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2022-2023
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
TREASURY LAWS AMENDMENT (SUPPORT FOR SMALL BUSINESS AND
CHARITIES AND OTHER MEASURES) BILL 2023
EXPLANATORY MEMORANDUM
(Circulated by authority of the Assistant Treasurer and Minister for Financial Services,
the Hon Stephen Jones MP)
Table of Contents
Glossary................................................................................................. iii
General outline and financial impact ...................................................... 1
$20,000 instant asset write-off for small business
entities ......................................................................... 9
Small business energy incentive................................ 17
New class of deductible gift recipients ....................... 33
Deductible gift recipients--specific listings ................ 45
Exemption for Global Infrastructure Hub Ltd .............. 49
Income tax amendments for updates to the accounting
standard for general insurance contracts................... 51
Non-arm's length expenses of superannuation funds 65
AFCA scheme ........................................................... 83
Statement of Compatibility with Human Rights .......... 91
Glossary
This Explanatory Memorandum uses the following abbreviations and acronyms.
Abbreviation Definition
AASB 17 Australian Accounting Standards Board
Accounting Standard 17 Insurance
Contracts
AASB 1023 Australian Accounting Standards Board
Accounting Standard 1023 General
Insurance Contracts
ABN Australian Business Number
ADF Approved deposit fund
AFCA Australian Financial Complaints
Authority
AFCA Rules Australian Financial Complaints
Authority Complaint Resolution Scheme
Rules
APRA Australian Prudential Regulation
Authority
Bill Treasury Laws Amendment (Support for
Small Business and Charities and Other
Measures) Bill 2023
Commissioner Commissioner of Taxation
Corporations Act Corporations Act 2001
DGR Deductible gift recipient
GI Hub Global Infrastructure Hub Ltd
GST Goods and services tax
Glossary
Abbreviation Definition
ICCPR International Covenant on Civil and
Political Rights
IT(TP) Act Income Tax (Transitional Provisions)
Act 1997
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
MetLife MetLife Insurance Limited v Australian
Financial Complaints Authority Limited
[2022] FCAFC 173
PST Pooled superannuation trust
SIS Act Superannuation Industry (Supervision)
Act 1993
SMSF Self managed superannuation fund as
defined in section 17A of the
Superannuation Industry (Supervision)
Act 1993
TAA Taxation Administration Act 1953
Treasury Laws Amendment (Support for Small Business and Charities and Other Measures)
Bill 2023
General outline and financial impact
Schedule 1 - $20,000 instant asset write-off for
small business entities
Outline
Schedule 1 to the Bill amends the IT(TP) Act to increase the instant asset write-off
threshold (the threshold below which amounts can be immediately deducted under the
simplified depreciation rules) from $1,000 to $20,000. This will allow small businesses
(with an aggregated annual turnover of less than $10 million) to immediately deduct
the full cost of eligible depreciating assets costing less than $20,000 that are first used
or installed ready for use between 1 July 2023 and 30 June 2024. This is a temporary
measure to support small businesses improve their cash flow and reduce compliance
costs.
Date of effect
Schedule 1 to the Bill commences on the first 1 January, 1 April, 1 July or 1 October
after the day the Bill receives Royal Assent. It applies to eligible depreciating assets
first used or first installed ready for use for a taxable purpose in the period from
1 July 2023 until 30 June 2024.
Proposal announced
Schedule 1 to the Bill implements the Small Business Support - $20,000 instant asset
write-off measure from the 2023-24 Budget.
Financial impact
Schedule 1 to the Bill is estimated to decrease receipts by $290.0 million over the five
years from 2022-23.
All figures in this table represent amounts in $m.
2022-23 2023-24 2024-25 2025-26 2026-27
- - -$670.0 -$60.0 $440.0
1
General outline and financial impact
Human rights implications
Schedule 1 to the Bill does not raise any human rights issues. See Statement of
Compatibility with Human Rights -- Chapter 9.
Compliance cost impact
Schedule 1 to the Bill is expected to have minimal regulatory impact.
Schedule 2 - Small business energy incentive
Outline
Schedule 2 to the Bill amends the IT(TP) Act to provide small and medium businesses
(with an aggregated annual turnover of less than $50 million) with access to a bonus
deduction equal to 20 per cent of the cost of eligible assets or improvements to existing
assets that support electrification or more efficient energy use.
This is a temporary measure to support small and medium businesses to electrify,
improve their energy efficiency and save on their energy bills. The bonus deduction
applies to the cost of eligible assets and improvements up to a maximum amount of
$100,000, with the maximum bonus deduction being $20,000.
Date of effect
Schedule 2 to the Bill commences on the first 1 January, 1 April, 1 July or 1 October
after the day the Bill receives Royal Assent. It applies to eligible assets first used or
first installed ready for use, and eligible improvement costs incurred, from 1 July 2023
until 30 June 2024.
Proposal announced
Schedule 2 to the Bill implements the Small Business Support - Small Business Energy
Incentive measure from the 2023-24 Budget.
Financial impact
Schedule 2 to the Bill is estimated to decrease receipts by $310.0 million over the five
years from 2022-23.
All figures in this table represent amounts in $m.
2022-23 2023-24 2024-25 2025-26 2026-27
- - -260.0 -50.0 -
2
Treasury Laws Amendment (Support for Small Business and Charities and Other Measures)
Bill 2023
Human rights implications
Schedule 2 to the Bill does not raise any human rights issues. See Statement of
Compatibility with Human Rights -- Chapter 9.
Compliance cost impact
The measure is expected to have minimal regulatory impact.
Schedule 3 - New class of deductible gift
recipients
Outline
Schedule 3 to the Bill facilitates certain community charities ('community charity
trusts' and 'community charity corporations') achieving DGR status in recognition of
their valuable contribution to their communities and Australian society. A new
pathway is created to enable these charities to apply for DGR endorsement by the
Commissioner. The charities are specified in two new items in Division 30 of the
ITAA 1997, are defined in Division 426 in Schedule 1 to the TAA, and will be
specified by name in a ministerial declaration made under that Division. That Division
will also set out certain requirements, modelled on those relating to ancillary funds,
and a ministerial obligation to make legislative guidelines.
Date of effect
Schedule 3 to the Bill will commence on the day after the Bill receives Royal Assent.
Proposal announced
Schedule 3 to the Bill, together with the legislative instruments empowered by
provisions contained in this Schedule, will implement the element of the Philanthropy
- updates to specifically listed deductible gift recipients measure dealing with
community charities from the 2022-23 Budget, as modified by the 2023-2024 Budget.
Financial impact
Schedule 3 to the Bill is estimated to decrease receipts by $5.4 million over the forward
estimates period. All figures in the following table represent amounts in $m.
2022-23 2023-24 2024-25 2025-26 2026-27
0.0 0.0 -1.3 -1.7 -2.4
3
General outline and financial impact
Human rights implications
Schedule 3 to the Bill does not raise any human rights issues. See the Statement of
Compatibility with Human Rights -- Chapter 9.
Compliance cost impact
Community charities needing to modify their governing documents or establish a new
entity to meet the new endorsement requirements will incur a minor one-off cost.
Schedule 4 - Deductible gift recipients--specific
listings
Outline
Schedule 4 to the Bill amends the ITAA 1997 to:
• list Justice Reform Initiative Limited and Transparency International
Australia as DGRs; and
• extend the DGR listings of Victorian Pride Centre Ltd and Australian
Sports Foundation Charitable Fund.
Date of effect
Schedule 4 to the Bill commences on the first 1 January, 1 April, 1 July or 1 October
after the day the Bill receives Royal Assent.
The amendments apply to gifts made:
• in the period on or after 1 July 2023 and on or before 30 June 2028 to
Justice Reform Initiative Limited; and
• on or after 1 July 2023 to Transparency International Australia.
The amendments extend the period of the listing of the Victorian Pride Centre Ltd so
that it applies to gifts made on or after 9 March 2023 and on or before 8 March 2028.
The amendments extend the period of listing of the Australian Sports Foundation
Charitable Fund so that it applies to gifts made on or after 1 July 2023.
Proposal announced
Schedule 4 to the Bill partially implements the Philanthropy - updates to the list of
specifically listed deductible gift recipients measure from the 2023-24 Budget.
4
Treasury Laws Amendment (Support for Small Business and Charities and Other Measures)
Bill 2023
Financial impact
The listing of the Justice Reform Initiative Limited, Transparency International
Australia, and extending the listing of the Victorian Pride Centre Ltd and the
Australian Sports Foundation Charitable Fund was part of the 2023-24 Budget and is
estimated to have a minor financial impact, reducing receipts by $4.6 million from
2022-23 to 2026-27.
All figures in this table represent amounts in $m.
2022-23 2023-24 2024-25 2025-26 2026-27
0.0 0.0 -1.7 -1.4 -1.5
Human rights implications
Schedule 4 to the Bill does not raise any human rights issue. See Statement of
Compatibility with Human Rights -- Chapter 9.
Compliance cost impact
The measure has a low compliance cost impact.
Schedule 5 - Exemption for Global Infrastructure
Hub Ltd
Outline
Schedule 5 to the Bill amends the ITAA 1997 to continue to provide the GI Hub with
an exemption from the liability to pay income tax on its ordinary and statutory income.
Date of effect
Schedule 5 to the Bill commences on the first 1 January, 1 April, 1 July or 1 October
after the day the Bill receives Royal Assent.
Financial impact
Nil.
Human rights implications
Schedule 5 to the Bill does not raise any human rights issues. See Statement of
Compatibility with Human Rights -- Chapter 9.
5
General outline and financial impact
Compliance cost impact
Nil.
Schedule 6 - Income tax amendments for
updates to accounting standards for general
insurance contracts
Outline
Schedule 6 to the Bill amends the income tax law with respect to general insurance to
provide broad alignment with the new accounting standard, AASB 17.
The amendments reduce the income tax compliance burden on the general insurance
industry caused by the misalignment between the income tax law and the adoption of
the new AASB 17.
Date of effect
Schedule 6 to the Bill commences on the first 1 January, 1 April, 1 July or 1 October
after the day the Bill receives Royal Assent. The amendments apply to income years
starting on or after 1 January 2023.
Proposal announced
Schedule 6 to the Bill fully implements the Amending the tax law to reduce compliance
costs for general insurers measure from the 2023-24 Budget.
Financial impact
Schedule 6 to the Bill is estimated to result in an unquantifiable impact on receipts over
the five years from the 2022-23 financial year. Financial impacts are expected to first
occur in 2023-24.
Human rights implications
Schedule 6 to the Bill does not raise any human rights issues. See Statement of
Compatibility with Human Rights -- Chapter 9.
Compliance cost impact
The measure reduces the compliance cost burden on general insurers.
6
Treasury Laws Amendment (Support for Small Business and Charities and Other Measures)
Bill 2023
Schedule 7 - Non-arm's length expenses of
superannuation funds
Outline
Schedule 7 to the Bill limits the amount of non-arm's length income that arises relating
to a general non-arm's length expense, to address stakeholder concerns that all
superannuation fund income could be taxed at a higher rate due to a general non-arm's
length expense which provides an outcome that is disproportionate to any advantage
gained. It also narrows the application of the non-arm's length expense provisions so
that they no longer apply to expenses incurred before 1 July 2018 or to large APRA-
regulated funds, exempt public sector superannuation funds, PSTs and ADFs. This
addresses stakeholder concerns around the application of the non-arm's length
provisions to expenses incurred before the provisions were enacted, and their
application to large superannuation entities that represent a lower risk of gaining an
advantage through non-arm's length expenses.
Date of effect
Schedule 7 to the Bill commences on the first 1 January, 1 April, 1 July or 1 October
after the day the Bill receives Royal Assent. The amendments apply in relation to
income derived in the 2018-19 income year and following income years. This Schedule
provides that the non-arm's length expense rules no longer apply to expenses incurred
before 1 July 2018 to ensure that expenses incurred before the original non-arm's
length expenses provisions were enacted cannot result in non-arm's length income.
Proposal announced
Schedule 7 to the Bill partially implements the Amending measures of the former
Government measure from the 2023-24 Budget.
Financial impact
Schedule 7 to the Bill was estimated to have an unquantifiable impact on receipts over
the 4 years from 2023-24.
Human rights implications
Schedule 7 to the Bill does not raise any human rights issues. See Statement of
Compatibility with Human Rights -- Chapter 9.
7
General outline and financial impact
Compliance cost impact
The amendments are likely to reduce compliance costs on an ongoing basis for
superannuation entities and related parties providing services to them, such as
administrative companies, wholly owned investment managers, and accountants.
Schedule 8 - AFCA scheme
Outline
Schedule 8 to the Bill amends the Corporations Act to reinstate AFCA's jurisdiction to
hear complaints relating to superannuation, whether or not they meet the definition of
superannuation complaint in the Corporations Act. This reinstates the original policy
intent, following the MetLife decision.
Date of effect
The amendments in Schedule 8 to the Bill (other than the contingent amendments)
commence on the day after the Bill receives Royal Assent. They apply to complaints
made to AFCA before, on or after the commencement date.
Proposal announced
Schedule 8 to the Bill implements the announcement Ensuring external dispute
resolution for consumers of financial services made by the Assistant Treasurer and
Minister for Financial Services on 23 May 2023.
Financial impact
Nil.
Human rights implications
Schedule 8 to the Bill does not raise any human rights issues. See Statement of
Compatibility with Human Rights -- Chapter 9.
Compliance cost impact
There are nil compliance costs associated with this measure.
8
$20,000 instant asset write-off for small
business entities
Table of Contents:
Outline of chapter .................................................................................. 9
Context of amendments ....................................................................... 10
Small business entities .................................................................. 10
$20,000 instant asset write-off for small business entities............. 10
Summary of new law............................................................................ 10
Comparison of key features of new law and current law ...................... 11
Detailed explanation of new law .......................................................... 13
Deductions for depreciating assets ............................................... 13
Deductions for amounts included in the second element of the cost
of depreciating assets ................................................................... 13
Deductions for low pool values ...................................................... 15
Deferral of five year 'lock-out' rule ................................................. 15
Commencement, application, and transitional provisions .................... 16
Outline of chapter
1.1 Schedule 1 to the Bill amends the IT(TP) Act to increase the instant asset
write-off threshold (the threshold below which amounts can be immediately
deducted under the simplified depreciation rules) from $1,000 to $20,000. This
increased threshold will allow small businesses (with an aggregated annual
turnover of less than $10 million) to immediately deduct the full cost of
eligible depreciating assets costing less than $20,000 that are first used or
installed ready for use for a taxable purpose between 1 July 2023 and
30 June 2024. This is a temporary measure to help small businesses improve
their cash flow and reduce compliance costs.
9
$20,000 instant asset write-off for small business entities
Context of amendments
Small business entities
1.2 Division 328 of the ITAA 1997 provides a range of income tax concessions for
small business entities, including access to the simplified depreciation rules
(see Subdivision 328-D). Under section 328-110, an entity is a small business
entity for an income year if the entity carries on a business in that year and
either:
• the entity carried on a business in the prior income year and its
aggregated turnover was less than a threshold amount; or
• the aggregated turnover of the entity in the current income year is
likely to be less than that threshold.
1.3 The threshold for 2016-17 and later income years is $10 million.
$20,000 instant asset write-off for small business
entities
1.4 The instant asset write-off supports small businesses by allowing eligible
depreciating assets each costing less than a threshold amount to be
immediately deducted. Immediate deductibility reduces the compliance costs
associated with business investment as the depreciation of eligible assets does
not need to be tracked over time. It also improves cash flow by bringing
forward deductions from future years. Small businesses tend to be more
vulnerable to cash flow problems than larger businesses as their profitability
tends to be more volatile.
1.5 The ongoing legislated threshold below which eligible amounts can be
immediately deducted is $1,000 (see section 328-180 of the ITAA 1997).
However, the threshold has been temporarily increased over recent years.
1.6 The Government announced in the 2023-24 Budget that it will support small
businesses by temporarily increasing the instant asset write-off threshold to
$20,000, from 1 July 2023 until 30 June 2024.
Summary of new law
1.7 Schedule 1 to the Bill amends the IT(TP) Act to temporarily increase the
instant asset write-off threshold from $1,000 to $20,000. The increased
threshold applies to the cost of eligible depreciating assets, eligible amounts
10
Treasury Laws Amendment (Support for Small Business and Charities and Other Measures)
Bill 2023
included in the second element of the cost of a depreciating asset, and general
small business pools, from 1 July 2023 to 30 June 2024.
