House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Infrastructure and Regional Development, the Hon Jamie Briggs MP)

Tax And Superannuation Laws Amendment (Norfolk Island Reforms) Bill 2015
A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Amendment Bill 2015

Notes on clauses

Outline of chapter

1.1 Schedules 1 and 2 to the Tax and Superannuation Laws Amendment (Norfolk Island Reforms) Bill 2015 (this Bill) amend the Income Tax Assessment Act 1936 (ITAA 1936), Income Tax Assessment Act 1997 (ITAA 1997) and Superannuation Guarantee (Administration) Act 1992 (SG Act) to repeal the:

•

income tax exemptions that apply to Norfolk Island resident individuals, companies and trustees in relation to their Norfolk Island sourced income and their foreign sourced income, bringing them fully into Australia's income tax system;

•

Medicare levy exemptions that apply to Norfolk Island residents, bringing them fully into Australia's Medicare levy system; and

•

superannuation guarantee charge exemptions that apply to Norfolk Island employers and employees in relation to work performed on Norfolk Island, bringing them fully into Australia's superannuation guarantee system.

1.2 The A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Amendment Bill 2015 supports this measure by making consequential amendments to A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999 as a result of the repeal of the Medicare levy exemptions.

1.3 The taxation and superannuation reforms made by this Bill and A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Amendment Bill 2015 generally apply from 1 July 2016, with transitional arrangements applying in relation to capital gains tax (CGT) and superannuation guarantee charge.

Context of amendments

1.4 During the 2013 federal election, the Government committed to extend federal taxation and social welfare systems to Norfolk Island to address issues of community welfare and ensure Australian citizens are treated equally throughout Australia.

1.5 From 1 July 2016, the taxation system is to apply in Norfolk Island in the same way it currently applies to mainland Australia with the exception of indirect taxes, including goods and services tax, luxury car tax, wine equalisation tax, excise duties and customs duties. This approach is consistent with the current taxation arrangements in Australia's other external territories.

1.6 Similarly, Australia's government benefits (such as social security and Medicare) will also be extended to Norfolk Island. See the Norfolk Island Legislation Amendment Bill 2015 for further details.

1.7 Australia's superannuation guarantee regime is to be extended to employers and employees on Norfolk Island. Given Norfolk Island's depressed economic situation and its predominantly low-income population, the superannuation guarantee will be phased in over several years.

Operation of existing law

Income tax

1.8 The Australian income tax system currently extends to Norfolk Island and includes Norfolk Island as part of Australia.

1.9 However, certain Norfolk Island residents receive an income tax exemption for their income sourced from Norfolk Island and from outside Australia (Division 1A of Part III of the ITAA 1936).

1.10 Distributions from Norfolk Island resident companies are unfrankable (paragraph 202-45(b) of the ITAA 1997). Broadly, the purpose of the franking credit system in Australia is to prevent the profits of companies being taxed both in the hands of shareholders and the company. However, to be a Norfolk Island resident company, all shareholders have to be Norfolk Island residents. Those shareholders currently do not pay income tax on distributions from Norfolk Island resident companies and as a result no double taxation can arise in relation to the distribution.

1.11 For this reason, distributions from Norfolk Island companies are unfrankable, because if they were frankable, all Australian income tax paid by those companies would be refundable to its tax exempt shareholders who would not themselves be subject to tax on this income. This would undermine the core rule that Norfolk Island residents pay income tax on their Australian sourced income (except for that income sourced from Norfolk Island).

Medicare levy

1.12 Similar to the treatment of foreign residents, Norfolk Island residents (although being Australian resident taxpayers) are exempt from the Medicare levy (sections 251S, 251T and 251U of the ITAA 1936).

Superannuation guarantee

1.13 The salary and wages paid to Norfolk Island resident employees for work done in Norfolk Island and the salary and wages paid by Norfolk Island resident employers for work done in Norfolk Island are not counted in calculating the superannuation guarantee entitlements of a particular employee and the liability for the superannuation guarantee charge of an employer (section 27 of the SG Act). This effectively removes Norfolk Island from the Australian superannuation guarantee system provided the proper nexus exists between Norfolk Island, the employer and the employee.

