Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No 2) Bill 2018 [2018] AUSStaCSBSD 42 (14 February 2018)

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Purpose	This bill seeks to amend the Income Tax Assessment Act 1997, the Income Tax (Transitional Provisions) Act 1997, the Foreign Acquisitions and Takeovers Act 1995 and the Taxation Administration Act 1953 to: • remove the entitlement to the capital gains tax (CGT) main residence exemption for foreign residents; • clarify that, for the purpose of determining whether an entity’s underlying value is principally derived from taxable Australian real property , the principal asset test is applied on an associate inclusive basis; • require a reconciliation payment to be made by developers who sell dwellings to foreign persons under a near-new dwelling exemption certificate; • provide an additional affordable housing capital gains discount of up to 10 per cent if a CGT event occurs to an ownership interest in residential premises that has been used to provide affordable housing
Portfolio/Sponsor	Treasury
Introduced	House of Representative on 8 February 2018

Retrospective application^[148]

1.186 Schedule 1 to the bill seeks to remove foreign residents' entitlements to the capital gains tax (CGT) main residence exemption, and to modify the foreign resident CGT regime to clarify that, for the purposes of determining whether an entity's underlying value is principally derived from taxable Australian real property (TARP), the principal asset test^[149] is to be applied on an associate inclusive basis.

1.187 Schedule 2 to the bill seeks to create a reconciliation mechanism to ensure that where a near-new dwelling is sold by a developer to a foreign person, the developer provides a reconciliation payment in respect of that sale. The measures in Schedule 2 are complemented by the provisions of the Foreign Acquisitions and Takeovers Fees Imposition Amendment (Near-new Dwelling Interests) Bill 2018. Finally, Schedule 3 to the bill seeks to provide additional CGT discounts on CGT events that occur with respect to residential premises that have been used to provide affordable housing.

1.188 It is proposed that all of the measures identified above would apply retrospectively. The measures in Schedule 1 (relating to CGT exemptions for foreign residents) are proposed to apply to CGT events happening on or after those measures were announced (7:30pm on 9 May 2017.^[150] The measures in Schedule 2 (relating to payments with respect to near-new dwellings) are proposed to apply in relation to the acquisition of a new-new dwelling occurring on or after 1 July 2017. The measures in Schedule 3 (relating to CGT discounts with respect to affordable housing) are proposed to apply to CGT events happening on or after 1 January 2018.

1.189 The committee has a long-standing concern about provisions that apply retrospectively, including provisions that back-date commencement to the date of the announcement of particular measures (i.e. 'legislation by press release'), as such an approach challenges a basic value of the rule of law that, in general, laws should only operate prospectively. The committee has particular concerns where legislation will, or might, have a detrimental effect on individuals. Generally, where proposed legislation will apply retrospectively, the committee would expect the explanatory materials to set out the reasons why retrospectivity is sought, and whether any persons are likely to be adversely affected and the extent to which their interests are likely to be affected.

1.190 The committee also notes that, 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 application or commencement, when used too widely or insufficiently justified, can diminish respect for the rule of law and its underlying values. In outlining issues around this matter previously, the committee has accepted that some amendments may apply retrospectively when legislation is introduced. However, this has been limited to the introduction of bills within six calendar months after the relevant 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). The committee notes that, in this case, the bill was introduced almost nine months after the Budget announcement on 9 May 2017.

1.191 With respect to the amendments in Schedule 1, the explanatory memorandum states:

1.192 With respect to the amendments in Schedule 2, the explanatory memorandum states that:

1.193 The committee notes that that item 11 of Schedule 2 also seeks to introduce a transition period, which would extend the time in which a person is required to make a reconciliation payment in relation to an acquisition of a near-new dwelling that occurred on or after 1 July 2017.

1.194 Finally, with respect to the amendments in Schedule 3, the explanatory memorandum states that, as the amendments provide additional CGT discounts to taxpayers and allow more concessional tax treatment to apply, the amendments are beneficial and their retrospective application will not result in any disadvantage.^[153]

1.195 The committee reiterates its long-standing concerns that provisions with retrospective application (including where provisions are back-dated to the date of announcement of an initiative) challenge a basic value of the rule of law that, in general, laws should only operate prospectively.

1.196 In light of the detailed explanation provided in the explanatory memorandum as to the retrospective application of the amendments proposed by the bill, the committee draws its concerns to the attention of senators and leaves to the Senate as a whole the appropriateness of applying the amendments in the bill on a retrospective basis.

[148] Schedule 1, items 31 and 34; Schedule 2, item 10; and Schedule 3, item 7. The committee draws senators’ attention to these provisions pursuant to Senate Standing Order 24(1)(a)(i).

[149] The principal asset test applies in relation to certain membership interests held by a foreign resident entity in another entity. The test is satisfied if the market value of the other entity's TARP assets exceeds the market value of its non-TARP assets.

Australian Senate Standing Committee for the Scrutiny of Bills - Scrutiny Digests