1.8 Schedule 1 to the Bill also extends the deferral of the 'lock-out' rule for small
businesses that previously opted out of the simplified depreciation rules to 30
June 2024.
Comparison of key features of new law and
current law
Table 1.1 Comparison of new law and current law
New law Current law
Deduction for depreciating assets
Small business entities can claim an Small business entities can claim an
immediate deduction for eligible immediate deduction for eligible depreciating
depreciating assets that cost less than assets that cost less than $1,000.
$20,000, provided the asset is first used or
installed ready for use for a taxable purpose
on or after 1 July 2023 and on or before
30 June 2024.
Depreciating assets that are first used or
installed ready for use for a taxable purpose
on or after 1 July 2024 will be subject to
the $1,000 threshold.
Deduction for amounts included in the second element of the cost of depreciating assets
Small business entities can claim a Small business entities can claim a deduction
deduction for an eligible amount included for an eligible amount included in the second
in the second element of the cost of element of the cost of depreciating assets
depreciating assets that were first used or that were first used or installed ready for use
installed ready for use for a taxable purpose for a taxable purpose in a previous income
in a previous income year. The total year. The total amount of the cost must be
amount of the cost must be less than less than $1,000.
$20,000 and the cost must be incurred on or
after 1 July 2023 and on or before
30 June 2024.
Costs that are incurred on or after
1 July 2024 will be subject to the $1,000
threshold.
11
$20,000 instant asset write-off for small business entities
New law Current law
Deduction for low pool values
For an income year that ends on or after Assets and costs allocated to a general small
1 July 2023 and on or before 30 June 2024, business pool are deducted at a rate of
assets that cost $20,000 or more, and costs 15 per cent in the year they are allocated,
of $20,000 or more relating to depreciating and a rate of 30 per cent in subsequent
assets are allocated to a small business income years.
entity's general small business pool and If the balance of a small business entity's
deducted at specified rates for the depletion general small business pool is less than
of the pool. $1,000 at the end of an income year that
Assets and costs allocated to a general ends on or after 1 July 2023, the small
small business pool are deducted at a rate business entity can claim a deduction for the
of 15 per cent in the year they are allocated, entire balance of the pool.
and a rate of 30 per cent in subsequent
income years.
If the balance of a small business entity's
general small business pool is less than
$20,000 at the end of an income year that
ends on or after 1 July 2023 and on or
before 30 June 2024, the small business
entity can claim a deduction for the entire
balance of the pool.
If the balance of a small business entity's
general small business pool is less than
$1,000 at the end of an income year that
ends on or after 1 July 2024, the small
business entity can claim a deduction for
the entire balance of the pool.
Deferral of five year 'lock-out' rule
The lock-out rule that prevents small The lock-out rule applies. A small business
business entities from re-entering the entity that elects to apply the simplified
simplified depreciation rules for five years depreciation rules in an income year, and
if they opt out, will be suspended including then does not choose to apply the rules for a
for income years that end on or before later income year in which the entity
30 June 2024. satisfies the conditions to make this choice
For the purposes of applying the lock-out (that is, the entity 'opted out'), is not able to
rule to an income year ending on or after apply the simplified depreciation rules for a
1 July 2024, only the choice made in the period of five income years. This restriction
last income year ending before 1 July 2024 commences from the first of the later years
is relevant. for which the entity could have made the
choice to apply the provisions.
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Treasury Laws Amendment (Support for Small Business and Charities and Other Measures)
Bill 2023
Detailed explanation of new law
1.9 The threshold that applies to the cost of depreciating assets, amounts included
in the second element of a depreciating asset's cost, and the low pool value
deduction under the simplified depreciation rules is temporarily increased from
$1,000 to $20,000 from 1 July 2023 until 30 June 2024.
Deductions for depreciating assets
1.10 A small business entity that has elected to use the simplified depreciation rules
in Subdivision 328-D of the ITAA 1997 for an income year may immediately
deduct or 'write off' the taxable purpose proportion of the cost of an asset
acquired for less than a threshold amount.
1.11 The 'taxable purpose proportion' of a depreciating asset is defined in
subsection 328-205(3) of the ITAA 1997 and in general terms represents the
proportion of an asset's use in an income year that is for the purposes of
producing assessable income. The deduction for assets that cost less than the
threshold is claimed in the income year in which the asset is first used or
installed ready for use for a taxable purpose.
The ongoing legislated threshold is $1,000. The amendments increase the
threshold to $20,000 from 1 July 2023 until 30 June 2024. This increased
threshold applies to depreciating assets first used or installed ready for use for
a taxable purpose on or after 1 July 2023 and on or before 30 June 2024.
[Schedule 1, item 4, paragraph 328-180(4)(d) of the IT(TP) Act]
A consequential change is made to the heading to section 328-180 of the
IT(TP) Act to reflect the increased threshold end date of 30 June 2024.
[Schedule 1, item 1, the heading to section 328-180 of the IT(TP) Act]
A minor change is made to the heading to subsection 328-180(4) of the IT(TP)
Act to clarify that the subsection sets out temporary increases to the ongoing
legislated threshold.
[Schedule 1, item 3, the heading to subsection 328-180(4) IT(TP) Act]
Deductions for amounts included in the second
element of the cost of depreciating assets
1.12 A small business entity can also immediately deduct an amount included in the
second element of a depreciating asset's cost (for example, an amount spent on
improving or transporting a depreciating asset), provided the amount is:
• less than the threshold;
13
$20,000 instant asset write-off for small business entities
• the first such amount to be deducted in respect of the asset; and
• the asset was written off (its cost was fully deducted) in a previous
income year.
The ongoing legislated threshold is $1,000. The amendments increase the
threshold to $20,000 from 1 July 2023 until 30 June 2024. That means an
eligible amount included in the second element of cost must be less than
$20,000, and the amount must be incurred on or after 1 July 2023 and on or
before 30 June 2024.
[Schedule 1, item 5, paragraph 328-180(5)(e) of the IT(TP) Act]
Example 1.1
Thomas, a bricklayer, is a small business entity and has elected to
use the simplified depreciation rules.
Assets below the threshold
On 1 September 2023, Thomas purchases a tablet for $4,000 to be
used 100 per cent for business purposes. Thomas can use the
instant asset write-off to immediately deduct the full cost of the
tablet as it is below the asset threshold of $20,000.
Assets exceeding the threshold
On 1 December 2023, Thomas purchases a ute for $50,000. He
estimates he will use the ute 50 per cent of the time for his
business, and 50 per cent for private purposes.
Thomas cannot use the instant asset write-off as the total cost of the
ute ($50,000) exceeds the asset threshold of $20,000.
Instead, the $25,000 taxable purpose proportion of the cost of the
ute ($50,000 multiplied by 50 per cent) is allocated to Thomas'
general small business pool. Thomas can claim a deduction of
$3,750 (15 per cent multiplied by $25,000) in his 2023-24 income
tax return. Deductions for later income years will be calculated as
30 per cent of the opening pool balance of Thomas' general small
business pool.
Amounts included in the second element of cost of an asset
Thomas used the instant asset write-off to immediately deduct the
cost of a cement mixer that is used 100 per cent for business
purposes in a prior income year. On 1 March 2024, Thomas incurs
a cost of $400 to improve the asset. This is the first amount
included in the second element of the cost of the asset.
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Treasury Laws Amendment (Support for Small Business and Charities and Other Measures)
Bill 2023
Thomas can claim an immediate deduction for the full amount
included in the second element of the asset's cost ($400
improvement) under the instant asset write-off.
However, if Thomas subsequently includes another amount in the
second element of the cost of the asset, that expenditure will
instead be allocated to Thomas' general small business pool.
Deductions for low pool values
1.13 A small business entity can also deduct the balance of its general small
business pool at the end of an income year if the balance of the pool at the end
of the year is less than a threshold amount. For this purpose, the balance of the
pool is determined prior to calculating any deductions in respect of the pool for
the income year.
The ongoing legislated threshold is $1,000. The amendments increase the
threshold to $20,000 from 1 July 2023 until 30 June 2024. That means if the
balance of a small business entity's general small business pool is less than
$20,000 at the end of an income year that ends on or after 1 July 2023 and on
or before 30 June 2024, the entity can claim a deduction for the entire balance
of the pool in that income year.
[Schedule 1, item 6, paragraph 328-180(6)(e) of the IT(TP) Act]
Deferral of five year 'lock-out' rule
1.14 A small business entity that elects to apply the simplified depreciation rules in
an income year, and then does not choose to apply the rules for a later income
year in which the entity satisfies the conditions to make this choice (that is, the
entity 'opted out'), is not able to apply the simplified depreciation rules for a
period of five income years. This restriction commences from the first of the
later years for which the entity could have made the choice to apply the rules.
This rule is commonly referred to as the 'lock-out' rule.
1.15 The operation of the lock-out rule has been modified over recent years so that
small business entities did not need to apply the lock-out rule to income years
if any day in the year occurs on or after 12 May 2015 and on or before
30 June 2023 (referred to as the 'increased access years').
1.16 The amendments suspend the operation of the lock-out rule for a further
12 months to 30 June 2024. As a result of this suspension, small businesses can
choose to apply the small business simplified depreciation rules and take
advantage of the $20,000 threshold while it applies without being locked out.
[Schedule 1, item 2, the definition of 'increased access year' in
subsection 328-180(1) of the IT(TP) Act]
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$20,000 instant asset write-off for small business entities
Commencement, application, and transitional
provisions
1.17 The amendments commence on the first 1 January, 1 April, 1 July or 1 October
to occur after the day the Bill receives the Royal Assent.
1.18 Whilst these amendments commence prospectively, they apply retrospectively
from 1 July 2023. However, they are wholly beneficial in operation and allow
greater flexibility for entities to access the increased threshold
16
Small business energy incentive
Table of Contents:
Outline of chapter ................................................................................ 17
Context of amendments ....................................................................... 17
Summary of new law............................................................................ 18
Detailed explanation of new law .......................................................... 18
Entities eligible for the bonus deduction ........................................ 18
Costs eligible for the bonus deduction........................................... 19
Calculating and claiming the bonus deduction .............................. 25
Commencement, application, and transitional provisions .................... 31
Outline of chapter
2.1 Schedule 2 to the Bill amends the IT(TP) Act to provide small and medium
businesses (with an aggregated annual turnover of less than $50 million) with
access to a bonus deduction equal to 20 per cent of the cost of eligible assets or
improvements to existing assets that support electrification or more efficient
energy use.
2.2 This is a temporary measure to support small and medium businesses to
electrify, improve their energy efficiency and save on their energy bills. The
bonus deduction applies to the cost of eligible assets and improvements up to a
maximum amount of $100,000, with the maximum bonus deduction being
$20,000.
Context of amendments
2.3 This measure supports small and medium businesses to save on energy bills
through incentivising the electrification of assets and improvements to energy
efficiency.
2.4 Small and medium businesses will have access to a 20 per cent bonus
deduction for the cost of eligible depreciating assets and improvements to
17
Small business energy incentive
depreciating assets that support electrification or more efficient energy use, up
to a maximum bonus deduction of $20,000.
2.5 This new tax incentive, which applies from 1 July 2023 until 30 June 2024,
will help ensure small and medium businesses share in the benefits and
opportunities of the energy transition that is now underway.
Summary of new law
2.6 Schedule 2 to the Bill amends the IT(TP) Act to provide small and medium
businesses (with an aggregated annual turnover of less than $50 million) with
access to a bonus deduction equal to 20 per cent of the expenditure on eligible
assets or improvements to existing assets that support electrification or more
efficient energy use.
2.7 To be eligible for the bonus deduction:
• the expenditure must be eligible for a deduction under another
provision of the tax law; and
• the asset must be first used or installed ready for use, or the
improvement cost incurred, between 1 July 2023 and 30 June 2024.
2.8 Certain kinds of assets and improvements are not eligible for the bonus
deduction, including where the asset or improvement uses a fossil fuel.
2.9 Small and medium businesses may claim up to a maximum bonus deduction of
$20,000.
Detailed explanation of new law
Entities eligible for the bonus deduction
2.10 The bonus deduction is available to entities that meet the definition of a small
business entity under section 328-110 of the ITAA 1997. Section 328-110
defines a small business entity as an entity that carries on a business with an
aggregated annual turnover of less than $10 million.
[Schedule 2, item 1, paragraphs 328-470(1)(e) and (3)(d) of the IT(TP) Act]
2.11 The bonus deduction is also available to entities that would meet the definition
of a small business entity under section 328-110 of the ITAA 1997 if each
reference in Subdivision 328-C of the ITAA 1997 to $10 million were instead
a reference to $50 million. This allows medium businesses to access the bonus
deduction.
[Schedule 2, item 1, paragraphs 328-470(1)(e) and (3)(d) and
subsection 328-470(4) of the IT(TP) Act]
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2.12 Small and medium businesses are eligible for the bonus deduction if they meet
these requirements in the income year in which the asset is first used or
installed ready for use for a taxable purpose, or the improvement cost is
incurred.
[Schedule 2, item 1, paragraphs 328-470(1)(e) and (3)(d) of the IT(TP) Act]
Costs eligible for the bonus deduction
2.13 To be eligible for the bonus deduction, a cost must be for an eligible
depreciating asset first used or installed ready for use, or an eligible
improvement to a depreciating asset for which the cost is incurred, between
1 July 2023 and 30 June 2024. The cost must be able to be deducted under
another provision of the tax law.
Bonus period
2.14 An entity can only claim the bonus deduction for the cost of depreciating assets
first used or installed for any purpose, and a taxable purpose, between
1 July 2023 and 30 June 2024 ('the bonus period').
[Schedule 2, item 1, paragraph 328-470(1)(c) subparagraph 328-470(1)(d)(ii)
of the IT(TP) Act]
2.15 An entity can only claim the bonus deduction for the cost of improvements
incurred during the bonus period.
[Schedule 2, item 1, subparagraph 328-470(3)(c)(ii) of the IT(TP) Act]
Depreciating assets
2.16 A depreciating asset is eligible for the bonus deduction if:
• it uses electricity and:
- there is a new reasonably comparable asset that uses a fossil
fuel available in the market; or
- is more energy efficient than the asset it is replacing; or
- if it is not a replacement, it is more energy efficient than a new
reasonably comparable asset available in the market; or
• it is an energy storage, time-shifting or monitoring asset, or an asset
that improves the energy efficiency of another asset.
[Schedule 2, item 1, paragraph 328-470(1)(f) and subsection 328-470(2) of
the IT(TP) Act]
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Small business energy incentive
2.17 An asset is eligible for the bonus deduction if it meets one or more of the
above requirements.
[Schedule 2, item 1, paragraph 328-470(2)(a) of the IT(TP) Act]
Assets that use electricity instead of a fossil fuel
2.18 An asset is eligible for the bonus deduction if it uses electricity, and there is a
new reasonably comparable asset that is available in the market and uses a
fossil fuel (other than merely incidentally).
[Schedule 2, item 1, subparagraph 328-470(2)(a)(i) of the IT(TP) Act]
2.19 For example, if a business installs an electric reverse cycle air conditioner in
place of a gas heater, the business could claim a bonus deduction for the cost
of that air conditioner as it uses electricity, and a fossil fuel alternative is
available in the market.
2.20 The asset must be reasonably comparable to a new asset that is available in the
market at the time it is first used or installed ready for use for a taxable purpose
and that uses a fossil fuel. An asset will not qualify for the bonus deduction if
the only reasonably comparable asset that uses a fossil fuel is a second-hand
asset.
2.21 Whether an asset is reasonably comparable and available in the market is
intended to take a broad meaning. For example, a reasonably comparable asset
could include an asset that has a similar purpose or function.
Assets that replace a less energy efficient asset
2.22 An asset that uses electricity may be eligible for the bonus deduction if it is
replacing another depreciating asset and is more energy efficient than the asset
it is replacing.
[Schedule 2, item 1, subparagraph 328-470(2)(a)(ii) of the IT(TP) Act]
2.23 For example, if a business replaces an existing commercial coffee machine, the
business could claim the bonus deduction if the new machine is more energy
efficient than the machine it is replacing. In this case, the business could see if
the new machine is more energy efficient by checking the electricity
consumption information provided by its manufacturer, and comparing that to
the same information about the existing machine or to the estimated electricity
consumption of the existing machine.