Summary of new law

1.14 Schedules 1 and 2 to this Bill amend the ITAA 1936, ITAA 1997 and SG Act to repeal the:

•

income tax exemptions that apply to Norfolk Island resident individuals, companies and trustees in relation to their Norfolk Island sourced income and their foreign sourced income, bringing them fully into Australia's income tax system (Division 1A of Part III of the ITAA 1936);

•

Medicare levy exemptions that apply to Norfolk Island residents, bringing them fully into Australia's Medicare levy system (sections 251S, 251T and 251U of the ITAA 1936); and

•

superannuation guarantee exemptions that apply to Norfolk Island employers and employees in relation to work performed on Norfolk Island, bringing them fully into Australia's superannuation guarantee system (paragraphs 27(1)(b) and (c) of the SG Act).

1.15 Norfolk Island resident companies will also be brought within the dividend imputation system by repealing paragraph 202-45(b) of the ITAA 1997.

1.16 A number of consequential amendments are also required to the taxation and superannuation laws to reflect the removal of the Norfolk Island tax exemptions.

Comparison of key features of new law and current law

Detailed explanation of new law

Income tax

1.17 Schedule 1 amends the ITAA 1936 to remove an income tax exemption that is available to Norfolk Island resident individuals, Norfolk Island companies and Norfolk Island trustees on income sourced from Norfolk Island and income sourced from outside Australia. [Schedule 1, item 1]

1.18 Transitional provisions apply in respect of CGT to ensure that Norfolk Island taxpayers are only taxed on capital gains that accrue after the day the Norfolk Island income tax exemption is removed (see paragraph 1.34).

1.19 The definitions of Norfolk Island resident, Norfolk Island company and Norfolk Island trust are currently contained in Division 1A of Part III of the ITAA 1936 and are very detailed to ensure only those entities that genuinely reside in Norfolk Island are eligible for the exemption.

1.20 The removal of the income tax exemption in Division 1A of Part III of the ITAA 1936 means that all Norfolk Island resident individuals are subject to Australian income tax on their income sourced from Norfolk Island and from sources outside Australia, in addition to their income sourced from areas of Australia outside Norfolk Island.

1.21 Similarly, with the removal of the Norfolk Island income tax exemption, Norfolk Island companies must pay income tax on their income sourced from Norfolk Island and from sources outside Australia, in addition to their income sourced from areas of Australia outside Norfolk Island. Further, consistent with the treatment of other Norfolk Island sourced income, Norfolk Island shareholders will be subject to income tax on dividends from Norfolk Island companies. To prevent double taxation of corporate income following these changes, the dividend imputation system has been extended to Norfolk Island companies and shareholders. [Schedule 1, item 15, section 202-45 of the ITAA 1997]

1.22 Schedule 1 also removes exemptions for Norfolk Island residents from the requirement to quote their tax file number to an investment body or their employer or be subject to pay as you go withholding. Under the current law, Norfolk Island residents are taken to have quoted their tax file number to an investment body (such as a bank) or to their employer where the income they receive from that body or employer is exempt from Australian income tax. With the removal of the income tax exemption, the exemption from having to quote a tax file number or be subject to withholding becomes redundant and is therefore repealed. [Schedule 1, items 2 to 4]

Medicare levy

1.23 Schedule 1 to this Bill amends the ITAA 1936 to remove the full exemption from the Medicare levy for residents of Norfolk Island. [Schedule 1, items 5 to 8]

1.24 As a result, the Medicare levy will apply to all Norfolk Island residents as it currently applies to all other Australian resident taxpayers.

1.25 The rationale for the exemption of Norfolk Island residents was that generally, the Medicare levy does not apply to those taxpayers who are unable to access Medicare benefits. However, with the extension of Medicare benefits to Norfolk Island residents, the exemption from the Medicare levy is being removed.

1.26 This change will not affect the treatment of Norfolk Island residents who are nonetheless entitled to an exemption from the Medicare levy for another reason.

1.27 Changes to the Medicare levy will have the same effect on liabilities for the Medicare levy surcharge for those Norfolk Island resident individuals who have income for surcharge purposes above the relevant thresholds and who do not hold private health insurance for themselves and their dependants. [Schedule 1, items 5 to 8 and Schedule 1, items 1 to 4 of A New Tax System (Medicare levy Surcharge-Fringe Benefits) Amendment Bill 2015]

Superannuation guarantee

1.28 Schedule 2 to this Bill amends the SG Act to remove exemptions for salary and wages paid to Norfolk Island resident employees for work done in Norfolk Island, and for salary and wages paid by Norfolk Island resident employers for work done in Norfolk Island. [Schedule 2, item 1]

1.29 The removal of the exemption means that salary and wages paid to Norfolk Island resident employees for work done in Norfolk Island and salary and wages paid by Norfolk Island resident employers for work done in Norfolk Island will be covered by the superannuation guarantee arrangements. Employers will be required to make mandatory superannuation contributions to an appropriate superannuation fund on behalf of employees.

