Proposed tax changes and Bills lapse with the calling of the Federal Election
The Federal Election has been called for later this month, and it is consequently an important time to reflect on the current state of affairs regarding tax and superannuation legislation.
Prior to the calling of the election, a surprising number of proposed taxation and related measures did not make it to the Parliament floor, let alone become law. This includes measures proposed in the 2021/22 and 2022/23 Federal Budget such as the Patent Box and proposed changes to the individual and corporate tax residency tests, as well as long-running proposed amendments such as those to the loan arrangements associated with the deemed dividend provision (Division 7A).
It remains to be seen whether the next Government, whoever that is, reintroduces existing draft legislation, or advances previously announced measures which have not made it that far.
The tax and superannuation related Bills and proposed measures that have lapsed are outlined below, including:
- Bills before Parliament that have lapsed;
- Measures proposed in the 2022-2023 Federal Budget, announced in March 2022; and
- Measures proposed in proposed in previous Federal Budgets, which were yet to be included in draft legislation.
We have also outlined the Australian Taxation Office (ATO) guidance which is under development, and yet to be completed.
When the Federal Election was called, all unpassed legislation introduced before Parliament lapsed, including the following tax and superannuation bills:
- Proposed amendments to the electronic platform reporting regime, to facilitate the Australian Financial Complaints Authority replacing the Superannuation Complaints Tribunal, and to remove the $250 non-deductible threshold for work-related self-education expenses.
- Draft legislation to allow taxpayers to self-assess the effective life of certain intangible depreciating assets, amendments relating to record-keeping penalties, and recovery grants for Cyclone Seroja.
- Draft legislation in respect of the tax treatment for labour mobility programs.
- Draft legislation which proposed to introduce concessional tax treatment for eligible income derived from exploiting a medical or biotechnology patent.
- Proposed amendments relating to reporting and auditing requirements of registrable superannuation entities.
- Draft legislation to provide the Administrative Appeals Tribunal with increased powers to stay or modify the ATO’s debt recovery actions in relation to disputes against small business entities (i.e. businesses with less than $10 million annual turnover). This was a measure set out in the Federal Budget 2021-2022.
Lapsed proposed measures
Notable measures from the Federal Budget 2022-2023 that were note legislated and have lapsed include:
- Patent Box – ag sector and carbon reduction (see also biomed from 2021-2022 Federal Budget)
- Carbon credit income can be treated as primary production for Farm Management Deposit Schemes
- Small business skills and training
- Small business technology investment
- Minimum pension drawdowns (from 1 July 2022) – regulations
- Various compliance measures
- $660m extension of the ATO Tax Avoidance Taskforce
Our summary of a number of these key measures and there import is included in our Budget report (here).
Previous Federal Budget measures not introduced into legislation
The following significant measures were announced in prior budgets but draft legislation not introduced:
- Proposed amendments to the individual tax residency rules as announced in the Federal Budget 2021-2022.
In very simple terms, under the proposed amendments an individual that is in Australia more than 183 days in a financial year will be an Australian tax resident. Alternatively, an individual arriving/departing Australia need only be in Australia for 45 days to be determined a resident, however they must also establish a requisite number of objective factors.
- Proposed amendments announced in the Federal Budget 2020-21 to modernise the corporate tax residence test to provide that a foreign incorporated company will be treated as an Australian tax resident if it has a significant economic connection to Australia. The foreign company would satisfy this test if it undertakes its core commercial activities in Australia and its central management and control is in Australia.
- Targeted amendments to Division 7A were announced in the Federal Budget 2016-17. These amendments include a self-correction mechanism to assist taxpayers to rectify inadvertent breaches of Division 7A, safe harbour rules for taxpayers, proposed simplified rules regarding complying Division 7A loans, and technical amendments to the integrity and operation of Division 7A.
- Proposed amendments to clarify that unpaid present entitlements come within the scope of Division 7A. This was first announced in the Federal Budget 2018-19.
If any of these proposed changes were enacted, they would see amendments to key underlying concepts in Australian taxation which have been around for decades. The proposed changes led to significant discussion in the professional community, and it is perhaps understandable that the Government would require some time to legislate the changes, although significant time has now passed without any update or apparent movement.
Reform of trusts
On the vein of long-promised, critical changes to basic tax concepts – it is also helpful to reflect on the trust streaming provisions in Division 6E ITAA36 which were introduced in 2011 after the decision in Commissioner of Taxation v Bamford (2010) 240 CLR 481 as a temporary measure to deal with perceived anomalies in the taxation of capital gains and franked distributions.