Assets that are more energy efficient than another available asset
2.24 If the asset is not replacing another asset, then it may be eligible if it uses
electricity and is more energy efficient than a new reasonably comparable asset
available in the market at the time it is first used or installed ready for use for a
taxable purpose. The comparable asset cannot be a second-hand asset.
[Schedule 2, item 1, subparagraph 328-470(2)(a)(iii) of the IT(TP) Act]
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2.25 For example, if a business installs a refrigerator (when it previously did not
have one) and uses it for a taxable purpose, the business could claim the bonus
deduction if the purchased refrigerator is more energy efficient than a new
reasonably comparable refrigerator available in the market. In this case, the
business could use the Energy Rating Label to compare energy efficiency.
Alternatively, the business could, for example, compare the electricity
consumption information provided by the manufacturer of each asset.
Assets that facilitate energy efficiency, storage, time-shifting or
monitoring
2.26 An asset that allows another asset to be more energy efficient may be eligible
for the bonus deduction, provided the asset being made more energy efficient
is not an excluded asset.
[Schedule 2, item 1, subparagraph 328-470(2)(b)(i) of the IT(TP) Act]
2.27 An asset may be eligible for the bonus deduction if it enables the storage of
electricity, or the storage of energy that is generated from a renewable source.
For example, a battery that stores electricity may be eligible for the bonus
deduction. Similarly, a thermal storage system that can store heat or cold from
a renewable source, such as a solar thermal hot water system may be eligible
for the bonus deduction, provided it meets the other eligibility requirements.
[Schedule 2, item 1, subparagraph 328-470(2)(b)(ii) of the IT(TP) Act]
2.28 An asset can qualify for the bonus deduction if it allows energy to be used at a
different time. For example, a time-shifting device that allows electric
appliances to be operated at off-peak hours may be eligible for the bonus
deduction.
[Schedule 2, item 1, subparagraph 328-470(2)(b)(iii) of the IT(TP) Act]
2.29 An asset can also qualify for the bonus deduction if it enables the energy use of
another asset to be monitored. For example, a data logging device attached to a
regular utility meter that enables a business to better measure their energy
consumption may be eligible for the bonus deduction.
[Schedule 2, item 1, subparagraph 328-470(2)(b)(iv) of the IT(TP) Act]
Improvements
2.30 In addition to newly-acquired depreciating assets, improvements to existing
depreciating assets may also be eligible for the bonus deduction.
2.31 An improvement to a depreciating asset is eligible if it:
• enables the asset to only use electricity, or energy that is generated
from a renewable source, instead of a fossil fuel;
• enables the asset to be more energy efficient, provided that asset only
uses electricity, or energy generated from a renewable source; or
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Small business energy incentive
• facilitates the storage, time-shifting or usage monitoring of electricity,
or energy generated from a renewable source.
[Schedule 2, item 1, paragraph 328-470(3)(e) of the IT(TP) Act]
Improvements enabling electricity use
2.32 An improvement that allows an asset to only use electricity, or to use energy
generated from a renewable source, may be eligible for the bonus deduction if,
prior to the improvement, the asset could use a fossil fuel (other than merely
incidentally).
[Schedule 2, item 1, subparagraph 328-470(3)(e)(i) of the IT(TP) Act]
2.33 For example, an electric motor may be eligible for the bonus deduction if it
replaces a diesel engine in an asset, allowing that asset to only use electricity.
Improvements to energy efficiency
2.34 An improvement that allows an asset to be more energy efficient may be
eligible for the bonus deduction, provided the asset being improved uses
electricity, or energy generated from a renewable source.
[Schedule 2, item 1, subparagraph 328-470(3)(e)(ii) of the IT(TP) Act]
2.35 For example, a variable speed drive fitted to an existing electric motor may be
eligible for the bonus deduction.
Improvements facilitating energy storage, time-shifting or monitoring
2.36 An improvement that allows for energy use by an asset to be stored, reduced at
specific times, confined to specific times, or monitored may be eligible for the
bonus deduction, provided the asset being improved uses electricity, or energy
generated from a renewable source.
[Schedule 2, item 1, subparagraphs 328-470(3)(e)(iii)-(v) of the IT(TP) Act]
2.37 For example, a switchboard-mounted device that enables the shifting of loads
from peak times to off-peak times may be eligible for the bonus deduction.
Cost used to calculate the bonus deduction must be able to
be deducted under another taxation provision
2.38 To claim the bonus deduction for an amount of expenditure, the entity must be
able to deduct the eligible expenditure under another provision of the taxation
law, regardless of which income year or income years in which it claims the
deduction.
[Schedule 2, item 1, paragraphs 328-470(1)(b) and (3)(b) of the IT(TP) Act]
2.39 Generally, the cost of an asset can only be deducted to the extent that that asset
is used for a taxable purpose. For example, under Division 40 of the
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ITAA 1997, an entity can deduct an amount equal to the decline in value of
a depreciating asset and this amount must be reduced to the extent that the
decline in value is attributable to the asset being used or installed ready for use,
for a purpose other than a taxable purpose.
2.40 Therefore, if expenditure is for multiple purposes (e.g. a mix of private and
business use), the bonus deduction will only apply to the proportion of the
expenditure that is for a taxable purpose.
The deductions operate as bonus deductions under the ITAA 1997
2.41 The amendments provide that the bonus deduction provisions have effect as if
they were provisions of Division 25 of the ITAA 1997. This does not affect the
requirement that the eligible expenditure must be able to be deducted under
another taxation provision.
[Schedule 2, item 1, subsection 328-465(2) of the IT(TP) Act]
2.42 Division 25 sets out amounts you can deduct under the ITAA 1997.
Deductions set out in Division 25 are specific deductions under section 8-5 of
the ITAA 1997. The bonus deduction introduced by these amendments will
therefore be considered a specific deduction, ensuring it can be taken into
account as a deduction when computing taxable income.
2.43 The amendments provide that section 8-10 of the ITAA 1997 (about no double
deductions) does not prevent a taxpayer from claiming the bonus deduction.
[Schedule 2, item 1, subsection 328-465(3) of the IT(TP) Act]
2.44 Section 8-10 specifies that when multiple provisions of the ITAA 1997 allow
for deductions in respect of the same amount, the taxpayer can deduct only
under the provision that is most appropriate. The deduction introduced by these
amendments is a bonus deduction, where the same expenditure provides
eligibility for the original deduction as well as the bonus deduction. The
amendments clarify that section 8-10 of the ITAA 1997 does not apply to the
bonus deduction to ensure that the bonus deduction can be claimed in addition
to the ordinary deduction.
2.45 The amendments also provide that section 40-215 of the ITAA 1997 does not
prevent a taxpayer from claiming the bonus deduction.
[Schedule 2, item 1, subsection 328-465(3) of the IT(TP) Act]
2.46 Section 40-215 provides that each element of the cost of a depreciating asset is
reduced by any portion of that element of cost that is deducted, can be
deducted, or will be taken into account in working out the amount that can be
deducted, other than under Division 40, 41 or 328. The deduction introduced
by these amendments is a bonus deduction, where the same expenditure
provides eligibility for the original deduction as well as the bonus deduction.
The amendments clarify that using the cost of an asset to calculate the bonus
deduction amount does not reduce the amount of that cost that may be
deducted under Division 40.
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Small business energy incentive
2.47 The amendments also provide that section 355-715 of the ITAA 1997 does not
prevent a taxpayer from claiming the bonus deduction.
[Schedule 2, item 1, subsection 328-465(3) of the IT(TP) Act]
2.48 Section 355-715 specifies that where a taxpayer is entitled to a notional
deduction under the Research and Development Tax Incentive regime and
another deduction under the tax law, then the taxpayer is only entitled to the
notional Research and Development deduction, and not the other deduction.
The notional Research and Development deduction is used to calculate a tax
offset.
2.49 The deduction introduced by these amendments is a bonus deduction, where
the same expenditure provides eligibility for the original deduction as well as
the bonus deduction. Therefore, if expenditure is eligible for both the Research
and Development Tax Incentive and the bonus deduction, the taxpayer may
claim both the bonus deduction and the tax offset. The bonus deduction will
not affect the amount of the tax offset.
Exclusions
2.50 Some types of assets and expenditure are ineligible for the bonus deduction
even where they would otherwise meet the requirements. These are:
• assets, and expenditure on assets, that can use a fossil fuel;
• assets, and expenditure on assets, which have the sole or predominant
purpose of generating electricity (such as solar photovoltaic panels);
• capital works;
• motor vehicles (including hybrid and electric vehicles) and expenditure
on motor vehicles;
• assets and expenditure on an asset where expenditure on the asset is
allocated to a software development pool; and
• financing costs, including interest, payments in the nature of interest
and expenses of borrowing.
[Schedule 2, item 1, paragraphs 328-470(1)(g) and (3)(f),
subsection 328-470(6) of the IT(TP) Act]
2.51 Other incentives are available for electric and hybrid vehicles and renewable
electricity generation and these assets are not eligible for the bonus deduction.
Assets that can use a fossil fuel
2.52 If an asset can use a fossil fuel, then that asset, and expenditure on that asset, is
not eligible for the bonus deduction, unless that use is merely incidental.
[Schedule 2, item 1, paragraphs 328-470(6)(a) and (b) of the IT(TP) Act]
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2.53 Fossil fuels include natural gas, oil and coal. The allowance for merely
incidental usage means that, for example, an asset is not excluded from the
bonus deduction merely because it uses an oil-based lubricant.
2.54 The use of fossil fuels is not 'merely incidental' when that use can partially or
entirely replace electricity, or energy that is generated from a renewable
source, in powering the asset. For example, if a solar hot water system has a
gas booster that could be used to heat water when there is no solar heat energy
available, then that hot water system is not eligible for the bonus deduction.
2.55 The exception to this exclusion is an improvement that allows an asset to only
use electricity, or energy that is generated from a renewable source. For
example, an improvement to the gas and solar hot water system mentioned
above would be eligible for the bonus deduction if that improvement allowed
the system to use an electric booster instead of a gas booster to heat additional
water.
[Schedule 2, item 1, subparagraph 328-470(3)(e)(i) and
paragraph 328-470(6)(b) of the IT(TP) Act]
Balancing adjustment events
2.56 An entity cannot claim the bonus deduction for the cost of a depreciating asset,
or an improvement to a depreciating asset, if any balancing adjustment event
occurs to the asset while the entity holds it during the relevant time period,
unless the balancing adjustment event is an involuntary disposal. This means,
for example, that an entity cannot claim the bonus deduction if it sells the asset
within the bonus period.
[Schedule 2, item 1, paragraphs 328-470(1)(h) and (3)(g) of the IT(TP) Act]
Calculating and claiming the bonus deduction
20 per cent of eligible cost
2.57 The amount of the bonus deduction is calculated as 20 per cent of the total
eligible cost, up to a maximum bonus deduction of $20,000 across the bonus
period.
[Schedule 2, item 1, subsection 328-465(1) of the IT(TP) Act]
2.58 This applies regardless of how the entity calculates any other deductions in
respect of the expenditure.
2.59 The bonus deduction is a one-off bonus deduction that does not affect any
other deductions in the taxation law.
2.60 The requirement that expenditure is deductible under a taxation provision
means that there are certain exclusions to eligible expenditure. For example, if
a business is registered for GST, and the expenditure is not for a GST-free
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Small business energy incentive
supply, the bonus deduction is calculated on the amount of expenditure less the
GST amount claimable as an input tax credit. The GST component of
expenditure that is claimed as an input tax credit is not deductible in
accordance with section 27-5 of the ITAA 1997.
2.61 When calculating the bonus deduction for the cost of an asset or improvement
to an asset, it is assumed that the entity will continue to hold the asset
throughout its effective life; and:
• if the bonus deduction is for the cost of an asset, the entity will use it
for a taxable purpose to the same extent that it does in the income year
it first uses or installs the asset for a taxable purpose; or
• if the bonus deduction is for expenditure on an improvement, the entity
will use it for a taxable purpose to the same extent that it does in the
income year in which the expenditure is incurred.
[Schedule 2, item 1, subsection 328-470(5) of the IT(TP) Act]
Eligible cost for assets
2.62 For assets first used or installed ready for use during the bonus period,
expenditure that is included in the first element of cost may be eligible for the
bonus deduction.
[Schedule 2, paragraph 328-470(1)(a) of the IT(TP) Act]
2.63 Generally, the first element of cost is the cost associated with beginning to
hold an asset. That is, the cost of purchasing and installing the asset.
Timing of first use or installation
2.64 The first element of cost of an asset may be eligible for the bonus deduction if
that asset is first used or installed ready for use for any purpose and for a
taxable purpose during the bonus period.
[Schedule 2, item 1, paragraphs 328-470(1)(c) and (d) of the IT(TP) Act]
2.65 This means that, if an entity first uses or installs ready for use an asset for any
purpose before 1 July 2023, the entity cannot claim a bonus deduction for the
first element of cost of the asset. This is the case even if the entity does not use
the asset for a taxable purpose until on or after 1 July 2023.
2.66 Due to the general deduction rules for depreciating assets under Division 40 of
the ITAA 1997, an entity can only claim a deduction for the cost of a
depreciating asset to the extent that it uses the asset for a taxable purpose. An
entity can only claim a bonus deduction for expenditure that would otherwise
be able to be deducted, so the bonus deduction can only be claimed on the first
element of cost to the extent the asset is used for a taxable purpose.
[Schedule 2, item 1, paragraph 328-470(1)(b) of the IT(TP) Act]
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Eligible cost for improvements
2.67 Expenditure on the part of the second element of cost of an asset worked out
under paragraph 40-190(2)(a) of the ITAA 1997 may be eligible for the bonus
deduction. The second element of cost under paragraph 40-190(2)(a) of the
ITAA 1997 is the amount paid or taken to have been paid to bring an asset to
its present condition and location since the entity started to hold the asset.
[Schedule 2, item 1, paragraph 328-470(3)(a) of the IT(TP) Act]
2.68 The second element of cost of an asset can only be claimed if it allows the
asset to be more energy efficient, able to store energy, monitor energy use, use
energy at a different time, or enable the asset to run solely on electricity, or
energy that is generated from a renewable source. This therefore captures the
cost of eligible improvements to an asset.
[Schedule 2, item 1, paragraph 328-470(3)(e) of the IT(TP) Act]
2.69 The expenditure on the improvement must be incurred during the bonus
period.
[Schedule 2, item 1, subparagraph 328-470(3)(c)(ii) of the IT(TP) Act]
2.70 The cost of an improvement to an asset can be claimed for assets first used or
installed ready for use before or during the bonus period. This means that if an
entity first uses or installs an asset during the bonus period, and also improves
the asset during the bonus period, it can claim the bonus deduction for the first
element of cost of the asset and for the cost of the improvement.
Example 2.1 Claiming the bonus deduction for an entity that makes an
eligible improvement (second element of cost)
Note that in all the worked examples, it is assumed that each
business is registered for GST and costs are net of GST input tax
credit entitlements.
A Co Pty Ltd (A Co) is a small business entity with a normal
accounting period (1 July to 30 June). On 15 July 2023, A Co
purchases and installs ten variable speed drives that it fits to
existing electric motors that it owns and uses in its business for a
cost of $50,000. The variable speed drives enable each motor to run
more efficiently.
The expenditure on each variable speed drive is an eligible
improvement to a depreciating asset. A Co can therefore claim a
bonus deduction of $10,000 (20 per cent of $50,000).
Depreciation deductions that A Co can claim for the amount
included in the second element of the cost of the existing electric
motors ($50,000) are not altered by the bonus deduction.
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Small business energy incentive
Depreciation and the instant asset write-off
2.71 Under the existing taxation law, for depreciating assets, small business entities
with an aggregated annual turnover of less than $10 million that use the
simplified depreciation rules generally either deduct the cost of a depreciating
asset in one income year, or place the asset in the simplified depreciation pool
and depreciate it at set rates over time (under the instant asset write-off in
Subdivision 328-D of the ITAA 1997 and section 328-180 of the IT(TP) Act).
2.72 Small business entities with an aggregated annual turnover of less than
$10 million may be eligible to claim both the instant asset write-off and the
Small Business Energy Incentive bonus deduction.
2.73 Alternatively, small businesses can opt out of the simplified depreciation rules
and instead deduct the decline in value of the asset over its effective life (under
the uniform capital allowance regime in Division 40 of the ITAA 1997).
