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Australian Senate Standing Committee for the Scrutiny of Bills - Scrutiny Digests |
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Purpose
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This bill seeks to amend various Acts in relation to taxation
Schedule 1 seeks to ensure that the multinational anti-avoidance law
applies to artificial or contrived arrangements involving trusts
and
partnerships entered into by multinational entities to avoid the taxation of
business profits in Australia
Schedule 2 seeks to include additional conditions that must be met for
the small business capital gains tax concessions to capital
gains to apply
Schedule 3 seeks to provide for venture capital tax concessions to be
available for investments in 'fintech' businesses
Schedule 4 seeks to provide a tax exemption for payments made under
the Defence Force Ombudsman Scheme
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Portfolio
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Treasury
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Introduced
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House of Representatives on 28 March 2018
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Bill status
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Before the Senate
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2.280 The committee dealt with this bill in Scrutiny Digest No. 5 of 2018. The Treasurer responded to the committee's comments in a letter dated 30 May 2018. Set out below are extracts from the committee's initial scrutiny of the bill and the minister's response followed by the committee's comments on the response. A copy of the letter is available on the committee's website.[149]
Initial scrutiny – extract
2.281 Schedule 2 of the bill seeks to amend the Income Tax Assessment Act 1997 to include additional conditions that must be satisfied in order for small business capital gains tax (CGT) concessions to apply. The explanatory memorandum states that the changes will result in CGT concessions only applying to assets used, held ready for use or that are an interest in a small business.[151]
2.282 The application provision in Schedule 2 provides for the amendments to commence in relation to CGT events on or after 1 July 2017, which results in the amendments applying retrospectively. The explanatory memorandum notes the retrospective application is, 'consistent with the Budget announcement [made] by the Government on 9 May 2017 to ensure small business CGT concessions are only available in relation to assets used in a small business and ownership interests in small business.'[152]
2.283 The explanatory memorandum argues that, while it may disadvantage some taxpayers, as an integrity measure the retrospective application is 'necessary to minimise the scope for entities to inappropriately access the small business CGT concessions in the period after the measure was announced but before legislation is enacted.'[153]
2.284 The committee reiterates its long-standing scrutiny concern that provisions that back-date commencement to the date of the announcement of the bill (i.e. 'legislation by press release') challenges a basic value of the rule of law that, in general, laws should only operate prospectively (not retrospectively).
2.285 In the context of tax law, reliance on ministerial announcements and the implicit requirement that persons arrange their affairs in accordance with such announcements, rather than in accordance with the law, tends to undermine the principle that the law is made by Parliament, not by the executive. Retrospective commencement, when too widely used or insufficiently justified, can work to diminish respect for law and the underlying values of the rule of law.
2.286 However, in outlining scrutiny issues around this matter previously, the committee has been prepared to accept that some amendments may have some retrospective effect when the legislation is introduced if this has been limited to the introduction of a bill within six calendar months after the date of that announcement. In fact, where taxation amendments are not brought before the Parliament within 6 months of being announced the bill risks having the commencement date amended by resolution of the Senate (see Senate Resolution No. 44). In this instance it has been 11 months since the Budget announcement
2.287 The committee therefore requests the Treasurer's more detailed advice as to how many individuals will be detrimentally affected by the retrospective application of the legislation, and the extent of their detriment.
Treasurer's response
2.288 The Treasurer advised:
The Government announced in the 2017-18 Budget that it would amend the concessions "to ensure that the concessions can only be accessed in relation to assets used in a small business or ownership interests in a small business" with effect from 1 July 2017. This announcement ahead of the commencement of the amendments allowed taxpayers to take the proposed changes into account when considering applying the CGT small business concessions.
I am advised by the Australian Taxation Office (ATO) that detailed information about the number of adversely affected taxpayers and the extent of any adverse effects is not available. This is because the ATO has not yet received any tax return data for transactions in the 2017-18 income year, which this measure would affect.
