Tax and Superannuation Laws Amendment Bill 2015
It gives me great pleasure to rise this evening to speak on the Tax and Superannuation Laws Amendment (2015 Measures No. 4) Bill 2015. This is a bill of unrelated tax and super measures. I will go through the three schedules in relation to each element of the bill.
The first schedule relates to improving the integrity of the scrip for scrip rollover relief rules in the Income Tax Assessment Act following a 2009 decision of the Federal Court. Secondly, this bill will end the personal income tax exemption of wages under the provisions of the Income Tax Assessment Act earned by some Australian government employees who work overseas for more than 91 days delivering official development assistance. Thirdly, it will increase the super account balance below which small lost super accounts will be required to be transferred to the Commissioner of Taxation under the provisions of the Superannuation (Unclaimed Money and Lost Members) Act 1999. I will deal with the first schedule and then go on to the other ones in order.
It is normal practice for a company acquiring or merging with another company to offer its own shares as payment for the acquired company. Normally, such an event, which, in effect, amounts to a disposal of shares, would create capital gains tax liability. However, in certain circumstances, an entity may be able to defer paying capital gains tax until a later capital gains tax event. This is where a scrip for scrip rollover becomes a possibility. A scrip for scrip rollover is the deferral of a liability where: the owner of the asset chooses to take advantage of these provisions; the owner acquired its interest in the company being sold on or after 20 September 1985; the exchange of shares which results in a capital gain occurs on or after 10 December 1999; the exchange of shares results in the purchasing company gaining at least 80 per cent of the equity of the target company or trust; holders of voting interest in the acquired entity can participate in the merger or takeover on substantially the same terms; and the purchase bid does not contravene key provisions in chapter 6 of the Corporations Act or, if the target entity is a company, it includes a scheme of arrangement approved by the court under part 5 of the Corporations Act. Similar provisions apply to allow the deferral of capital gains tax where one trust acquires units in another trust. However, scrip for scrip rollover capital gains tax relief is not available if a share is exchanged for a unit or other interest in a fixed trust or if a unit or other interest in a fixed trust is exchanged for a share. Generally, foreign residents for tax purposes cannot take advantage of these provisions.
The origin of the proposed changes in schedule 1 is that they arise from a decision of the Federal Court in AXA Asia Pacific Holdings Ltd v Commissioner of Taxation in 2009. Briefly, this case examined whether two parties were dealing with one another on an arms-length basis and whether their arrangements invoked the general anti-avoidance provisions of part IVA of the Income Tax Assessment Act. Neither issue is being addressed by the proposed amendments in schedule 1, but the decision in this case left open opportunities to unduly avoid capital gains tax.
The proposed amendments involve subdivision 124-M of the Income Tax Assessment Act. This subdivision contains provisions to deny scrip for scrip rollover relief in circumstances where the same person or company group has influence over both the selling company and the purchasing company. According to the explanatory memorandum of the bill, subdivision 124-M treated the AXA arrangement as a genuine takeover involving a substantial change in ownership rather than as a corporate restructure. As result, AXA was able to obtain the benefit of a capital gains tax cost base uplift when eventually disposing of one of its subsidiaries.
A restructure of an entity that involves the sale of a business into a different entity, such as the sale of a business from a trust to a company, will inevitably result in an uplift to the cost base to the acquiring entity for that asset. For example, a family trust conducts a successful retail business with goodwill worth around $1.5 million, but, due to problems with distributions to a corporate beneficiary, it decides to dispose of the business to a new company which it established. The trust vendor finances the purchase price. Thus, the newly created company now has the goodwill and the cost base of $1.5 million. The revenue earned by the company can be used for the loan payable to the trust. When the company sells the business, it can use the cost base of $1.5 million. However, because the parties to the transaction are not at arm's length, an independent evaluation of the business asset should be undertaken. The explanatory memorandum notes that the AXA case demonstrates that these integrity provisions can be circumvented. This can occur by:
… temporarily suppressing the ownership rights of a party in a scrip for scrip exchange through the use of instruments including convertible shares, options and rights.