2.74 Medium businesses with an aggregated annual turnover of at least $10 million
and less than $50 million can deduct the decline in value of the asset over its
effective life under Division 40 of the ITAA 1997.
2.75 The bonus deduction is equal to 20 per cent of the eligible first and second
element costs worked out under the incentive. This means that regardless of the
method of deduction that the entity takes (i.e. whether immediate or over time),
and the provisions of the tax law the deduction is claimed under (e.g.
Division 40 or Subdivision 328-D), the bonus deduction in respect of a
depreciating asset is calculated based on the cost of the eligible asset or
improvement.
Example 2.2 The instant asset write-off and claiming the bonus deduction
Aggregated annual turnover of less than $10 million - simplified
depreciation
B Co Pty Ltd (B Co) is a small business entity with an aggregated
annual turnover of less than $10 million. B Co has elected to use
the simplified depreciation rules.
On 1 August 2023, B Co purchases a new commercial refrigerator
for a cost of $10,000, which is installed ready for use later that
month. The refrigerator is used 100 per cent for business purposes
and is more energy efficient than the old refrigerator that it is
replacing.
B Co can use the instant asset write-off to immediately deduct the
full cost of the refrigerator as it is below the asset threshold of
$20,000 that applies from 1 July 2023 until 30 June 2024. B Co can
also claim a bonus deduction of $2,000 (20 per cent of $10,000) in
its 2023-24 income tax return.
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Aggregated annual turnover of less than $50 million - effective life
depreciation
If B Co elected not to use the simplified depreciation rules or had
an aggregated annual turnover of at least $10 million but less than
$50 million, it could not use the instant asset write-off to
immediately deduct the full cost of the refrigerator and would
instead be required to depreciate the refrigerator over its effective
life.
However, the amount and timing of the bonus deduction would be
the same as if the cost of the refrigerator had been immediately
deducted. This means B Co can claim a bonus deduction of $2,000
(20 per cent of $10,000) in its 2023-24 income tax return.
Depreciation deductions that B Co could claim for the refrigerator
over its effective life would not be altered by the bonus deduction.
Timing for claiming the bonus deduction
2.76 For depreciating assets first used or installed ready for use during the bonus
period, entities must claim the bonus deduction in the income year in which the
asset is first used or installed ready for use for a taxable purpose.
[Schedule 2, item 1, subparagraph 328-470(1)(d)(i) of the IT(TP) Act]
2.77 For improvements made to existing assets, entities must claim the bonus
deduction in the income year in which the improvement cost is incurred.
[Schedule 2, item 1, subparagraph 328-470(3)(c)(i) of the IT(TP) Act]
2.78 This applies even if an entity has a substituted accounting period with an
income year beginning before 1 July 2023 (i.e. it is an 'early balancer') or after
1 July 2023 (i.e. it is a 'late balancer').
2.79 Early and late balancers may claim the bonus deduction across more than one
income year, provided the eligible asset was first used or installed ready for
use, or the improvement cost was incurred, during the bonus period
(1 July 2023 until 30 June 2024).
Example 2.3 Claiming the bonus deduction for an entity with a
substituted accounting period
C Co Pty Ltd (C Co) is a business with an aggregated annual
turnover of less than $50 million, which has a substituted
accounting period of 1 January to 31 December.
2023-24 income year (1 January 2023 to 31 December 2023)
On 1 August 2023, C Co purchases two commercial ride-on electric
lawnmowers for a cost of $70,000. The assets are delivered on
5 August 2023 and C Co starts to use them immediately for a
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Small business energy incentive
taxable purpose. At the time of first use, new diesel-powered
lawnmowers are available in the market.
The expenditure included in the first element of cost of each asset
is $35,000. C Co can claim a bonus deduction of $14,000
(20 per cent of $70,000) in its 2023-24 income tax return.
Depreciation deductions that C Co can claim for the electric
lawnmowers are not altered by the bonus deduction.
2024-25 income year (1 January 2024 to 31 December 2024)
On 10 March 2024, C Co purchases a new industrial
air-conditioning unit for a cost of $15,000. The asset is installed for
a taxable purpose on 21 March 2024. It is more energy efficient
than the older unit that it is replacing.
The expenditure included in the first element of the cost of the asset
is $15,000. C Co can claim a bonus deduction of $3,000
(20 per cent of $15,000) in its 2024-25 income tax return.
Depreciation deductions that C Co can claim for the
air-conditioning unit are not altered by the bonus deduction.
In total, C Co can claim $17,000 in bonus deductions for the
electric lawnmowers and air-conditioning unit over the bonus
period, which is below the maximum bonus deduction of $20,000.
Cap on the bonus deduction
2.80 The total expenditure eligible for the bonus deduction is effectively $100,000
over the bonus period such that entities can claim a maximum bonus deduction
of $20,000.
[Schedule 2, item 1, subsection 328-465(1) of the IT(TP) Act]
2.81 The cap on the bonus deduction works on a cumulative basis in respect of the
eligible costs. An entity may purchase multiple eligible assets or
improvements. The cap operates to limit the bonus deduction to a maximum of
$20,000.
2.82 The cap is a limit on the total bonus deduction that may be claimed, even
where the bonus deduction is claimed across more than one income year (such
as for early or late balancers). If an entity can claim the bonus deduction across
more than one income year, then the maximum amount of the bonus deduction
it can claim in a subsequent income year is reduced by any amount claimed in
the previous income year. This ensures that the cap applies equally to entities
with normal accounting periods and with substituted accounting periods.
[Schedule 2, item 1, paragraph 328-465(1)(b) of the IT(TP) Act]
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Commencement, application, and transitional
provisions
2.83 The amendments commence on the first 1 January, 1 April, 1 July or 1 October
to occur after the day the Act receives Royal Assent.
2.84 The amendments apply to eligible assets first used or installed ready for use,
and eligible improvement costs incurred, between 1 July 2023 and
30 June 2024.
[Schedule 2, item 1, paragraphs 328-470(1)(c), (1)(d) and (3)(c) of the
IT(TP) Act]
2.85 The amendments apply retrospectively from 1 July 2023. The changes are
wholly beneficial to entities incurring expenditure affected by these
amendments.
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New class of deductible gift recipients
Table of Contents:
Outline of chapter ................................................................................ 33
Context of amendments ....................................................................... 33
Summary of new law............................................................................ 34
Income Tax Assessment Act 1997 ................................................ 34
Taxation Administration Act 1953 .................................................. 35
Detailed explanation of new law .......................................................... 35
A new class of deductible gift recipients ........................................ 35
Income Tax Assessment Act 1997 ................................................ 36
Taxation Administration Act 1953 .................................................. 38
Other amendments to the TAA ...................................................... 44
Consequential amendments ................................................................ 44
Commencement, application, and transitional provisions .................... 44
Outline of chapter
3.1 Schedule 3 to the Bill creates a new class of community charities that may
apply for DGR endorsement by the Commissioner. The class consists of
community charity trusts and community charity corporations.
Context of amendments
3.2 In the 2023-24 Budget, the Government reaffirmed its earlier decision to
facilitate DGR status for up to 28 entities affiliated with the peak body
Community Foundations Australia. The entities are, or will be, structured as
either trusts or incorporated entities.
3.3 The income tax law allows taxpayers who make gifts of $2 or more to DGRs to
claim tax deductions for those gifts, subject to any conditions applying to the
DGR and/or the gift. An entity may apply, under Division 426 in Schedule 1 to
33
New class of deductible gift recipients
the TAA, to the Commissioner for endorsement as a DGR. The criteria for
endorsement, set out in section 30-125 of the ITAA 1997, include the
requirement that the entity be covered by one of the DGR categories in
Subdivision 30-B of the ITAA 1997, or be established to donate funds to an
entity covered by one of those categories.
3.4 Separate to the endorsement process, an entity is a DGR if it is listed by name
in Subdivision 30-B of the ITAA 1997. The decision to list an entity by name
is made in exceptional circumstances by the Government. Generally, a specific
listing is accorded if the entity does not easily fit within any of the existing
DGR categories, but has a single charitable purpose that closely parallels one
of those categories. Entities may be specifically listed for a limited period of
time or in perpetuity (or until the specific listing is repealed). A listing of 3 to 5
years is now the default.
3.5 The specific listing regime has a low level of regulatory oversight and lacks
compliance infrastructure. The Commissioner's powers in relation to
specifically listed DGRs are limited to seeking information and conducting
audits.
3.6 Community charity trusts and community charity corporations do not fit neatly
into any of the existing DGR categories in the ITAA 1997. A particular
charity's activities may fall under several of those categories; some activities
may extend beyond them. This would create integrity risks were this class of
entity to attain DGR status through specific listing.
3.7 By contrast, the endorsement regime empowers the Commissioner to revoke an
entity's endorsement on grounds including failure to comply with its
conditions of entitlement. Administrative penalties may also be imposed.
3.8 In view of the above considerations, the amendments in Schedule 3 to the Bill
create a hybrid framework for DGR endorsement for community charities.
This involves specification by class in the ITAA 1997, specification by name
in a ministerial declaration, and entitlement to endorsement by the
Commissioner, subject to certain conditions, including compliance with the
community charity guidelines.
Summary of new law
Income Tax Assessment Act 1997
3.9 Part 1 of Schedule 3 to the Bill specifies the class of community charities in
Subdivision 30-B of the ITAA 1997. It inserts listing items in respect of
community charity trusts and community charity corporations. These new
listings do not confer DGR status in and of themselves. Rather, they allow
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entities in the specified class to apply for DGR endorsement under Division
426 in Schedule 1 to the TAA.
3.10 The new listing items apply only to community charities that meet certain
conditions, as discussed below. The conditions relate to entity purposes,
registration under the Australian Charities and Not-for-profits Commission Act
2012, financial obligations set out in entity governing rules, and compliance
with the community charity guidelines.
Taxation Administration Act 1953
3.11 Part 2 of Schedule 3 to the Bill amends Subdivision 426-D in Schedule 1 to the
TAA in order to:
• empower the Minister to make a declaration setting out community
charity trusts by name;
• create a ministerial obligation to make guidelines;
• require the Australian Business Register to show community charity
trust status;
• impose civil liability for misrepresenting endorsement status;
• empower the Commissioner to suspend, remove and replace trustees of
community charity trusts; and
• limit certain transfers between community charity trusts and other
entities.
3.12 Part 2 of Schedule 3 to the Bill also creates a new Subdivision in Schedule 1 to
the TAA in order to achieve the same suite of objectives listed above in
relation to community charity corporations (other than the suspension, removal
and replacement of trustees, which is not relevant to corporations).
Detailed explanation of new law
A new class of deductible gift recipients
3.13 The amendments create a new framework to facilitate community charities
achieving DGR status, subject to appropriate oversight and enforcement
powers. Although this framework will currently only apply to a small number
of named community charities, additional organisations could be brought
within scope in future by being specified in ministerial declarations as
candidates for endorsement.
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New class of deductible gift recipients
Income Tax Assessment Act 1997
3.14 Section 30-105 of the ITAA 1997 is amended by inserting a new table that sets
out two new categories of miscellaneous recipients of tax deductible gifts. The
categories cover the subset of community charity trusts and community charity
corporations that meet new requirements inserted in other than a community
charity Subdivision 30-B of the ITAA 1997. An additional special condition
set out in the new table, which must be met by the relevant community
charities before donors may claim tax deductions, is registration as a charity
under the Australian Charities and Not-for-profits Commission Act 2012.
[Schedule 3, item 1, table in subsection 30-105(1) of the ITAA 1997]
Requirements for community charities
3.15 A new provision added to Subdivision 30-B of the ITAA 1997 in tandem with
the listing items requires community charities to have certain characteristics. A
community charity trust must be established and maintained under a will or
instrument of trust for specified allowed purposes, and for no other purposes.
A community charity corporation must be operated only for the same specified
purposes.
3.16 The specified mandatory purposes are:
• providing money, property or benefits to a DGR (other than a
community charity) for any of the purposes for which the DGR may
receive such gifts; and
• engaging in the principal activity of a DGR (other than a specifically
listed DGR or a community charity), or pursuing the principal purpose
of such a DGR.
[Schedule 3, item 2, subsections 30-110(3) and (4) of the ITAA 1997]
The second requirement may be met by funding another organisation, whether
or not it has DGR status, to assist the community charity to engage in its own
activities or pursue its purposes. However, any such funding must be for a
purpose consistent with a general DGR category. The community charity
guidelines may impose requirements on distributions to entities without DGR
status.
3.17 In addition to the two mandatory purposes, community charities may have an
optional purpose of establishing one or more DGR entities, other than
community charities.
[Schedule 3, item 2, section 30-110(5) of the ITAA 1997]
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Endorsement as a DGR
3.18 A community charity will be entitled to endorsement as a DGR, upon
application to the Commissioner, if it:
• has an ABN; and
• is described in item 1 of the table in section 30-15 of the ITAA 1997,
and is not described by name in Subdivision 30-B; and
• meets the relevant conditions identified in the column headed "special
conditions" of table item 1 in section 30-15; and
• has governing rules requiring it, in the event of being wound up, to
transfer any surplus assets, gifts, contributions or associated monies to
another entity with current DGR status; and
• complies with the rules in the community charity guidelines (so long as
all the trustees/directors of the charity also comply with those rules).
[Schedule 3, item 3, subsection 30-125(1) of the ITAA 1997]
Definitions
3.19 To facilitate the expansion of the DGR regime to community charities,
Schedule 3 to the Bill adds the following definitions to the ITAA 1997.
• 'ancillary or community charity trust fund' means a public ancillary
fund, a private ancillary fund or a community charity trust. Note that
this term is merely an internal label designed to extend existing
references to 'the fund' in the ITAA 1997 and TAA to community
charity trusts. It is not intended to suggest that a community charity
trust has the characteristics of a fund. Nor will the label affect the
existing ancillary fund regime in any way.
• 'applicable trust fund guidelines' means the relevant ministerial
guidelines in respect of public or private ancillary funds or community
charity trusts.
• 'community charity corporation' has the meaning given by section
426-180 in Schedule 1 to the TAA. This definition is outlined below in
paragraph 3.26.
• 'community charity corporation guidelines' has the meaning given by
section 426-185 in Schedule 1 to the TAA. This new section in
Schedule 1 to the TAA requires the Minister to create guidelines for
community charities, and is explained further in paragraphs 3.28 -
3.30.
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New class of deductible gift recipients
• 'community charity trust' has the meaning given by section 426-117 in
Schedule 1 to the TAA. This definition is explained in paragraph 3.23.
• 'community charity trust guidelines' has the meaning given by section
426-118 in Schedule 1 to the TAA. This new section in Schedule 1 to
the TAA requires the Minister to create guidelines for community
charities, and is explained in further detail at paragraphs 3.28 - 3.30.
[Schedule 3, item 5, subsection 995-1(1) of the ITAA 1997]
3.20 References to community charity trusts and community charity corporations
are added to the index to Division 30, which indicates where to find the new
table specifying the class of community charities.
[Schedule 3, item 4, section 30-315 of the ITAA 1997]
Taxation Administration Act 1953
3.21 Schedule 3 to the Bill amends Subdivision 426-D in Schedule 1 to the TAA to
extend its application to community charity trusts, as newly defined in that
Subdivision. The Subdivision's governance of ancillary funds will continue
unchanged. Its operation in respect of community charity trusts is explained
below.
3.22 Also as explained below, a new Subdivision 426-E in Schedule 1 to the TAA is
created in respect of community charity corporations.
Community charity trusts
3.23 A 'community charity trust' is defined in Schedule 1 to the TAA as a trust:
• that is specified in a declaration by the Minister that is in force; and
• each trustee of which is a constitutional corporation, has agreed to
comply with the rules in the community charity guidelines, and has not
revoked that agreement.
[Schedule 3, item 11, subsections 426-117(1) and (2) in Schedule 1 to the
TAA]
3.24 The ministerial declaration specifying community charity trusts is a legislative
instrument and subject to disallowance by Parliament.
[Schedule 3, item 11, subsection 426-117(3) in Schedule 1 to the TAA]
3.25 It is appropriate to delegate this power to specify community charities because:
• the declaration is only the first step in the process of being endorsed as
a DGR; and
• the declaration will be subject to Parliamentary oversight; and
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• the ITAA 1997 and TAA impose robust requirements on entities
seeking to qualify as community charity trusts and community charity
corporations, and on endorsed community charities' continuing
entitlement to that status.