1.30 However, transitional arrangements have been introduced to allow the superannuation guarantee arrangements to be progressively introduced, in order to reduce the impact on Norfolk Island and employers (see paragraphs 1.41 to 1.44).

Consequential amendments

1.31 Cross references and notes contained in the taxation and superannuation laws that refer to the current Norfolk Island tax exemptions have been repealed. Cross-references to the CGT transitional provisions have also been added or updated. [Schedule 1, items 9 to 14, 16 and 17]

1.32 The A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Amendment Bill 2015 makes consequential amendments to the A New Tax System (Medicare Levy Surcharge-Fringe Benefits) Act 1999 reflecting changes made to the Medicare levy as it applies to Norfolk Island residents.

Application and transitional provisions

Income tax and Medicare levy

Application

1.33 The amendments to the income tax system (and Medicare levy system) apply to the 2016-17 income year and later income years. For most taxpayers, this will mean the changes commence on 1 July 2016 unless a taxpayer has a substituted accounting period. [Schedule 1, item 19]

Transitional rules - capital gains tax

1.34 A special transitional regime applies to the CGT liabilities of entities resident in Norfolk Island.

1.35 The object of the transitional CGT arrangements is to ensure that the income tax system only applies to tax capital gains that accrue in relation to Norfolk Island taxpayers' CGT assets on or after 1 July 2016 unless those assets were already subject to Australian income tax.

1.36 To achieve this, all CGT assets held by Norfolk Island taxpayers at the end of 30 June 2016, will be taken on 1 July 2016 to have been acquired on 30 June 2016 for their market value on that day. However, this rule will not apply if the Norfolk Island taxpayer would have not been entitled to disregard any gain or loss from a CGT event that happened in relation to that asset under the law as it applied prior to these amendments. [Schedule 1, item 18, subsection 102-25(2) of the Income Tax (Transitional Provisions) Act 1997]

1.37 However, if the CGT asset is a pre-CGT asset (broadly one that was acquired by the taxpayer before 20 September 1985), the transitional rule does not apply and the asset will continue to be treated as a pre-CGT asset (that is, exempt from CGT) until a CGT event happens or another rule applies that affects the pre-CGT status of the asset.

1.38 Section 24P of the ITAA 1936 has also been rewritten and transferred into the Income Tax (Transitional Provisions) Act 1997. Section 24P provides an identical CGT transitional provision in relation to Christmas Island and the Cocos (Keeling) Islands as a result of similar changes which were made to the taxation arrangements applying to those territories in 1991. [Schedule 1, item 18, subsection 102-25(1) of the Income Tax (Transitional Provisions) Act 1997]

1.39 There are no policy changes in relation to the rewrite and transfer and the rewritten provision is intended to operate identically to section 24P.

Superannuation guarantee

Application

1.40 The superannuation guarantee changes apply for quarters starting on or after 1 July 2016. [Schedule 2, subitem 2(1)]

Transitional rules - superannuation guarantee

1.41 Recognising the potential impact that imposing the superannuation guarantee could have on Norfolk Island employment, the superannuation guarantee will be gradually phased-in. A special Norfolk Island transitional rate will apply, starting at one per cent and slowly increasing over a twelve-year period to minimise any employment impacts. In this way employers and employees will have time to adjust and take the increasing superannuation entitlements into account in their wage negotiations.

1.42 The transitional superannuation guarantee rate will only apply to salary and wages that were previously exempt from superannuation guarantee (to the extent that they were exempt). The transitional rates are set out in Table 1.1.

1.44 Employers will apply the general superannuation guarantee rate to all salary and wages that were not previously exempt from the superannuation guarantee under the limited Norfolk Island exemption. Salary and wages that were exempt under the Norfolk Island exemption will be subject to the Norfolk Island transitional rate from 1 July 2016 to 30 June 2026. [Schedule 2, subitem 2(2)]

1.45 Employers will need to apportion the salary and wages they pay between the two categories - previously subject to superannuation guarantee and previously exempt from superannuation guarantee - and apply the correct rate to the salary and wages in each category. [Schedule 2, subitem 2(2)]