Additionally, to be affected by this measure, taxpayers must access the CGT concessions in relation to specific types of assets (principally interests in large businesses). Tax returns include only limited information on taxpayers' use of the small business CGT concessions, which is not sufficient to identify taxpayers that would be affected by the 2017-18 Budget measure as they have accessed the concessions in relation to such an asset. For the ATO to identify instances where taxpayers have sought to access the concessions in ways that these amendments would prevent, further information would be required, such as from ATO compliance action.
Committee comment
2.289 The committee thanks the Treasurer for this response. The committee notes the Treasurer's advice that detailed information about the number of adversely affected taxpayers and the extent of adverse effects is not available. The committee also notes the Treasurer's advice that the government's announcement in the
2017-18 Budget allowed taxpayers to take the proposed changes into account when considering applying the CGT small business concessions.
2.290 The committee notes that it has received correspondence from a number of former small business owners that claim that, if these amendments are applied retrospectively, they will incur a large taxation liability, which they were not aware of at the time their small businesses were sold.
2.291 The committee is concerned that the government is not aware of the extent of the detrimental impact that will be caused by the retrospective application of these amendments. The committee takes the opportunity to reiterate its long-standing scrutiny concern that the retrospective application of legislative provisions challenges a basic value of the rule of law that, in general, laws should only operate prospectively (not retrospectively). In the context of tax law, reliance on ministerial announcements and the implicit requirement that persons arrange their affairs in accordance with such announcements, rather than in accordance with the law, tends to undermine the principle that the law is made by Parliament, not by the executive.
2.292 The committee considers it may be appropriate for the bill to be amended to apply the changes to the CGT small business concessions to events happening after the bill receives Royal Assent.
2.293 The committee otherwise draws its scrutiny concerns to the attention of senators and leaves to the Senate as a whole the appropriateness of retrospectively applying the amendments in relation to the CGT small business concessions.
Initial scrutiny – extract
2.294 Schedule 3 of the bill seeks to amend the Income Tax Assessment Act 1997 (ITAA) to implement reforms of tax incentives for venture capital investors and their investments in financial technology or 'fintech'.[155] The changes are intended to clarify that certain 'fintech' activities are not ineligible activities for the purpose of venture capital tax concessions.[156]
2.295 Proposed subsection 118-432(2) provides that Innovation and Science Australia may, on receipt of an application, make a written decision finding that a specified activity is a substantially novel application of technology (or refuse to make such a finding). This is known as a 'private finding'. A refusal to make a private finding will be subject to internal and Administrative Appeals Tribunal (AAT) review in the same way as other administrative decisions relating to venture capital tax concessions.[157]
2.296 Proposed subsection 118-432(5) provides that Innovation and Science Australia must notify the applicant in writing of any decision about an application for a private finding; however, proposed subsection 118-432(6) provides that failure to so notify an applicant does not affect the validity of the finding (or refusal to make a finding).[158]
2.297 A legislative provision that indicates that an act done or decision made in breach of a particular statutory requirement or other administrative law norm does not result in the invalidity of that act or decision, may be described as a 'no-invalidity' clause. There are significant scrutiny concerns with no-invalidity clauses, as these clauses may limit the practical efficacy of administrative review to provide a remedy for administrative errors. For example, as the conclusion that a decision is not invalid means that the decision-maker had the power (i.e. jurisdiction) to make it, review of the decision on the grounds of jurisdictional error is unlikely to be available. The result is that some of judicial review's standard remedies will not be available. Consequently, the committee expects a sound justification for the use of a no-invalidity clause to be provided in the explanatory memorandum.
2.298 In this instance, the explanatory memorandum does not include a justification for including the no-invalidity clause in proposed subsection 118-432(6).
2.299 As the explanatory materials do not address this issue, the committee requests the Treasurer's advice as to why it is proposed to include a no-invalidity clause in proposed subsection 118-432(6). The committee also requests advice about how, in practice, an applicant will be able to seek internal and AAT review of a refusal to make a finding under proposed subsection 118-432(2) in circumstances where Innovation and Science Australia does not notify the applicant of that refusal.