Community charity corporations
3.26 A 'community charity corporation' is defined in Schedule 1 to the TAA as a
company:
• that is specified in a declaration by the Minister that is in force; and
• that is either a constitutional corporation or a body corporate that is not
a constitutional corporation; and
• each director of which has agreed to comply with the rules in the
community charity guidelines, and has not revoked that agreement.
[Schedule 3, item 34, subsections 426-180(1) and (2) in Schedule 1 to the
TAA]
3.27 As with community charity trusts, the Minister is empowered to specify a
company by declaration. The declaration is a legislative instrument and subject
to disallowance by Parliament. It is appropriate to delegate this power for the
reasons set out in paragraph 3.25 above.
[Schedule 3, item 34, subsection 426-180(3) in Schedule 1 to the TAA]
Ministerial obligation to make guidelines for community charity
trusts and community charity corporations
3.28 The activity profile of the entities covered by the new class of DGRs makes it
appropriate to formulate mandatory guidelines. These will be modelled on the
existing guidelines governing ancillary funds. The guidelines will set out rules
that community charities and their trustees or directors must comply with if
community charities are to be, or remain, endorsed as DGRs. The guidelines
will also include the amount of the administrative penalty, or a method for how
to work out the amount of the administrative penalty, imposed by section 426-
120 in Schedule 1 to the TAA and the new analogous provision relating to
community charity corporations. The penalty relates to misrepresentations
about endorsement status, and is further discussed below.
[Schedule 3, items 11 and 34, sections 426-118 and 426-185 in Schedule 1 to
the TAA]
3.29 The guidelines may specify different penalties or methods for different
infringing behaviours. It is appropriate for the guidelines to set out penalty
amounts, as this allows for them to be customised to the nature and size of the
breach, as well as taking account of the trustee or director's level of
culpability. This level of specificity is not present in, or appropriate for, the
39
New class of deductible gift recipients
primary legislation, which sets out an overarching narrative in the context of
which detailed obligations would be out of place and difficult to comprehend.
An additional reason for including penalty amounts in the guidelines rather
than the primary legislation is that the former may be more readily updated to
respond to new factual scenarios and ensure recipients of DGR status are being
satisfactorily regulated.
3.30 The guidelines may also specify requirements about the structure and
governing rules of a community charity. This ensures community charities
have robust governance arrangements, are properly accountable and act in a
manner consistent with public expectations of philanthropic organisations.
These requirements may also need updating to reflect changing circumstances
and ensure ongoing appropriate regulation. Hence, it is preferable to locate
them in the guidelines rather than in primary legislation.
Administrative penalties
3.31 As outlined above, administrative penalties will apply to trustees of community
charity trusts and directors of community charity corporations. This is achieved
through amending the existing administrative penalties provision for ancillary
funds and their trustees in Division 426 in Schedule 1 to the TAA, and creating
a similar provision in respect of community charity corporations and their
directors.
3.32 Neither the trustees of a community charity trust, nor any directors of such
trustees, may hold out the trust as being endorsed, entitled to be endorsed or
entitled to remain endorsed as a DGR if there is no factual basis to do so.
Trustees and their directors will be jointly and severally liable to an
administrative penalty if the trust is held out in this manner, and any portion of
the penalty cannot reasonably be recovered from the trustees. As corporate
trustees of community charity trusts may not have much capital, it is necessary
to also impose the penalty on their directors to ensure compliance with this
requirement.
3.33 Neither a community charity corporation nor any of its directors may hold out
the corporation as being endorsed, entitled to remain endorsed, or endorsed at a
particular point in time as a DGR, if there is no factual basis to do so. Liability
for such misrepresentations rests with the directors alone, as it is undesirable to
impose a financial impost on the community charity corporation itself.
3.34 Exposure to liability promotes an appropriate level of accountability by
directors for decisions affecting the community charity in question.
3.35 A director may an administrative penalty in certain circumstances avoid. These
circumstances are that:
• the director can demonstrate a lack of awareness of the breach, if it
would not have been reasonable to expect such awareness; or
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Bill 2023
• the director took all reasonable steps to ensure that the breach did not
occur, or there were no such steps that the director could have taken.
3.36 It is appropriate to place the burden of proof on a director to make out this
defence, because knowledge of whether or not they were aware of the breach is
peculiarly within their possession and would be relatively easy to establish.
Also, as noted, these provisions are not novel; they have been extended or used
as a model in respect of community charities.
3.37 As noted above, the amount of the administrative penalty for misrepresenting
the endorsement status of a community charity trust or community charity
corporation will be specified in the community charity guidelines made under
sections 426-118 and 426-195 in Schedule 1 to the TAA.
3.38 An administrative penalty must not be reimbursed from the community charity
in question, and the Corporations Act cannot apply to provide relief to a
director of a corporate trustee or of a community charity corporation in respect
of any administrative penalty imposed for breach of the holding out provision.
[Schedule 3, items 12 to 15 and 34, sections 426-120 and 426-195 in
Schedule 1 to the TAA]
Suspension or removal of trustees
3.39 The amendments relating to the Commissioner's powers to suspend and
remove trustees, explained below, will apply to the trustees of community
charity trusts. This regime is an extension of the Commissioner's current
powers in relation to the trustees of public and private ancillary funds.
Commissioner's powers to suspend or remove trustees
3.40 As is the case for public and private ancillary funds, the Commissioner will
have the power to remove or suspend a trustee of a community charity trust
that breaches the community charity guidelines, or any other Australian law.
Section 425-125 in Schedule 1 to the TAA is amended so that the
Commission's suspension and removal powers extend to community charity
trusts.
3.41 It is expected that the Commissioner would only suspend or remove trustees of
community charity trusts in cases of serious non-compliance.
3.42 Should the Commissioner choose to suspend a trustee, it will be for a period
that the Commissioner determines by reference to the circumstances. The
Commissioner may also modify the suspension period as necessary.
3.43 If the Commissioner suspends or removes a trustee, the Commissioner must
give the trustee a written notice advising them of the decision, explaining the
reasons for the decision and, in the case of suspension, setting out the period of
suspension. The trustee may seek a review of the decision by the
41
New class of deductible gift recipients
Administrative Appeals Tribunal or a court following the process set out in
Part IVC of the TAA.
[Schedule 3, items 16-19, section 426-125 in Schedule 1 to the TAA]
Commission's powers in case of suspension or removal of trustees
3.44 If a trustee is suspended or removed, the Commissioner must appoint an acting
trustee to undertake the duties of trustee until the suspension period has ended
or a replacement trustee is appointed.
3.45 An acting trustee may be an individual, a body corporate or a Government
authority. The Commissioner may also appoint themselves as acting
trustee. The acting trustee must agree to comply with the community charity
trust guidelines, and the governing rules of the community charity will apply to
the acting trustee. The Commissioner cannot appoint an acting trustee that is
not a constitutional corporation for more than 6 months.
3.46 The Commissioner may determine the terms and conditions of an acting
trustee's appointment, including by determining that the acting trustee's fees
are to be paid out of the corpus of the community charity trust. Such terms and
conditions are valid despite any limitation in an Australian law or the
governing rules of the community charity.
3.47 The Commissioner may also direct an acting trustee to do or not do certain
things. An acting trustee commits an offence if they contravene a direction.
3.48 The Commissioner may terminate the appointment of an acting trustee at any
time. If the Commissioner were to do so, the Commissioner would be required
to appoint a new acting trustee.
3.49 An acting trustee may resign that office, by written resignation given to the
Commissioner. The resignation is not effective until seven days after its receipt
by the Commissioner.
3.50 If the Commissioner appoints an acting trustee, the Commissioner must make
an order transferring the property of the community charity trust from the
former or suspended trustee to the acting trustee. The order, which can cover
both legal and equitable property, has the legal effect of immediately
transferring the property, subject to certain limitations.
3.51 The Commissioner must also make a subsequent property transfer order at the
end of an acting trustee's appointment. This order may be to a new acting
trustee, to the previously suspended trustee or to a newly appointed trustee, as
appropriate.
3.52 If the Commissioner makes a property transfer order, that property
immediately vests in the entity to which it is transferred. However, the transfer
is not immediate if the property is of a kind whose transfer is registrable under
an Australian law. In this case, the property is transferred only after the
registration process has been completed.
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Treasury Laws Amendment (Support for Small Business and Charities and Other Measures)
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3.53 A former trustee has a number of obligations following their suspension or
removal or the ending of their appointment.
3.54 A former trustee must provide the acting or new trustee with all books relating
to the trust's affairs that are in their custody, possession or control within 14
days. Failing to do so constitutes an offence which attracts a penalty of 50
penalty units.
3.55 If the property of a community charity trust is vested in a former trustee, an
acting trustee may, by written notice, require the former trustee to identify all
the property of the community charity trust (as much as they possibly can), and
explain to the acting or new trustee how that property was accounted for.
3.56 The acting or new trustee may also require the former trustee to assist with the
property transfer. The acting or new trustee may mandate that the former
trustee take certain actions necessary for the transfer of a specific item of
property. Failing to do so constitutes an offence which attracts a penalty of 50
penalty units. Strict liability applies to this offence. This is appropriate in view
of the necessity of compelling former trustees to deal fairly with a community
charity trust's property during the handover period.
[Schedule 3, items 20-31, sections 426-130 to 426-165 in Schedule 1 to the
TAA]
Transfers between entities
3.57 Community charities, whether trusts or incorporated entities, are not permitted
to transfer money, property or benefits to other community charities or to
ancillary funds. Ancillary funds may make such transfers to community
charities, as this is consistent with their purpose of providing support to DGRs
covered by item 1 of the table in section 30-15 of the ITAA 1997. Under the
existing regime, ancillary funds may not make such transfers to other ancillary
funds.
3.58 This limitation applies unless the relevant guidelines explicitly permit such
transfers.
[Schedule 3, items 32-34, sections 426-170 and 426-200 in Schedule 1 to the
TAA]
Community charity status to be entered on Australian
Business Register
3.59 If a community charity trust or community charity corporation has an ABN,
the Australian Business Registrar must enter a statement on the Australian
Business Register that the entity is a community charity trust or a community
charity corporation, as applicable.
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New class of deductible gift recipients
3.60 The Australian Business Registrar must take reasonable steps to ensure that the
statement is true, and may change or remove it if necessary.
[Schedule 3, items 11 and 34, sections 426-119 and 426-190 in Schedule 1 to
the TAA]
Other amendments to the TAA
3.61 Schedule 3 to the Bill makes minor consequential amendments to Subdivision
426-D in Schedule 1 to the TAA to extend its application to community charity
trusts.
[Schedule 3, items 8-10, various sections in Schedule 1 to the TAA]
3.62 The scope of Subdivision 298-A in Schedule 1 to the TAA, which deals with
administrative penalties, is broadened to include penalties imposed on directors
of community charity corporations under section 426-195. (Penalties imposed
in relation to community charity trusts are already covered by Subdivision 298-
A.) That Subdivision sets out when penalties are due for payment, empowers
the Commissioner to remit all or part of a penalty, and enables an entity that is
dissatisfied with a decision by the Commissioner refusing to remit a penalty to
object in the manner set out in Part IVC of the TAA.
[Schedule 3, item 6, paragraph 298-5(c) in Schedule 1 to the TAA] .
3.63 As community charities must be registered charities, disclosures to the
Commissioner of the Australian Charities and Not-for-profits Commission or
the Attorney-General of a State or Territory are permitted, and will not
constitute an offence, if the information relates to the non-compliance of a
community charity with an Australian law, and the disclosure is for the
purpose of administering an Australian law governing trusts and charities.
[Schedule 3, item 7, subsection 355-65(8) in Schedule 1 to the TAA]
Consequential amendments
3.64 A New Tax System (Australian Business Numbers) Act 1999 is amended to
facilitate the Australian Business Registrar entering statements about
community charities onto the Australian Business Register.
[Schedule 3, item 35, paragraph 26(3)(ga) of the A New Tax System
(Australian Business Number) Act 1999]
Commencement, application, and transitional
provisions
3.65 The amendments made by Schedule 3 to the Bill commence on the day after
the Bill receives Royal Assent.
44
Deductible gift recipients--specific
listings
Table of Contents:
Outline of chapter ................................................................................ 45
Context of amendments ....................................................................... 45
Summary of new law............................................................................ 46
Detailed explanation of new law .......................................................... 46
Consequential amendments ................................................................ 47
Commencement, application, and transitional provisions .................... 47
Commencement ............................................................................ 47
Application ..................................................................................... 47
Outline of chapter
4.1 Schedule 4 to the Bill amends the ITAA 1997 to:
• list Justice Reform Initiative Limited and Transparency International
Australia as DGRs;
• extend the DGR listing of the Victorian Pride Centre Ltd and the
Australian Sports Foundation Charitable Fund.
Context of amendments
4.2 The income tax law allows income tax deductions for taxpayers who make
gifts of $2 or more to DGRs. To be a DGR, an organisation must fall within
one of the general categories set out in Division 30 of the ITAA 1997 or be
listed by name in that Division.
4.3 DGR status helps eligible organisations attract public financial support for
their activities.
45
Deductible gift recipients--specific listings
4.4 Justice Reform Initiative Limited (ABN 68 640 446 448) is a charity which
seeks to divert people affected by disadvantage from the criminal justice
system and address the impacts associated with periods of incarceration.
4.5 Transparency International Australia (ABN 23 068 075 525) is a charity that
pursues the object of overcoming corruption and its direct or indirect impacts
in Australia and across the world.
4.6 The Victorian Pride Centre Ltd (ABN 68 615 432 838) is a charity that
supports the LGBTIQ+ community and promotes reconciliation, mutual
respect and acceptance between groups of individuals, and the protection of
human rights.
4.7 The Australian Sports Foundation Charitable Fund (ABN 97 179 064 897) is a
charity that raises funds from the philanthropic community to support
charitable causes through sport, focusing on disadvantaged and marginalised
groups in Australia.
Summary of new law
4.8 Schedule 4 to the Bill amends the ITAA 1997 to allow the following entities to
be listed as DGRs under the income tax law:
• Justice Reform Initiative Limited; and
• Transparency International Australia.
4.9 Schedule 4 to the Bill amends the ITAA 1997 to extend the period in which the
Victorian Pride Centre Ltd is a DGR under the income tax law.
4.10 Schedule 4 to the Bill amends the ITAA 1997 to extend the period in which the
Australian Sports Foundation Charitable Fund is a DGR under the income tax
law.
Detailed explanation of new law
4.11 Taxpayers may claim an income tax deduction for gifts made to Justice
Reform Initiative Limited (ABN 68 640 446 448) provided the gift complies
with the existing requirements of the income tax law. This amendment ensures
that Justice Reform Initiative Limited receives public financial support for
their activities.
[Schedule 4, item 3, table item 13.2.38 in subsection 30-105(2)]
4.12 Taxpayers may claim an income tax deduction for gifts made to Transparency
International Australia (ABN 23 068 075 525) provided the gift complies with
the existing requirements of the income tax law. This amendment ensures that
Transparency International Australia receives public financial support for their
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Treasury Laws Amendment (Support for Small Business and Charities and Other Measures)
Bill 2023
activities.
[Schedule 4, item 3, table item 13.2.39 in subsection 30-105(2)]
4.13 Taxpayers may claim an income tax deduction for gifts made to the Victorian
Pride Centre Ltd (ABN 68 615 432 838) for a longer period than initially
provided when it was first listed as a DGR, provided the gift complies with the
existing requirements of the income tax law. This amendment ensures that the
Victorian Pride Centre Ltd continues to receive public financial support for
their activities.
[Schedule 4, item 1, table item 4.2.44 in subsection 30-45(2)]
4.14 Taxpayers may claim an income tax deduction for gifts made to the Australian
Sports Foundation Charitable Fund (ABN 97 179 064 897) for a longer period
than initially provided when it was first listed as a DGR, provided the gift
complies with the existing requirements of the income tax law. This
amendment ensures that the Australian Sports Foundation Charitable Fund
continues to receive public financial support for their activities.
[Schedule 4, item 2, table item 10.2.9 in section 30-90]
Consequential amendments
4.15 Schedule 4 to the Bill also amends the index (Subdivision 30-315) for Division
30 of the ITAA 1997 to reflect the amendments.
[Schedule 4, items 4 and 5, table items 64AB and 116AB]
Commencement, application, and transitional
provisions
Commencement
4.16 The amendments commence on the first day of the quarter following Royal
Assent.