Later, these transactions can be reversed, so that a transfer of ownership is accomplished without raising a capital gains tax liability that might otherwise occur. The proposed amendments seek to alter these integrity provisions so that this inappropriate tax relief would not occur.
This measure was first announced as part of the previous government's 2012-13 budget. The Treasury released a consultation on this matter back in July 2012, and it received only one submission in response. The coalition government announced that it was proceeding with this measure in December 2013, and in April 2015 the Treasury released an exposure draft of legislation containing the proposed provisions.
I will now move on to schedule 2 of this bill, which is removing the exemption of income earned from overseas employment. As it says in the Bills Digest:
Since 1964, under Article 34 of the Vienna Convention on Diplomatic Relations, a ‘diplomatic agent’ is exempt from personal income tax of the host country on income sourced from that agent’s home country. For the purposes of this Convention a diplomatic agent is the head of the mission or a member of the diplomatic staff of the mission. Thus Australian government staff, attached to an Australian diplomatic mission, are exempt from the host country personal income tax where that host country has signed this Convention (and the overwhelming majority of host countries have now signed).
Under section 23AG of the ITAA—
the Income Tax Assessment Act—
the foreign earnings of Australian residents for tax purposes, who have been engaged in foreign service for a continuous period of not less than 91 days, are also exempt from Australian personal income tax. This applies to periods of foreign service arising from:
the delivery of Australian official development assistance by the person’s employer
the activities of the person’s employer in operating a public fund that is a deductable gift recipient operating internationally
the person’s employment by a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident; or is a prescribed institution that has a physical presence in Australia but which incurs its expenditure and pursues its objectives principally outside Australia or
the person’s deployment outside Australia as a member of a disciplined force (armed forces or police).
Therefore, those persons attached to Australian diplomatic missions, who are Australian residents for taxation purposes, meeting the requirements of section 23AG of the ITAA 1936, engaged in foreign services for not less than 91 days are exempt from both Australian and host country personal income tax regimes on their foreign income.
Those Australian residents engaged in foreign services, that do not meet the requirements of section 23AG of the ITAA 1936, are subject to Australian personal income tax; for example ordinary Australian diplomatic staff on foreign postings.
The Explanatory Memorandum notes that this exemption under section 23AG was originally provided to avoid double taxation of those engaged in government service.
I will now move on to talk about schedule 3 of this bill. As it says in the Bills Digest:
As individuals move between jobs it is possible that superannuation payments made on their behalf are paid to different funds. Sometimes this is a deliberate choice made by the individual or is the result of restrictions on moving balances between funds (such as for certain defined benefit schemes). If an individual does not make a choice about their superannuation fund upon commencing employment, it is likely that they will be a member of multiple funds.
The holding of multiple superannuation accounts may disadvantage individuals through the imposition of fixed administration fees. Multiple accounts can also impose additional costs on the superannuation system. However, it is important not to assume that each individual should only have a single account. Multiple accounts may be an active choice that a member makes to obtain certain insurance benefits, to facilitate investment choice or as a transition to retirement arrangement.
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Certain ‘lost’ accounts are required to be identified and transferred biannually from superannuation funds and retirement savings account providers to the Commissioner of Taxation.
While the identification of lost superannuation has been part of superannuation industry arrangements since 1996, requirements for the transfer of these funds to the Commissioner of Taxation first applied from 1 July 2010, after being announced in the 2009-10 Budget. Prior to this, these funds remained with the relevant superannuation fund or were transferred to eligible roll-over funds. At that time, the transfer to the Commissioner of Taxation of these funds was expected to increase net revenue by almost $230 million over the period 2010-11 to 2012-13.
… … …
The justification for the transfer of such funds—which was already in place for unclaimed bank account and life insurance fund moneys—was that it would improve the efficiency of the superannuation system overall by removing the need for superannuation funds to administer or apply member protection to small accounts that are transferred and improve the equity for other members of the fund that were cross-subsidising the member protection arrangements.
