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The tax leftovers Labor must digest

Tax

Lapsed bills and policy loose ends mean the new government has a lot on its plate.

By Robyn Jacobson8 minute read

What happened on 21 May?

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After nearly nine years and three parliamentary terms, the Coalition was unable to hold sufficient seats to retain government. While counting continues to determine the final allocation of seats across both houses, it is apparent the incoming Labor government will hold a majority of seats (77 out of 151) in the House of Representatives.

New Prime Minister Anthony Albanese has been assured of sufficient support to guarantee supply and confidence from the crossbenchers. Significantly, the number of crossbenchers in the Lower House has swelled from six to 16, including three additional seats held by the Greens and seven by new independents.

The Senate is where things get interesting. The ALP is expected to hold 26 seats, the Coalition 31, the Greens 12, minor parties One Nation and the Jacqui Lambie Network two each, Independent David Pocock one seat and two remain in doubt (but likely to go to the Liberal Party and the United Australia Party).

This means that, even with a Labor-Greens voting bloc of 38, the government still needs at least one crossbencher to support the passage of their bills. It also means that the Coalition, together with the full support of the minor parties and independents (collectively, 38 seats), can block government bills.

Ultimately, power in the Senate will rest with the Greens and it will be interesting to observe the extent to which their position on issues — including climate, foreign investment and a crackdown on multinationals — will influence the ALP’s policies and politicking.

Another interesting dynamic is the rise of the independents. An adage attributed to Aristotle, “the whole is greater than the sum of the parts”, is apt here. An independent may represent only one vote, but the collective voice of a bloc of independents can shift the whole narrative and instil a sense of change.

The new member for Curtin, Western Australia, Kate Chaney, says:

“The major parties shy away from discussions about tax and debt. Our tax system is complex and requires reform so it is fit for purpose, looking ahead to the social and demographic changes of the next decade. This requires deep thinking about major issues including our national debt, housing affordability, and the impact of an aging population, and how we address these issues for our children’s generation.”

The new member for Wentworth, NSW, Allegra Spender, seeks to:

Reform our tax system, starting with a parliamentary review that reports back before the 2023 budget.

Throughout the election campaign, the mainstream media focused heavily on three core platforms of the independents: climate change, greater equality for women and the establishment of a federal integrity commission. It is encouraging to see the independents’ policies also include research and development, innovation, supporting small businesses and, at least for the abovementioned two independents, tax reform.

 

What should be the government’s tax policy priorities?

Non-arm’s length income

A key priority is the legislative resolution of the non-arm’s length income (NALI) issue, where a minor amount of non-arm’s length expenditure can have a disproportionate effect on the income and capital gains made by a superannuation fund.

The former minister for superannuation, Jane Hume, announced on 22 March 2022 that the Morrison government intended to make legislative changes with effect from 1 July 2022 to ensure the NALI provisions operated as envisaged, and that the government and Treasury would consult with relevant industry stakeholders on the appropriate operation of the provisions. Engagement continues with Treasury and the government on this issue to secure support for the necessary legislative amendments.

Corporate tax residency

Two budget announcements, in October 2020 and May 2021, advised that a key recommendation of the Board of Taxation — that a foreign company should be treated as an Australian tax resident if it had a “significant economic connection to Australia” — would be adopted, and that the amendments would include trusts and corporate limited partnerships.

With a commencement date of the first income year after the enabling legislation is enacted, and an optional retrospective application from 15 March 2017, progressing this measure is a priority to provide certainty to corporate taxpayers.

Small business boosts

The two small business boosts proposed to apply from 7.30pm on 29 March 2022 for businesses with an aggregated turnover of less than $50 million remain unlegislated. The bonus 20 per cent deduction is proposed to be available to claim in the 2023 and/or 2024 tax return for the skills and training boost, and the 2024 tax return only for the technology investment boost, which will also be subject to a $100,000 annual expenditure cap. It is imperative that the government clarify whether it supports this measure, and if so when it is likely to be legislated to provide certainty to small to medium sized business taxpayers.

Patent box regime

The future of two budget announcements, in October 2020 and May 2021, remains uncertain. The proposed patent box regime that will tax income derived from medical or biotechnology patents at a concessional tax rate of 17% progressed to a bill that has now lapsed. Separately, it was proposed that the regime would be expanded to cover the agricultural sector and low emissions technology innovations. Given these measures support and encourage innovation, a commitment by the government to proceed with them would be welcome.