[Clause 2]
Application
4.17 The amendments apply to gifts made on or after 1 July 2023 and on or before
30 June 2028 to the Justice Reform Initiative Limited.
[Schedule 4, item 3, table item 13.2.38 in subsection 30-105(2)]
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Deductible gift recipients--specific listings
4.18 The amendments apply to gifts made on or after 1 July 2023 to Transparency
International Australia.
[Schedule 4, item 3, table item 13.2.39 in section 30-105(2)]
4.19 The amendments apply to gifts made in the period on or after 9 March 2023
and on or before 8 March 2028 to the Victorian Pride Centre Ltd.
[Schedule 4, item 1, table item 4.2.44 in subsection 30-45(2)]
4.20 The amendments apply to gifts made on or after 1 July 2023 onwards to the
Australian Sports Foundation Charitable Fund.
[Schedule 4, item 2, table item 10.2.9 in section 30-90]
4.21 The amendments apply retrospectively. This ensures that if gifts were made
prior to the commencement of Schedule 4 to the Bill, they may be tax
deductible for income tax purposes, provided they comply with other
requirements of the income tax law.
4.22 Despite the retrospective application of DGR status, there is no adverse impact
on affected parties or the entities. This is because the amendments assist
entities to obtain support from the public and allow parties that provide gifts to
obtain an income tax deduction if eligibility requirements are met.
48
Exemption for Global Infrastructure Hub
Ltd
Table of Contents:
Outline of chapter ................................................................................ 49
Context of amendments ....................................................................... 49
Detailed explanation of new law .......................................................... 50
Commencement, application, and transitional provisions .................... 50
Outline of chapter
5.1 Schedule 5 to the Bill amends the ITAA 1997 to continue to provide the GI
Hub with an exemption from the liability to pay income tax on its ordinary and
statutory income.
Context of amendments
5.2 The GI Hub was established by G20 Leaders at the 2014 Brisbane Summit. It
was initially given a four-year mandate to December 2018 to advance
international efforts to lift infrastructure investment. In July 2018, the G20
Finance Ministers agreed to extend the mandate GI Hub for an additional four
years through to December 2022.
5.3 The GI Hub is funded by contributions from the Australian Government and
other G20 members. To avoid these payments being subject to income tax, the
GI Hub was granted tax exempt status under Division 50 of the ITAA 1997.
The current exemption expires on 30 June 2023.
5.4 In October 2021, the G20 decided to extend the GI Hub's mandate for a further
period to 2024. The GI Hub will receive financial contributions from G20
members in this period. As a result, the GI Hub's tax-exempt status under
Division 50 of the ITAA 1997 will be continued for a further year.
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Exemption for Global Infrastructure Hub Ltd
Detailed explanation of new law
5.5 Schedule 5 to the Bill amends Division 50 of the ITAA 1997 to extend the
GI Hub's exemption from income tax for a defined period.
5.6 The GI Hub will continue to be listed as an income tax exempt entity, meaning
that any payments made to it by the Australian Government, foreign
governments, non-government organisations and other contributors will not be
subject to income tax.
5.7 The exemption currently applies from 24 December 2014 until 30 June 2023.
The amendments apply to the income year starting on 1 July 2023, extending
the current exemption until 30 June 2024. This will ensure that all
contributions and other income of the GI Hub received during the period from
24 December 2014 until 30 June 2024 will be exempt from tax.
[Schedule 5, item 1, table item 8.4 of section 50-40 of the ITAA 1997]
Commencement, application, and transitional
provisions
5.8 The amendments commence on the first 1 January, 1 April, 1 July or 1 October
after the day the Act receives the Royal Assent.
5.9 The amendments apply to contributions and income of the GI Hub made in the
income year commencing on 1 July 2023. This includes any contributions or
income received on or after 1 July 2023 and before the amendments
commence.
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Income tax amendments for updates to
the accounting standard for general
insurance contracts
Table of Contents:
Outline of chapter ................................................................................ 51
Context of amendments ....................................................................... 51
Comparison of key features of new law and current law ...................... 52
Detailed explanation of new law .......................................................... 53
Subdivisions 321-A and 321-B - General insurance ..................... 53
Consequential amendments ................................................................ 58
Commencement, application, and transitional provisions .................... 60
Outline of chapter
6.1 Schedule 6 to the Bill amends the income tax law with respect to general
insurance to provide broad alignment with the new accounting standard,
AASB 17. The amendments reduce the income tax compliance burden on the
general insurance industry caused by the misalignment between the income tax
law and the adoption of the new AASB 17.
Context of amendments
6.2 Division 321 of the ITAA 1997 sets out requirements for calculating insurance
liabilities for tax purposes that arise from general insurance policies. Prior to
the amendments, the methodologies in Division 321 broadly aligned with the
requirements of the accounting standard that applied prior to the adoption of
AASB 17, being AASB 1023. From 1 January 2023, AASB 17 replaced
AASB 1023 as the mandatory accounting standard for insurance contracts for
financial reporting purposes.
6.3 The amendments seek to minimise the regulatory burden facing general
insurers following the introduction of AASB 17, which fundamentally differs
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Income tax amendments for updates to the accounting standard for general insurance contracts
from AASB 1023. This will allow general insurers to continue using audited
financial reporting information as the basis for their tax returns.
6.4 Legislative references in this Chapter are made to the ITAA 1997 unless
otherwise specified.
Comparison of key features of new law and
current law
Table 6.1 Comparison of new law and current law
New law Current law
Subdivision 321-A - compare the value of Subdivision 321-A - compare the value of
adjusted liability for incurred claims at the outstanding claims liability at the end of an
end of an income year with the value at the income year with the value at the end of the
end of the previous income year to previous income year to determine if the
determine if the change in the adjusted change in the liability for outstanding claims
liability for incurred claims should be should be treated as assessable income or as
treated as assessable income or as a a deduction.
deduction.
The subdivision sets out a two-step method
The measurement of liability for incurred statement to calculate outstanding claims
claims is broadly aligned to AASB 17, liability: calculate the present value of the
except where an accounting to tax estimated outstanding claims liabilities of a
adjustment is necessary. This amount is general insurance company and reduce this
reduced by estimated recoveries from amount by the estimated recoveries.
reinsurance.
A general insurance company can deduct
A general insurance company continues to claims paid during the current year.
be able to deduct claims paid during the
current year.
Subdivision 321-B - compare the value of Subdivision 321-B - compare the value of
adjusted liability for remaining coverage at unearned premium reserve at the end of an
the end of an income year with the value at income year with the value at the end of the
the end of the previous income year to previous income year to determine if the
determine if the change in the adjusted change in the unearned premium reserve
liability for remaining coverage should be should be treated as assessable income or as
treated as assessable income or as a a deduction.
deduction.
The subdivision sets out a five-step method
The measurement of liability for remaining statement to calculate unearned premium
coverage is aligned to AASB 17, except reserve. The unearned premium reserve at
where an accounting to tax adjustment is the end of the year is the value that the
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New law Current law
necessary. This amount is reduced by general insurance company determines based
reinsurance premiums paid or payable with on proper and reasonable estimates, to relate
respect to the relevant reinsurance. to risks covered by policies in respect of
later income years.
A general insurance company includes
premiums received during the year as The assessable income of a general
assessable income. insurance company includes gross premiums
received or receivable by the company
during the year.
Detailed explanation of new law
Subdivisions 321-A and 321-B - General insurance
6.5 Schedule 6 to the Bill amends the income tax law with respect to general
insurance to provide broad alignment with the new accounting standard,
AASB 17. This reduces the income tax compliance burden on the general
insurance industry caused by the misalignment between the income tax law
and the adoption of the new AASB 17.
6.6 The main changes under the amendments include:
• Subdivision 321-A - 'outstanding claims liabilities' is updated to
'adjusted liability for incurred claims';
• Subdivision 321-B - 'unearned premium reserve' is updated to
'adjusted liability for remaining coverage'; and
• The respective method statements are updated to broadly align with
AASB 17.
AASB 17 Insurance Contracts
6.7 The amendments introduce the following definitions:
• applicable insurance contracts accounting standard;
• asset for insurance acquisition cash flows;
• liability for incurred claims; and
• liability for remaining coverage.
[Schedule 6, item 14, subsection 995-1(1)]
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Income tax amendments for updates to the accounting standard for general insurance contracts
6.8 To broadly align the income tax law with AASB 17, AASB 17 must be used in
working out assessable income and deductions. The policy intention is to
reduce compliance costs for relevant taxpayers by broadly aligning
requirements under the tax law with the taxpayer's audited financial
statements.
6.9 For the purposes of the amendments, the applicable insurance contracts
accounting standard is the compiled version of AASB 17 in force on
31 December 2022, and this can be accessed on the Federal Register of
Legislation: https://www.legislation.gov.au/Details/F2023C00382.
[Schedule 6, item 14, definition of applicable insurance contracts accounting
standard in subsection 995-1(1)]
6.10 The amendments also include a regulation-making power to prescribe another
accounting standard. The scope of the power is limited and ensures that any
future updates to AASB 17 can be incorporated in the ITAA 1997 once they
are determined to be suitable for tax law purposes.
6.11 Requiring such modifications to be prescribed by regulations provides the
opportunity to separately consider any tax and revenue impacts caused by
future changes to the accounting standard with respect to general insurers. The
regulation-making power is therefore necessary for the effective operation of
tax legislation and to deliver the policy intention.
6.12 Further, to provide certainty and clarity to taxpayers, the primary legislation
broadly specifies for the way assessable income and deductions are calculated
with reference to terminology used in the accounting standards to the extent
they are necessary for tax legislation, particularly in the relevant method
statements. The combination of a point-in-time reference and the
regulation-making power ensures that future updates to AASB 17 do not cause
a disconnect between the primary and subordinate legislation in a manner that
would adversely impact the effective operation of tax legislation.
6.13 The terms 'asset for insurance acquisition cash flows', 'liability for incurred
claims', and 'liability for remaining coverage' have the same meaning as in
AASB 17.
[Schedule 6, item 14, subsection 995-1(1)]
6.14 Under the amendments, AASB 17 is used for the purposes of calculating the
'adjusted liability for incurred claims' and the 'adjusted liability for remaining
coverage'. These adjustments refer to the adjustments for tax purposes required
under the amendments.
6.15 The policy intention is to minimise compliance costs for the industry, and to
align tax and accounting with respect to general insurers. Where applicable,
general insurance companies must use the measurement approach they have
adopted in their audited financial statements prepared according to AASB 17
or in the information provided to APRA prepared according to AASB 17.
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Subdivision 321-A: Provision for, and payment of, claims by
general insurance companies
Liability for incurred claims
6.16 The concept of liability for incurred claims comprises of the fulfilment cash
flows related to past services allocated to the relevant group of contracts at that
date.
6.17 To align the income tax provisions with AASB 17, the concept of 'outstanding
claims liability' is replaced with the 'adjusted liability for incurred claims'.
This refers to the liability for incurred claims (used in AASB 17) that is
adjusted for tax purposes under the amendments.
6.18 The provisions compare the value of a general insurance company's adjusted
liability for incurred claims at the end of an income year with the value of
those adjusted liabilities at the end of the previous income year.
• If the value of the adjusted liability for incurred claims at the end of an
income year is less than the value at the end of the previous income
year, the difference is included as assessable income as this represents
a decrease in the relevant liabilities in that income year.
• If the value of the adjusted liability for incurred claims at the end of an
income year exceeds the value at the end of the previous income year,
the excess is recognised as deductible as this represents an increase in
the relevant liabilities in that income year.
[Schedule 6, items 1, 2, 3 and 4, sections 321-10 and 321-15]
Working out the adjusted liability for incurred claims
6.19 To work out the adjusted liability for incurred claims, step 1 of the method
statement in section 321-20 requires a measurement of the liability for incurred
claims at the end of the income year using AASB 17.
[Schedule 6, item 5, step 1 of the method statement in section 321-20]
6.20 However, the measurement of liability for incurred claims is adjusted for tax
purposes to exclude certain accounting values from the calculation of liability
for incurred claims, specifically, claims handling costs that are not attached to,
nor directly attributable to, a particular claim.
6.21 The tax adjustment under the amendments broadly replicates the tax treatment
of general insurance policies prior to the amendments, by including only
settlement costs directly associated with the relevant claim. Indirect settlement
costs (also known as indirect claims handling costs) include the general
expenses of running and administering a general insurer's claims department.
These types of costs do not attach to, nor are they attributable to, a particular
claim, so they are not included in the calculation of the liabilities for a
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Income tax amendments for updates to the accounting standard for general insurance contracts
particular claim. Examples of indirect settlement costs may include items in
paragraphs B65(f) and (l) of AASB 17. For the purposes of the amendments,
the term 'direct settlement costs' is replaced with 'claims handling costs that
are neither attached to, nor directly attributable to, a particular claim', to align
with the terminology used in AASB 17. For clarity, the law prior to the
amendments included direct settlement costs whereas the amendments achieve
a similar result by disregarding 'indirect' claims handling costs.
6.22 Step 2 in the method statement is to reduce the step 1 amount by the amount
that the company expects to recover under a contract of reinsurance held by the
general insurance company, as measured using AASB 17.
[Schedule 6, item 5, step 2 of the method statement in section 321-20]
6.23 However, the step 1 amount is not reduced by the amount that the company
expects to recover under a contract of reinsurance to which subsection 148(1)
of the ITAA 1936 applies. If the step 2 amount was reduced by this amount,
the reinsured company's taxable income would effectively be increased by the
amount of the expected reinsurance recoveries. This would be inconsistent
with the objective of subsection 148(1).
6.24 Subsection 148(1) applies, so far as is relevant, to a reinsurance policy taken
out by a general insurance company carrying on business in Australia with a
non-resident company. If the subsection applies, broadly:
• the Australian general insurance company cannot deduct premiums
paid in respect of the policy and is not assessable on any reinsurance
recoveries; and
• the non-resident reinsurance company is not assessed in Australia on
the premiums received or receivable.
Claims paid - deduction
6.25 The amendments do not alter the taxation treatment of general insurance
companies in respect of the payment of claims (see section 321-25). A general
insurance company continues to deduct the amounts paid during an income
year in respect of claims under general insurance policies.
Subdivision 321-B: Premium income of general insurance
companies
Gross premiums - assessable income
6.26 The amendments alter the taxation treatment of gross premium income. A
general insurance company continues to include gross premiums received as
assessable income. However, a general insurance company does not include as
assessable income, gross premiums that are receivable.
[Schedule 6, item 6, section 321-45]
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6.27 To broadly reflect the accounting treatment, the timing of when gross
premiums of a general insurance company are included as assessable income is
achieved through a combination of premiums received and the changes in the
adjusted liability for remaining coverage. This treatment recognises income
when services are performed. To ensure that the tax treatment of premium
income appropriately aligns with the accounting treatment under AASB 17,
section 321-45 only requires gross premiums received to be included as
assessable income; and for the changes in the adjusted liability for remining
coverage to be worked out separately (see below).
Liability for remaining coverage
6.28 The liability for remaining coverage comprises of the fulfilment cash flows
related to future services allocated to the relevant group of contracts at that
date.
6.29 To align the income tax provisions with AASB 17, the concept of 'unearned
premium reserve' is replaced with the 'adjusted liability for remaining
coverage'. This refers to the liability for remaining coverage (used in
AASB 17) that is adjusted for tax purposes under the amendments.
6.30 The provisions compare the value of a general insurance company's adjusted
liability for remaining coverage at the end of an income year with the value of
the liability at the end of the previous income year.
• If the value of the adjusted liability for remaining coverage at the end
of an income year is less than the value at the end of the previous
income year, the difference is included as assessable income as this
represents a decrease in the relevant liabilities in that income year.
• If the value of the adjusted liability for remaining coverage at the end
of an income year exceeds the value at the end of the previous income
year, the excess is recognised as deductible as this represents an
increase in the relevant liabilities in that income year.
[Schedule 6, items 7, 8, 9, 10, 11 and 12, sections 321-50 and 321-55]
Working out the adjusted liability for remaining coverage
6.31 To work out the adjusted liability for remaining coverage, step 1 of the method
statement in section 321-60 requires a measurement of the liability for
remaining coverage at the end of the income year using AASB 17.