Treasurer's response
2.300 The Treasurer advised:
Among other things, these amendments allow for Innovation and Science Australia (ISA) to, on application, make a finding that an activity is a novel application of technology. The Committee has sought advice on why if ISA does not provide notice in writing of such a finding (or a decision not to make a finding), this does not result in the finding or decision being invalid. The Committee has also sought advice on how failure to provide such notice may affect the ability of the applicant to seek internal and Administrative Appeals Tribunal review of a refusal to make a finding.
Providing notice of a finding is an administrative matter that does not affect the substance of a decision. The consistent and longstanding approach for all findings by ISA and for reviewable decisions under the Administrative Appeals Tribunal Act 1975 (AAT Act) generally is that a failure to comply with such an administrative requirement does not affect the validity of the underlying decision (see subsections 29-5(3) and 29-10(7) of the Venture Capital Act 2002, subsections 27C(4), 27K(4), 28F(5) and 30B(3) of the Industry Research and Development Act 1986 and subsection 27A(3) of the AAT Act).
In the case of findings, this practice is generally to the benefit of the applicant - the existence of a finding provides certainty as to whether a venture capital fund is investing in an eligible business, and it would not be appropriate to defer or deny the effect of a decision because of a defective notification process.
I am also advised that there was close engagement with stakeholders in the development of this legislation and no concerns were raised about this matter.
In the event ISA does not provide notice of a decision not to make a finding, it would be expected that the applicant would follow up with ISA and ISA would rectify the error as soon as it came to their attention.
In the event ISA continued to not provide notice of the decision, the applicant would remain entitled to internal review of the decision and would have an unlimited period to apply for this review as a request for a review of a decision by ISA can be made until 21 days after notice of the decision is provided (see subsection 29-10(2) of the Venture Capital Act 2002). Should ISA continue to be non-responsive, it would be taken to confirm the decision after 60 days and the applicant could seek review by the Administrative Appeals Tribunal (see subsection 29-10(5) of the Venture Capital Act 2002).
It would also be open to the applicant to seek an order from the Federal Court compelling ISA to comply with its legislative obligation to provide a notice of the decision.
Committee comment
2.301 The committee thanks the Treasurer for this response. The committee notes the Treasurer's advice that providing notice of a finding is an administrative matter that does not affect the validity of the underlying decision, and this is generally to the benefit of the applicant as it would not be appropriate to defer or deny the effect of a decision because of a defective notification process. The committee also notes the Treasurer's advice as to how an applicant would be made aware of whether a decision had been made should the ISA not notify the applicant.
2.302 The committee requests that the key information provided by the Treasurer be included in the explanatory memorandum, noting the importance of this document as a point of access to understanding the law and, if needed, as extrinsic material to assist with interpretation (see section 15AB of the Acts Interpretation Act 1901).
2.303 In light of the information provided, the committee makes no further comment on this matter.
[149] See correspondence relating to Scrutiny Digest No. 6 of 2018 available at: www.aph.gov.au/senate_scrutiny_digest
[150] Schedule 2, item 3. The committee draws senators' attention to this provision pursuant to Senate Standing Order 24(1)(a)(i).
[151] Explanatory memorandum, p. 13.
[152] Explanatory memorandum, p. 23.
[153] Explanatory memorandum, p. 23.
[154] Schedule 3, item 3, proposed subsection 118-432(6). The committee draws senators' attention to this provision pursuant to Senate Standing Order 24(1)(a)(iii).
[155] Explanatory memorandum, p. 25.
[156] Explanatory memorandum, p. 27.
[157] Schedule 3, item 5; explanatory memorandum, p. 33.
[158] Proposed subsection 118-432(6).
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URL: http://www.austlii.edu.au/au/other/AUSStaCSBSD/2018/168.html
