedited restructuring of small business this period is too long. The expectation is that small businesses utilising the restructuring process will have relatively simple debt structures and simple assets to be realised to satisfy those debts. Such assets should be capable of being realised within a short period of time. The restructuring period should reflect the aim of quickly restructuring small business.

Under existing comparable regimes - voluntary administration and deeds of company arrangement -timeframes for repayment are usually much shorter than 5 years. The restructuring plan should allow for payments over a period of no more than 1 to 2 years. The longer a restructuring plan is in place, the longer uncertainty about the business's financial capacity will remain, restrict its access to capital and allows for costs to be incurred. The proposed period of up to 5 years does not appear consistent with the aims of the new process.

In light of this feedback, the maximum period for a restructuring plan was amended to 3 years. This was designed to balance the concerns raised by some stakeholders with the original policy intent of providing appropriate flexibility for the debtor company. This also reflects the period for which a Part IX debt agreement can run (in instances where the debtor does not own their home).

Amendments to the maximum period for a plan were made in the final regulations.

Admitting new debts to a plan

The exposure draft proposed that creditors would have 5 business days in which they could request to vary their claims following the provision of a plan to the creditor. This timeframe was put in place so that the practitioner would have sufficient time to respond to this request for variation. It was also proposed that only unrelated creditors (who were not in an existing plan) could request to enter a plan once it was made. The intent was to minimise the risk of related parties not fully disclosing debts up front in order to promote a company's access to the new process.

During consultation on the regulations, stakeholders expressed several concerns around this process:

•

Some stakeholders raised concern that the 5 business day period in which creditors had to certify or request to vary their claim was too short.

•

Some stakeholders raised concerns about the circumstances in which new creditors could be admitted to the plan.

•

Some stakeholders raised concerns that existing creditors lacked an avenue to amend their claim, if extraordinary circumstances prevented it from being made in the first instance.

The final design of the law sought to balance these various interests and concerns. In particular, the draft law was amended so that:

•

Creditors would have 5 business days in which they could request to vary their claims following the provision of a plan to creditors.

•

The SBRP could choose to consider variations after this period, and up to the making of a plan, provided the creditor provides a justification as to why this wasn't provided in the initial five business day period.

•

Following the making of a plan, new creditors as well as variation requests from existing creditors can be admitted into the plan, where the creditor provides a justification as to why this request wasn't provided prior to the making of the plan. The SBRP then has discretion to admit these requests in appropriate circumstances.

This approach seeks to address stakeholder concerns and to ensure policy objectives are met, by:

•

Ensuring there is an incentive for creditors to lodge any requests to vary their claims in the initial five day period.

•

Providing a means by which requests for variation can be admitted after this period, but at the discretion of the SBRP.

•

Providing a means to admit variations and new claims after the plan is made, but using a suitably high threshold (thereby providing certainty for existing creditors who have endorsed and are party to the plan).

Remuneration for SBRPs

The exposure draft Rules specified that remuneration for an SBRP could only take the form of amount specified prior to their appointment, and agreed with by the board of the company that had appointed them. The intent of this 'fixed' fee was to ensure transparency around the price of an SBRP's services, and to encourage competition in the market for these services.

Several stakeholders raised concerns about the impact of a fixed fee structure, particularly in the event that the SBRP faced costs that were not anticipated when the cost was settled. A major concern included the costs that an SBRP could face as a result of litigation.

For example, in its covering letter on its submission on the exposure draft regulations and rules, ARITA stated:

The level of uncertainty and possible complexity, including the potential for litigation, for a set fee is likely to dissuade many experienced practitioners from accepting an appointment as a restructuring practitioner.

To address this concern, the final Rules include an exemption from the fixed fee structure for costs incurred by an SBRP, where these are associated with defending legal actions brought by other parties. The intent is to remove the potential for a major, and uncertain, variant on the expected cost of a restructuring. The exemption only extends to defending legal actions, so there is no incentive for the SBRP to launch legal action themselves. At the same time, the broad benefits of the fixed structure are retained.

Technical and operational changes

In response to stakeholder feedback and further review, further amendments were made to the primary legislation in the period following consultation on the draft Bill. These are largely based on issues that stakeholders raised and which they argued were important to ensure the effective operation of the new processes. Examples of the changes include:

•

amending the ipso facto stay provisions (which prevent creditors from terminating contracts because of an insolvency event) applying during the debt restructuring process so that they apply to contracts entered into from 1 July 2018. This aligns with the scope of the ipso facto stays currently provided for companies in voluntary administration.

•

clarifying that debts incurred during the debt restructuring process prior to making a restructuring plan will be provable (that is, claimable by a creditor) in the event that the company subsequently enters liquidation.

•

providing a new regulation making power, which allows for regulations to specify cases that are or are not in the 'ordinary course of business'. Under the new restructuring process, company directors must seek approval from a small business restructuring practitioner for actions that fall outside this threshold.

During consultations, stakeholders indicated support for these changes which are reflected in the primary legislation.

In response to stakeholder feedback, further amendments were also made to the regulations and rules to ensure they operated as intended. These included:

•

ensuring that the provisions around more flexible continuing professional education (CPE) requirements for registered liquidators operated effectively (that is, that they benefited existing registered liquidators, not just those who had newly registered);

•

ensuring that the requirements around notification of creditors are applied consistently (for example, that creditors are notified where a plan lapses, regardless of the reason for it lapsing); and

•

addressing instances where there were inconsistencies in terminology between the draft regulations and the Bill.

6. What is the best option from those you have considered?

Option 2 is the preferred Option as it produces a number of regulatory savings and other improvements to the insolvency regime, while being appropriately targeted and addressing the risk of misconduct. The benefits for Option 2 include:

•

Lowers the costs of liquidation and restructuring for small businesses, promoting higher returns for creditors when insolvent businesses are required by law to enter an insolvency process.

•

Removes processes which are not necessary for small businesses.

•

Allows more businesses to successfully restructure when they face insolvency, rather than having to access an alternative process like liquidation.

•

Provides more control to business owners and encourages them to restructure.

•

Keeps important safeguards to protect against corporate misconduct including illegal phoenix activity.

•

Requires more complex businesses to go through the full liquidation and voluntary administration processes.

•

Helps to manage any anticipated wave of external administration.

•

Increases industry capacity to deal with an increased number of external administrations effectively and efficiently, so that the market can better respond to changes in demand for insolvency services including in the aftermath of COVID-19.

•

Changes registration requirements for insolvency practitioners to improve industry capacity and diversity.

•

Reduces fees to encourage new practitioners, boosting capacity and competition.

•

Enables greater usage of technology neutral practices in insolvency processes.

7. How will you implement and evaluate your chosen option?

The chosen option will be implemented through legislative changes to the Corporations Act 2001 and related subordinate legislation. Subordinate legislation includes changes to the Corporations Amendment (Corporate Insolvency Reforms) Regulations 2020, ASIC Supervisory Cost Recovery Levy Regulations 2017 and the Corporations (Fees) Regulations 2001, as well as rules made under the Corporations Act 2001.

Assuming legislation is passed and the reforms commenced, the new processes would be subject to ongoing monitoring to ensure they operate effectively. We will consider options, including post-implementation review, following the commencement of the new processes. The Government will continue to engage with stakeholders to determine the effectiveness of the new processes.

REGULATORY BURDEN ESTIMATE (RBE) TABLE

ANNEX 1: SUBMISSIONS RECEIVED ON DRAFT PRIMARY LAW

ANNEX 2: SUBMISSIONS RECEIVED ON DRAFT REGULATIONS AND RULES