[Schedule 6, item 13, step 1 of the method statement in section 321-60]
6.32 However, the measurement of liability for remaining coverage is adjusted for
tax purposes to exclude certain accounting values in the calculation of liability
for remaining coverage. Specifically, this is the treatment of onerous contract
loss components and loss recovery components within AASB 17.
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Income tax amendments for updates to the accounting standard for general insurance contracts
6.33 The treatment of onerous contracts in AASB 17 immediately expenses any
losses for accounting purposes on recognition. This is not applied for tax
purposes. Instead, the treatment of the loss components and loss recovery
components of onerous contracts under AASB 17 is disregarded for tax
purposes. To determine the value of the adjusted liability for remaining
coverage for tax purposes, the loss components and loss recovery components
of such contracts are treated the same as non-onerous contracts, resulting in the
release of the net loss component over the contract service period.
6.34 Step 2 of the method statement is to reduce the step 1 amount by any asset for
insurance acquisition cash flows. These assets arise where acquisition cash
flows have occurred but cannot be identified against a contract group.
[Schedule 6, item 13, step 2 of the method statement in section 321-60]
6.35 Step 3 of the method statement is to reduce the result from step 2 by the
premiums (relevant reinsurance premiums) paid or payable by the company, in
that or an earlier income year, under a contract of reinsurance held by the
general insurance company in respect of later years, as measured using
AASB 17, other than:
• reinsurance premiums that the company cannot deduct because of
subsection 148(1) of the ITAA 1936; and
• certain types of reinsurance premiums. Specifically, those that were
paid or payable in respect of a particular class of insurance business,
where, under the contract of reinsurance, the reinsurer agreed to pay an
amount in respect of the loss incurred by the company that is covered
by the relevant policy, some or all of the excess over an agreed
amount.
[Schedule 6, item 13, step 3 of the method statement in section 321-60]
6.36 Under the amendments, it is intended that the treatment of reinsurance
premiums in step 3 is consistent with the treatment of reinsurance premiums in
respect of the later income years prior to the amendments.
6.37 Under AASB 17, it is noted that reinsurance premiums paid are recorded
against the asset for remaining coverage, which is similarly recalculated at
reporting dates to only reflect the future contract service period.
6.38 Step 4 of the method statement works to increase the result from step 3 by the
amount of any reinsurance commissions received or receivable by the company
that relate to the relevant reinsurance premiums in step 3.
[Schedule 6, item 13, step 4 of the method statement in section 321-60]
Consequential amendments
6.39 The amendments update references throughout the ITAA 1997 as applicable,
to ensure consistency with the concepts adapted from AASB 17 and with the
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Bill 2023
above amendments.
[Schedule 6, items 15, 16, 17, 18, 19, 20 and 21, tables under sections 10-5
and 12-5, paragraphs 705-70(1AC)(c), 713-710(a) and 713-710(b), and notes
1 and 2 to section 713-710]
6.40 However, amendments are not made to outstanding claims or tainted
outstanding claims with reference to the tax framework in relation to the
controlled foreign company regimes. In these circumstances, references to
outstanding claims or tainted outstanding claims are not intended to align with
the update to the accounting standard under AASB 17. Further, these concepts
are separately provided for under section 446 of the ITAA 1936.
6.41 Consequential amendments are made in relation to the rules applying to
income tax consolidation. The basis for working out the value of the liability
for incurred claims and the liability for remaining coverage under the income
tax law is adjusted from the calculation of liabilities under AASB 17. These
differences cause distortions to arise under the tax cost setting rules.
6.42 Differences that are reflected in the accounting standard but not in the income
tax treatment of general insurance companies include:
• Assets for insurance acquisition cash flows to the extent they are used
to measure the company's adjusted liability for remaining coverage;
• Deferred reinsurance expenses to the extent that they are used to
measure the company's adjusted liability for remaining coverage;
• Recoveries receivable or potential recoveries to the extent they relate
to insurance contracts or reinsurance contracts;
• Claims handling costs that are neither attached to, nor directly
attributable to, a particular claim, to the extent these costs are used to
measure the company's adjusted liability for incurred claims; and
• The loss components and loss-recovery components on onerous
contracts to the extent that they are used to measure the company's
adjusted liability for remaining coverage.
[Schedule 6, item 22, subsection 713-725(4)]
6.43 Deferred reinsurance expenses arise from the premiums that have been paid for
the reinsurance of risks to the extent those risks relate to later income years.
Under AASB 17, it is noted that reinsurance premiums paid are recorded
against the asset for remaining coverage, which is similarly recalculated at
reporting dates to only reflect the future contract service period.
6.44 The tax cost setting rules are modified to reflect these differences where a
general insurance company joins or leaves a consolidated group and brings or
takes with it these things that exist in the accounting standard.
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Income tax amendments for updates to the accounting standard for general insurance contracts
6.45 The amendments also repeal the definition of 'outstanding claims' in
subsection 995-1(1).
[Schedule 6, item 23]
Commencement, application, and transitional
provisions
6.46 The amendments commence on the first day of the first quarter following
Royal assent of the Bill.
[Clause 2]
6.47 The amendments apply to income years starting on or after 1 January 2023
(this is the 'start year' in Part 3 of Schedule 6 to the Bill). The application date
is consistent with the general application of the AASB 17 for financial
reporting purposes. The application of the tax law and the accounting standards
are aligned to minimise compliance costs for relevant taxpayers.
[Schedule 6, items 24 and 25]
Transitional arrangements
6.48 Transitional arrangements ensure that no permanent tax differences arise for
general insurance companies on the application of the amendments that
broadly reflect the adoption of AASB 17.
6.49 To avoid doubt, the transitional provisions however, do not impact
Subdivisions 321-A and 321-B to the extent that those subdivisions are not
altered by items 26 and 27 of Schedule 6 to the Bill. Therefore, a taxpayer
continues to work out assessable income and deductions under sections 321-25
and 321-45.
Transitional arrangements - first income year for which amendments
apply
6.50 Unless the taxpayer chooses to apply item 27 of Schedule 6 to the Bill (see
below - extended transitional arrangements), the following transitional
arrangements apply, and apply only to the start year.
[Schedule 6, subitem 26(1)]
6.51 Item 26 of Schedule 6 to the Bill modifies the operation of sections 321-10,
321-15, 321-20 (regarding adjusted liability for incurred claims), 321-50,
321-55, and 321-60 (regarding adjusted liability for remaining coverage) under
the amendments for the start year. For this income year, the transitional
arrangements require a comparison between the values worked out under the
amendments, with the values worked out under the provisions immediately
prior to the amendments:
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Treasury Laws Amendment (Support for Small Business and Charities and Other Measures)
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• with respect to working out the assessable income or deduction
following sections 321-10, 321-15 and 321-20 in Subdivision 321-A,
compare the following with reference to the start year:
- the value of the adjusted liability for incurred claims (under the
amendments) at the end of the year; with
- the value of the liability for outstanding claims (immediately
prior to the amendments) at the end of the previous income
year; and
• with respect to working out the assessable income or deduction
following sections 321-50, 321-55 and 321-60 in Subdivision 321-B,
compare the following with reference to the start year:
- the value of the adjusted liability for remaining coverage
(under the amendments) at the end of year; with
- the value of the unearned premium reserve (immediately prior
to the amendments) at the end of the previous income year.
[Schedule 6, subitems 26(2), (3), (4) and (5)]
Transitional arrangements - extended transitional arrangements
6.52 The taxpayer may choose to apply the following extended transitional
arrangements instead of the transitional arrangements provided for under
item 26 of Schedule 6 to the Bill. These extended transitional arrangements
under item 27 are designed to isolate the changes that occur due to the
adoption of AASB 17 (as captured by the amendments in the new method
statements) and reallocate them over five income years ('relevant income
years').
6.53 The choice to apply these transitional arrangements under item 27 of
Schedule 6 to the Bill is irrevocable and is made by the taxpayer providing an
approved form to the Commissioner. The approved form must be provided
either by the day the taxpayer's income tax return is due to be lodged for the
applicable income year, or the day that tax return is lodged; whichever is
earlier.
[Schedule 6, subitem 27(2)]
6.54 The reallocation of assessable income or deductions applies for the relevant
income years, comprising of the start year and the four following income
years.
[Schedule 6, subitem 27(1)]
6.55 To avoid doubt, when applying item 27 of Schedule 6 to the Bill, no further
modification is made to the provisions as amended by the Schedule with
respect to Subdivisions 321-A and 321-B for the relevant income years.
Therefore, the taxpayer must still work out their income or deductions
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Income tax amendments for updates to the accounting standard for general insurance contracts
according to Subdivisions 321-A and 321-B (as amended) for those income
years (including for the start year, by working out the adjusted liability for
incurred claims and the adjusted liability for remining coverage for the year
previous to the start year), alongside the application of item 27 of Schedule 6
to the Bill that only seeks to reallocate the relevant assessable income and
deductions (see below).
[Schedule 6, subitem 26(3)]
6.56 To work out the amounts to be reallocated for over the five income years, work
out the following with reference to the start year:
• If the value of the liability for outstanding claims (immediately prior to
the amendments) at the end of the previous income year, exceeds the
value of the adjusted liability for incurred claims (under the
amendments) at the end of the previous income year; reallocate the
excess amount as assessable income over the relevant income years as
one-fifth of that amount; or
- if the value of the adjusted liability for incurred claims (under
the amendments) at the end of the previous income year,
exceeds the value of the liability for outstanding claims
(immediately prior to the amendments) at the end of the
previous income year; reallocate the excess amount as
deductions over the relevant income years as one-fifth of that
amount.
• If the value of the unearned premium reserve (immediately prior to the
amendments) at the end of the previous income year; exceeds the value
of the adjusted liability for remaining coverage (under the
amendments) at the end of previous income year; reallocate the excess
amount as assessable income over the relevant income years as
one-fifth of that amount; or
- if value of the adjusted liability for remaining coverage (under
the amendments) at the end of previous income year; exceeds
the value of the unearned premium reserve (immediately prior
to the amendments) at the end of the previous income year;
reallocate the excess amount as deductions over the relevant
income years as one-fifth of that amount.
[Schedule 6, subitems 27(4), (5), (6) and (7)]
6.57 As the policy intention is to reduce compliance costs for the general insurance
industry on the adoption of AASB 17 in financial reporting by broadly aligning
the tax law (by updating new terminology and method statements), these
transitional provisions require a comparison of the following information
considered largely available to the taxpayer, with reference to the start year:
• the relevant values at the end of the previous year immediately prior to
the amendments; and
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• the relevant values at the end of the previous year worked out under
the amendments (which broadly align with AASB 17); as the financial
reports that correspond to the start year include corresponding values
for the previous year worked out in accordance with AASB 17.
If the taxpayer ceases to carry on an insurance business at any time during the
relevant income years, the extended transitional provisions will also cease to
apply. Where this occurs, any amount of excess worked out under the extended
transitional provisions are not further reallocated and instead worked out as
assessable income or a deduction (as the case requires) for that income year
where the taxpayer ceases to carry on an insurance business.
[Schedule 6, subitem 27(8)]
6.58 Where there has not been a complete cessation of the insurance business in the
relevant income years, the taxpayer will continue to apply the extended
transitional provisions.
63
Non-arm's length expenses of
superannuation funds
Table of Contents:
Outline of chapter ................................................................................ 65
Context of amendments ....................................................................... 66
Comparison of key features of new law and current law ...................... 67
Detailed explanation of new law .......................................................... 68
Different approaches for different funds ........................................ 68
Meaning of non-arm's length and internal arrangements .............. 70
Types of expenses ........................................................................ 71
General expenses treatment ......................................................... 73
Commencement, application, and transitional provisions .................... 81
Outline of chapter
7.1 Schedule 7 to the Bill makes changes to the rules for non-arm's length
expenses for superannuation entities. For ease of reference, the word "expense"
is used to refer to a loss, outgoing or expenditure throughout this explanatory
memorandum in relation to Schedule 7 to the Bill.
7.2 The changes made by Schedule 7 to the Bill improve the operation of the rules
in relation to non-arm's length expenses that were introduced by the Treasury
Laws Amendment (2018 Superannuation Measures No. 1) Act 2019. Non-
arm's length expenses arise in two ways: where an expense is incurred for an
amount that is less than might have been expected to be incurred if the parties
had been dealing at arm's length, and where no expense is incurred but an
expense might have been expected to be incurred had the parties been dealing
at arm's length.
7.3 Schedule 7 to the Bill exempts large APRA-regulated funds, including exempt
public sector superannuation funds, PSTs and ADFs from the non-arm's length
income rules to the extent they relate to non-arm's length expenses. However,
65
Non-arm's length expenses of superannuation funds
these entities are still subject to the remaining non-arm's length income rules
for income derived on a non-arm's length basis.
7.4 For SMSFs and small APRA-regulated funds these amendments apply
different treatment depending on the type of non-arm's length expense
incurred.
7.5 Any non-arm's length expense is either a specific expense or a general
expense. A general expense is an expense that is not related to gaining or
producing income from a particular asset or assets of the fund. A specific
expense is any other expense. An expense incurred in relation to gaining or
producing income as a beneficiary of a trust through holding or acquiring a
fixed entitlement to the income of a trust is always a specific expense.
7.6 For specific expenses the previous treatment continues to apply, and the
amount of income that is taxed as non-arm's length income is the amount of
income derived from the scheme in which the parties were not dealing at arm's
length.
7.7 For general expenses the amount of income that is taxed as non-arm's length
income is twice the difference between the amount of the expense that might
have been expected to be incurred had the parties been dealing at arm's length,
and the amount the entity did incur. Where the entity did not incur any
expense, the amount of income that is taxed as non-arm's length income is
twice the amount that might have been expected to be incurred had the parties
been dealing at arm's length.
7.8 The total amount of an SMSF or small APRA-regulated fund's non-arm's
length component is capped at an entity's taxable income for the year not
including any assessable contributions or any deductions against assessable
contributions.
7.9 These changes apply to income derived in the 2018-19 income year or a later
income year, but not to expenses incurred or expected to have been incurred
prior to 1 July 2018.
Context of amendments
7.10 Superannuation industry stakeholders raised a range of concerns with the
original 2019 non-arm's length expense provisions contained in the Treasury
Laws Amendment (2018 Superannuation Measures No. 1) Act 2019.
Stakeholders also raised concerns with potential amendments to the non-arm's
length expense provisions released for consultation in January 2023.
Stakeholders expressed concerns that the law prior to these amendments led to
harsh outcomes for relatively minor breaches in respect of expenses, such as
accounting fees, that have a sufficient nexus to all income of the fund. In these
circumstances, a small advantage obtained by minimising an expense through a
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non-arm's length transaction can result in all income of the fund for that year
being taxed at the highest marginal rate.
7.11 When the original 2019 non-arm's length expense provisions were enacted,
they applied to the 2018-19 income year and following income years. This
resulted in the highest marginal tax rate applying in respect of income derived
in the 2018-19 income year, despite the expenses giving rise to that income
being incurred prior to the provisions being enacted.
7.12 Prior to these amendments, the provisions applied equally to all complying
superannuation entities, rather than being tailored to the level of risk. For large
APRA-regulated funds there is a lower risk that these funds will gain a tax
advantage by engaging in schemes with related parties to incur expenses at less
than arm's length. These funds are exempt from additional compliance burdens
to account for this lower tax integrity risk.
Comparison of key features of new law and
current law
Table 7.1 Comparison of new law and current law
New law Current law
Non-arm's length expenses rules don't Non-arm's length expenses rules apply to all
apply to large APRA-regulated funds, complying superannuation entities.
exempt public sector superannuation funds,
PSTs and ADFs.
For SMSFs and small APRA-regulated Non-arm's length general expenses incurred
funds, the amount of non-arm's length in deriving all income result in that income
income taxed at the highest marginal tax being taxed at the highest marginal tax rate.
rate is twice the difference between the
amount that would have been expected to
Non-arm's length general expenses that
have been incurred for a general expense at
might have been expected to be incurred, if
arm's length, and the amount actually
the parties had been dealing at arm's length,
incurred, with no deductions applying
in deriving all income, result in that income
against that amount. However, the fund's
being taxed at the highest marginal tax rate.
total non-arm's length component cannot
exceed the fund's assessable income minus
deductions, excluding assessable
contributions and deductions against them.