Division 7A and section 100A

More than 10 years have passed since then assistant treasurer David Bradbury announced that the Board of Taxation would review Division 7A (of Part III of the Income Tax Assessment Act 1936) to consider improvements to its operation. A myriad of ATO guidance has been issued since then, but legislative reform remains elusive. Before practitioners insist on the proposed reforms proceeding — some would bring positive change while others were strongly criticised by the profession — we should be careful what we wish for. A replacement set of rules more complex than those already in the law is undesirable.

Meanwhile, many in the profession continue to press for legislative change to section 100A, which deals with present entitlements of trust beneficiaries arising from reimbursement agreements where a purpose of the arrangement is to reduce the income tax of a taxpayer, and which do not fall within the exemption as an ordinary family or commercial dealing.

The primary concern is the unlimited amendment period. A review of this rule is warranted, given the context in which the provision was originally inserted into the law to address trust-stripping arrangements, the equivalent unlimited amendment period for arrangements where the taxpayer is found to have engaged in fraud or evasion, and the capped four-year period that applies to arrangements to which Part IVA of the ITAA 1936 (the general anti-avoidance rule) applies.

Other issues

The key priorities are set out above, but an extensive list of other announced and unenacted measures remains on foot. Clarity on all these measures is needed; will the government proceed with each measure as announced, proceed but change the scope or the timing, or abandon the measure altogether?

Some of these measures include:

  • ABN system reformsannouncement on 2 April 2019 (federal budget 2019-20) requiring that ABN holders with an income tax return obligation lodge their tax return and annually reconfirm their details on the Australian Business Register.
  • Car parking fringe benefitsannouncement on 29 March 2022 by former assistant treasurer Michael Sukkar that the government would undertake a public consultation to identify appropriate modifications to the definition of “commercial parking station” with a view to restoring the previously understood interpretation, which better reflects the policy intention of the law.
  • Digital games tax offset — proposes to introduce a 30 per cent refundable DGTO for eligible businesses that spend a minimum of $500,000 on qualifying Australian games expenditure, up to a maximum offset each year of $20 million.
  • Education and training expensesannouncement on 2 October 2020 proposing that individuals will be able to deduct education and training expenses they incur, where the expense is not related to their current employment.
  • Individual’s fame or imageconsultation paper released on 13 December 2018 that sets out a proposal to include all remuneration, including payments and non-cash benefits, provided for the commercial exploitation of a person’s fame or image in that individual’s assessable income.
  • Individual tax residency rulesannouncement on 11 May 2021 (federal budget 2021-22) that the individual tax residency rules will be replaced with a new, modernised framework comprising a primary “bright line” test based on physical presence in Australia for 183 days or more in any income year and a secondary four-factor test for individuals who do not meet the primary test.
  • Legacy retirement product conversionsannouncement on 29 March 2022 (federal budget 2022-23) that a specified range of legacy retirement products will be able to be converted into an account-based pension.
  • MITs and AMITs announcement on 8 May 2018 (federal budget 2018-19) proposing that managed investment trusts (MITs) and attributed managed investment trusts (AMITs) will be prevented from applying the 50 per cent capital gains discount at the trust level.
  • PAYG instalment system — an announcement on 29 March 2022 (federal budget 2022-23) that companies will be able to choose to have their PAYG instalments calculated based on current financial performance, better aligning PAYG liabilities with business revenue.
  • Relaxing superannuation fund residency requirementsannouncement on 11 May 2021 (federal budget 2021-22) that the residency requirements for SMSFs and small APRA-regulated funds would be relaxed by extending the central control and management test safe harbour from two to five years for SMSFs and removing the active member test for both fund types.

The following key measures are contained in bills that have lapsed (if they were before the House of Representatives when the election writs were issued, or will soon lapse on the commencement of the 47th Parliament (if before the Senate):

  • Effective life of intangible assets — proposes to allow taxpayers to choose whether to self-assess the tax-effective life of eligible depreciating intangible assets or continue to use the effective life set by the statute.
  • Self-education expenses — proposes to remove the $250 non-deductible threshold for work-related self-education expenses.
  • Sharing economy reporting regime — proposes to require electronic platform operators to provide information on transactions made through the platform to the ATO.

Final thoughts

It will be fascinating to watch the new government navigate its way through the most diverse Senate this country has ever seen, while balancing the dynamics of rising inflation and interest rates, record deficit and debt levels and a volatile global environment.

The Tax Institute will continue to engage with the government and all relevant stakeholders in working our way through tax policy during the 47th Parliament.

Robyn Jacobson is the senior advocate at the Tax Institute.

 

The tax leftovers Labor must digest
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