The requirements to be a ‘lost member’ are set out in the Retirement Savings Accounts Regulations 1997 and Superannuation Industry (Supervision) Regulations 1994. These require the account holder to be ‘uncontactable’ or ‘inactive’:
the account holder is ‘uncontactable’ if:
– the provider has never had an address for the account holder or
– at least one written communication has been sent to the account holder’s last known address and has been returned unclaimed
and the provider has not received a contribution or roll-over in respect of the account holder within the last 12 months
the account holder is ‘inactive’ if the account has been held for more than two years and the provider has not received a contribution or roll-over in respect of the account within the last five years. The regulations provide for account holders to be permanently excluded from being ‘lost’ if they have indicated by some positive act or another contact that they wish to continue with the provider.
There are two strands to a superannuation account being classified as a ‘lost member account’ under the Superannuation (Unclaimed Money and Lost Members) Act 1999:
the first relates to ‘small accounts’, which are taken to be the accounts of lost members (as defined by the Regulations above) with an account balance that is less than the specified threshold in paragraph 24B(1)(b) of the Act—currently $2,000
the second relates to ‘inactive accounts of unidentifiable members’, which are taken to be the accounts of lost members (as defined by the Regulations above) where:
– the superannuation provider has not received an amount in respect of the member within the last 12 months and
– the superannuation provider is satisfied that it will never be possible for the provider, having regard to the information reasonably available to the provider, to pay an amount to the member.
Schedule 3 of this Bill proposes to change the account balance threshold relating to ‘small accounts’ from $2,000 to $4,000 from 31 December 2015 and then to $6,000 from 31 December 2016.
With the time that remains to me I would like to go through some of the key issues contained in the schedules of this bill, starting with schedule 1 of the methods for dealing with potential tax loopholes in the Income Tax Assessment Act. The proposed methods are:
to include any interests involved in a scrip for scrip rollover that are convertible shares, options, rights or similar interests in the calculations of equity interests involved in a scrip for scrip roll-over between the parties in these arrangements
where debt is involved the proposed solution is to remove the debt sheltering opportunity arising from the current disregarding of a capital gain arising on the settlement of a debt owed, as part of a scrip for scrip acquisition, by an acquiring company to its ultimate holding company and
where trusts are involved in a scrip for scrip roll-over, the proposed solution is to extend the operation of the new provisions so that they apply to trusts as well as to companies.
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Item 4 of Schedule 1 amends section 127-780 of the ITAA 1997 to add a new condition for a scrip for scrip roll-over to apply. This new condition is that where a purchasing entity is part of a wholly owned group, no member of that group may issue equity (other than the necessary replacement equity), or owe new debt:
to an entity that is not a member of that wholly owned group and
in relation to the issue of a replacement interest as part of that purchasing arrangement. This prevents other members of a wholly owned group from issuing unnecessary debt or equity to third parties that can be used to avoid CGT—
capital gains tax—
Under section 124-780—
of the Income Tax Assessment Act—
only an original interest holder can obtain a roll-over of share interests. Under section 124-781 only an original interest holder can obtain a roll-over of trust interests. The transfer of a cost base for the purposes of a scrip for scrip roll-over can, under section 124-782, only be applied to the holder of an ‘original interest’ in an entity who is either a significant stake holder or a common stake holder. This makes the definitions of the terms ‘significant stake’ and ‘common stake’ critical for the functioning of the scrip for scrip roll-over provisions. Both terms are defined at section 124-783 and apply where the entities involved are not ‘widely-held’—that is they have less than 300 shareholders (if they are a company) or beneficiaries (if they are a trust).
An entity has a ‘significant stake’ in a company if it and its associates own shares with 30 per cent or more of the voting rights, or the right to receive 30 per cent or more of any dividends or capital distributions (subsection 124-783(6)).
An entity has, or two or more entities have, a ‘common stake’ if they and their associates own shares with 80 per cent or more of the voting rights, or the right to receive 80 per cent or more of any dividends or capital distributions …
Equivalent tests are applied to trusts …
Item 8— (Time expired)