The provisions in Division 6E, and Subdivisions 115-C and 207-B ITAA97 were intended to be evaluated after a broader review of the taxation of trusts provisions in Division 6, which has not occurred to date. The interaction between these provisions and the ATO’s stance has produced some unusual and unfair results for beneficiaries.
In light of the decisions in Greensill  FCAFC 99 and Carter  HCA 10, as well as the recent ATO focus and compliance activity in respect of section 100A and the decision in Guardian  FCA 1619, a broader review of the taxation of trusts (including Divisions 6 and 6E) is clearly needed and would be welcomed by many tax practitioners.
The Commissioner’s excuse appears to be that Treasury wants to see attempts at (more) judicial guidance before embarking on a root and branch reform of taxation of trusts, which is starkly at odds with the Government’s position in 2011.
ATO guidance under development
The following ATO rulings, determinations and guidance are still in development:
- Taxation Ruling – Income tax: composite items and identifying the depreciating asset for the purposes of working out capital allowances, which is intended to set out the Commissioner’s views on how to determine whether a composite item or its components is a depreciating asset for the purposes of Division 40 ITAA97.
- Taxation Ruling – Income tax: when does a corporate limited partnership ‘credit’ an amount to a partner in that partnership?, intended to clarify when an amount is credited within the meaning of section 94M ITAA36.
- Taxation Ruling – Income tax: personal services income and personal services businesses, which is intended to provide a consolidation Taxation Rulings TR 2001/7 and TR 2001/8.
- Privatisation and Infrastructure – Australian Federal Tax Framework. This is intended ATO guidance in relation to a range of infrastructure-related tax issues.
- Taxation Determination – Income tax: tax incentives for early stage investors: what is an ‘expense’ that is ‘incurred’ for the early stage test? This will set out the Commissioner’s view on the expenses taken into account for the early state innovation company tests.
- Draft Taxation Determination – Income tax: can a corporate trustee be caused to suffer undue hardship due to payment of a debt for the purposes of subsection 109G(4) of the Income Tax Assessment Act 1936?, regarding the Commissioner’s preliminary view on whether a corporate trustee could suffer undue hardship on payment of a debt for the purposes of section 109G(4) ITAA36.
- Taxation Ruling – Income tax: application of paragraph 8-1(2)(a) of the Income Tax Assessment Act 1997 to labour costs related to the construction or creation of capital assets. This is intended to clarify the treatment of labour costs associated with the construction or building of capital assets.
- Draft Taxation Ruling – Income tax: research and development tax offset: expenditure incurred to acquire or construct a building, which is intended to set out the Commissioner’s preliminary view on notional deductions for expenditure incurred to acquire or construct a building for the purposes of the research and development tax offset (section 355-225(1)(a) ITAA97).
- Taxation Ruling – Income tax: income of international organisations and persons connected with them that is exempt from income tax, which will update the ATO view in Taxation Ruling TR 92/14 following the decisions of Macoun v Commissioner of Taxation and Commissioner of Taxation v Jayasinghe regarding exempt income and pension payments in connection with international organisations (s 6-20(1) ITAA97)
- Draft Taxation Ruling – Income tax: royalties – character of receipts in respect of software, regarding the circumstances in which amounts in relation to the licensing and distribution of software will be royalties (section 6(1) ITAA36)
- Taxation Ruling – Income tax: expenses associated with holding vacant land, which is intended to cover the deductibility of expenses relating to holding vacant land (section 26-102 ITAA97)
- Draft Taxation Determination – Income tax: use of an individual’s image by related entities, regarding the treatment of ordinary income (section 6-5 ITAA97) in relation to arrangements involving the non-exclusive use of an individual’s name, age, likeness, identity, reputation and signature by their related entities
- Draft Taxation Ruling – Income tax: residency tests for individuals, which is intended to incorporate the amendments to Taxation Ruling IT 2650 and TR 98/17 following the decision of Harding v Commissioner of Taxation regarding place of abode (section 6(1) ITAA36)
- Draft Practical Compliance Guideline – Income tax: non-commercial losses – Commissioner’s discretion regarding flood, bushfire or COVID-19 (section 35-55(1)(a) ITAA97)
- Draft Taxation Determination – Income tax: Commissioner’s discretion to determine that an entity does not control another entity, regarding the meaning of control for the purpose of the discretion under 328-125(6) ITAA97 for small business entities
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