Expenses incurred or expected to have been Expenses incurred or expected to have been
incurred before 1 July 2018 cannot result in incurred before 1 July 2018 can result in the
the application of the non-arm's length application of the non-arm's length expense
expense rules rules in relation to income derived in
2018-19 and later income years
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Detailed explanation of new law
7.13 These amendments change the non-arm's length expense rules for complying
superannuation entities. These changes restrict the operation and application of
the rules.
Different approaches for different funds
7.14 These amendments apply different rules to different entities based on the size
of the entity. The non-arm's length expense rules only apply to small APRA-
regulated funds and SMSFs. The existing definition of SMSF in section 995-1
of the ITAA 1997 is used. A small APRA-regulated fund is any regulated
superannuation fund that has 6 or fewer members other than an SMSF.
[Schedule 7, item 3, paragraph 295-550(5)(b) and (c) of the ITAA 1997]
7.15 All other complying superannuation entities are exempt from the non-arm's
length expense rules. These entities include APRA-regulated funds with more
than 6 members, PSTs, ADFs, and exempt public sector superannuation funds.
The size of these entities means that they are less likely to be influenced by
individual members or related parties, and those related parties will also have
less incentive to enter into schemes of the kind which result in tax arbitrage.
[Schedule 7, items 1, 2 and 3, subsections 295-545(2) and 295-550(1) and
295-550(5) of the ITAA 1997]
7.16 By contrast, members of smaller funds may have the capacity to control or
influence the arrangements of the fund to directly inflate their superannuation
balance though non-arm's length expenses to take advantage of lower tax rates.
The tax penalty for non-arm's length expenses is a strong disincentive from
using non-arm's length arrangements for small funds which cannot be
adequately addressed through other provisions such as those related to
contributions and trustee responsibilities.
7.17 For small APRA-regulated funds and SMSFs, the rules apply a different
approach based on the kind of expense that is, or might have been expected to
be, incurred. Whilst specific expenses continue to be subject to the same
treatment as prior to these amendments, the consequences of gaining an
advantage through a non-arm's length transaction in relation to general
expenses are lessened.
7.18 This is achieved by amending the existing non-arm's length expense provision
in paragraph 295-550(1)(b) so that it does not apply to expenses incurred that
are covered under subsection 295-550(8), which covers general expenses
incurred for an amount that is less than what might have been expected to be
incurred at arm's length.
[Schedule 7, item 2, subsection 295-550(1) of the ITAA 1997]
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7.19 Similarly, paragraph 295-550(1)(c) is amended so that it does not apply to
expenses covered under subsection 295-550(9), which covers general expenses
which are non-arm's length expenses where no expense was incurred but might
have been expected to be incurred at arm's length.
[Schedule 7, item 2, subsection 295-550(1) of the ITAA 1997]
7.20 For small APRA-regulated funds and SMSFs with a general non-arm's length
expense, the resulting non-arm's length income is calculated under subsection
295-550(8) where an expense is incurred and subsection 295-550(9) where no
expense is incurred. Where an expense is incurred, the resulting non-arm's
length income is the amount that might have been expected to be incurred if
the parties had been at arm's length, minus the amount actually incurred, with
the resulting number multiplied by two. Where no expense is incurred, the
resulting non-arm's length income is twice the amount that might have been
expected to be incurred if the parties had been at arm's length.
[Schedule 7, item 4, subsections 295-550(8) and 295-550(9) of the ITAA
1997]
7.21 To implement this approach, the amendments change the way that the
non-arm's length component is calculated with a different approach for small
funds, meaning SMSFs and small APRA-regulated funds, and other complying
superannuation entities.
[Schedule 7, item 1, subsections 295-545(2) and 295-545(2A) of the ITAA
1997]
7.22 Large APRA-regulated funds, PSTs, ADFs and exempt public sector
superannuation funds continue to calculate their non-arm's length component
in the same way as prior to these amendments, but the rules in relation to non-
arm's length expenses do not apply to these entities.
[Schedule 7, item 1, subsection 295-545(2) of the ITAA 1997]
7.23 For small APRA-regulated funds and SMSFs, there is a change to the
deduction rules in relation to general expenses. The actual amount incurred for
a general non-arm's length expense will not be deductible against the non-
arm's length component. This is because the new approach for calculating the
consequence of incurring a general non-arm's length expense already takes
into account any amount actually incurred in relation to the general expense,
by subtracting it from the amount that might have been expected to be incurred
if the parties had been at arm's length, before multiplying the result by two to
arrive at the non-arm's length income. Therefore, in calculating the non-arm's
length income relating to a general non-arm's length expense, there is no
deduction available for the amount actually incurred so that there is not double
counting of that amount.
[Schedule 7, item 4, subsections 295-550(8) and 295-550(9) of the ITAA
1997]
7.24 For small APRA-regulated funds and SMSFs a cap is introduced on their total
non-arm's length component to ensure that assessable contributions minus
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Non-arm's length expenses of superannuation funds
related deductions are always part of the low tax component. Assessable
contributions are subject to other taxing provisions, and it is not intended that
they be subject to higher rates of tax under the non-arm's length income
provisions.
7.25 These amendments do not alter the existing meaning or definition of
'contribution'. Contribution takes its ordinary meaning as it does in other parts
of the ITAA 1997, for example in section 285-1 of the ITAA 1997, and
nothing in Schedule 7 to the Bill disturbs that meaning.
7.26 A small APRA-regulated fund or SMSF's non-arm's length component is
calculated as the lesser of:
• the sum of:
- any non-arm's length income amount (other than non-arm's length
income as a result of a general expense) less any deduction
attributable to that non-arm's length income amount; and
- any non-arm's length income as a result of a general expense that
is a non-arm's length expense; and
• the total of an entity's taxable income for the year, excluding any
contributions that are part of an entity's assessable income (this is
achieved by subtracting them from the calculation), and excluding any
deductions against those contributions (this is achieved by adding them
to the calculation).
[Schedule 7, item 1, subsection 295-545(2A) of the ITAA 1997]
Meaning of non-arm's length and internal
arrangements
7.27 For the non-arm's length income rules to apply to a scheme, it is necessary that
the parties to the scheme were not dealing with each other at arm's length.
7.28 The requirement that parties not be dealing with each other at arm's length
means that the non-arm's length income rules do not apply in respect of a
superannuation entity's arrangements that are purely internal. This is because
an entity's internal functions are not undertaken with another party on any
terms, non-arm's length or otherwise.
7.29 For example, an SMSF trustee may undertake bookkeeping activities for no
charge in performing their trustee duties. Such internal arrangements are
outside of the scope of the non-arm's length income rules as they do not
constitute a scheme between parties dealing with one another on a non-arm's
length basis.
7.30 In certain cases, the trustee of a fund may undertake particular activities in
performing its duties or choose to outsource those functions to third parties (for
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example, if the fund had a real estate portfolio, the trustee may be able to
manage the properties or contract the services of a real estate agent). The
question of whether the non-arm's length income rules apply in respect of
services or functions that are undertaken by the trustee depends on the capacity
in which the trustee undertakes those activities.
7.31 As a general rule, the trustee of an SMSF is prevented from charging for the
services or functions that it undertakes in its capacity as trustee by paragraph
17A(1)(f) of the SIS Act. Services of this kind do not involve a scheme
between parties as they fundamentally relate to the trustee's obligations in
respect of the fund.
7.32 If the trustee is not acting as a trustee but is instead providing services that are
procured as a third-party, the non-arm's length income rules are intended to
apply. Provided that the amount charged for any such services is not less than
that which would be expected to be charged between parties dealing at arm's
length, the dealings are not subject to the non-arm's length income rules. In
such cases, the trustee of an SMSF may also be prevented from charging any
more than the arm's length price because of the regulatory requirements in the
SIS Act (see section 17B of the SIS Act, which permits a trustee to charge up
to an arm's length amount for duties or services performed other than in the
capacity as trustee).
Types of expenses
7.33 When a small APRA-regulated fund or an SMSF incurs an expense as a part of
a scheme with related parties and that expense is related to earning income
from a particular asset of the fund, that is referred to here as a specific expense.
[Schedule 7, item 2, paragraphs 295-550(1)(b) and (c) of the ITAA 1997]
7.34 This also applies where an expense is not incurred but is expected to be
incurred, which is referred to as an expected expense.
7.35 A general expense is an expense that is incurred otherwise than in gaining or
producing income from any particular asset or assets of the fund (including the
acquisition of the asset itself).
[Schedule 7, item 4, subsections 295-550(8) and 295-550(9) of the ITAA
1997]
7.36 For the purposes of this explanatory memorandum, any other expense incurred
as part of a scheme where parties are not dealing with each other at arm's
length and where the expense is less than would have been expected to have
been incurred had the parties been dealing with each other at arm's length
(including not being incurred where it would have been expected to have been
incurred) and that expense is in relation to a particular asset or assets, is
referred to as a specific expense. This term is not defined in the legislation but
is used to differentiate these expenses from general expenses.
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Non-arm's length expenses of superannuation funds
7.37 Even where the income from the particular asset or assets comprises all of the
income of the fund in a particular year, the expense is still a specific expense if
it relates to the particular asset or assets.
7.38 To establish which category an expense falls into, it is necessary to examine
whether or not the expense is incurred in relation to a particular asset or assets
of the fund. Where an expense is incurred in relation to a particular asset or
assets of the fund it is a specific expense. In addition to the acquisition of an
asset itself, some examples of specific expenses include:
• maintenance expenses for a rental property;
• investment advice fees for a particular pool of investments; and
a limited recourse borrowing arrangement for the purchase of a
specific asset.
7.39 Although this list provides some guidance about what types of expenses are
specific expenses, it is not intended to be an exhaustive list and each expense
must be considered in relation to the facts and circumstances in which it is
incurred. For example, expenses related to income derived by an entity as a
beneficiary of a trust through holding or acquiring a fixed entitlement to the
income of a trust are always specific expenses. This is because such expenses
are always related to a particular asset or assets as a fixed entitlement is itself a
particular asset. No changes are made to how the provisions apply in
circumstances where specific expenses are non-arm's length expenses beyond
excluding large APRA-regulated funds, exempt public sector superannuation
funds, PSTs and ADFs.
[Schedule 7, item 3, paragraphs 295-550(5)(b) and (c) of the ITAA 1997]
7.40 Where a specific expense is incurred as a result of a scheme in which the
parties are not dealing with each other at arm's length and the entity is a small
APRA-regulated fund or SMSF, the amount of income that is non-arm's length
income is the same as the treatment prior to these amendments. All of the
ordinary or statutory income that results from the scheme is non-arm's length
income.
[Schedule 7, item 2, paragraphs 295-550(1)(b) and (c) of the ITAA 1997]
7.41 As general expenses have a sufficient nexus to the entirety of the income of the
fund, rather than a particular asset or assets of the fund, general non-arm's
length expenses are treated differently from specific expenses. These expenses
usually relate to the operation or obligations of the fund as a whole.
[Schedule 7, item 4, paragraph 295-550(8)(b) of the ITAA 1997]
7.42 Prior to these amendments, this resulted in the entire income of the fund
becoming non-arm's length income and being taxed at a higher tax rate, even
when the expense that is incurred on a non-arm's length basis, or not incurred
at all, can be relatively small.
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General expenses treatment
7.43 Under these amendments, when the expense that is incurred on a non-arm's
length basis is a general expense, the income that is non-arm's length income
as a result of the scheme is limited to twice the amount of the difference
between the actual amount of the expense incurred and the amount of the
expense that might have been expected if the parties had been dealing at arm's
length. Where no expense was incurred, the amount would be twice the
amount that might have been expected if the parties had been dealing at arm's
length.
[Schedule 7, item 4, subsections 295-550(8) and 295-550(9) of the ITAA
1997]
7.44 As the amount of any expense actually incurred has already been taken into
account under the approach outlined in the paragraph above in calculating the
amount of non-arm's length income that results from a non-arm's length
general expense, the amount actually incurred for a non-arm's length general
expense cannot be deducted against a fund's non-arm's length component.
[Schedule 7, item 1, subsection 295-545(2A) of the ITAA 1997]
7.45 The non-arm's length component is capped at an amount equal to the entity's
total taxable income for the year other than assessable contributions and
excluding deductions against assessable contributions. This cap applies where
it results in a smaller amount than the total of all amounts of non-arm's length
income calculated for all general and specific non-arm's length expenses and
any other non-arm's length income arising from the non-arm's length income
provisions that aren't related to expenses. If the cap calculation results in a
negative number, the non-arm's length component is zero.
[Schedule 7, item 1, subsection 295-545(2A) of the ITAA 1997]
7.46 In this way the maximum amount of non-arm's length component does not
exceed taxable income for the year and never includes contributions even if
there is no other income of the fund.
7.47 Although not intended to be an exhaustive list, some of the items that would be
expected to fall within the category of general expenses are:
• actuarial costs;
• accountant fees;
• fees to an auditor;
• administrative costs in managing the fund;
• trustee fees;
• costs of complying with the regulatory obligations of the
fund; and
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Non-arm's length expenses of superannuation funds
• investment adviser fees, where those fees relate generally
to the operation of the fund and not to a specific
investment or a particular pool of investments.
Example 7.1
Al is the director of Purple Co. Purple Co is the corporate trustee of
an SMSF of which Al is the sole member. Al, through his
accounting firm Al Accountants, provides general accounting
services to his SMSF in circumstances such that these services are
provided in a capacity other than as a trustee and meet the other
requirements of section 17B of the SIS Act. Although Al's
accounting firm charges his clients $3,000 for these types of
services, his SMSF acquires the services free of charge.
The acquisition of accounting services by the SMSF constitutes a
scheme between Al and their SMSF in which the parties were not
dealing with each other at arm's length. No expense was incurred
when the SMSF would have been expected to have incurred an
expense in respect of acquiring the accounting services had the
parties been dealing at arm's length, so the non-arm's length
expense provisions apply. The accounting services were general in
nature and did not relate to any particular asset or assets so are a
general expense that is a non-arm's length expense captured under
subsection 295-550(9).
The total income of the SMSF in 2023-24 is $20,000 in rent from a
rental property to which $5,000 in eligible deductions for
maintenance apply, resulting in a taxable income in 2023-24 of
$15,000. No assessable contributions were made in that income
year.
As no expense was incurred towards the general accounting
services, the amount of non-arm's length income under
subparagraph 295-545(2A)(a)(ii) is twice the amount that might
have been expected to have been incurred, or twice the $3,000
value of the services, which is $6,000.
Applying the cap on the total non-arm's length component, the cap
amount is the total of income other than assessable contributions,
minus deductions other than deductions against assessable
contributions. In this case, the cap is the $20,000 in rental income
minus the $5,000 in deductions against that rental income, giving
$15,000. As the cap on the total non-arm's length component is
higher than the non-arm's length component arrived at above, the
non-arm's length component remains at $6,000 to be taxed at the
highest marginal rate. This leaves a low-tax component of $9,000.
The low tax component is any remaining taxable income after
calculating the non-arm's length component.
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Example 7.2
Min is a trustee of an SMSF. The members of the SMSF are Min
and Min's spouse Tony. Min is a lawyer and through her law firm,
Min Lawyers, provides general legal services, worth $10,000 to
their SMSF which the SMSF acquires for $5,000. These services
were provided in circumstances such they were provided in a
capacity other than as a trustee and meet the other requirements of
section 17B of the SIS Act.
Min offers the same services she provides to the SMSF to the
general public and the market value of these services is readily
apparent from the fee schedule available on Min's website.
The acquisition of legal services by the SMSF constitutes a scheme
between Min and their SMSF in which the parties were not dealing
with each other at arm's length, and the expense was incurred at a
value less than what the SMSF would have been expected to have
incurred as an expense had the parties been dealing at arm's length,
so the non-arm's length expense provisions apply. The legal
services were general in nature and did not relate to any particular
asset or assets so are a general expense that is a non-arm's length
expense captured under subsection 295-550(8).
The total income of the SMSF in 2023-24 is $23,000 in rent from a
rental property to which $10,000 in eligible deductions for
maintenance apply. No assessable contributions were made in that
income year.
The taxable income is calculated as $23,000 in rent income minus
$10,000 in deductions minus $5,000 charged for legal services,
equalling $8,000.
As a general expense of $5,000 was incurred, which would have
been $10,000 if the parties had been dealing at arm's length, the
amount of non-arm's length income is twice the amount of the
difference between what was incurred and what would have been
expected to have been incurred had the parties been dealing at
arm's length, which is $10,000.
Applying the cap on the total non-arm's length component, the cap
amount is the total of income other than assessable contributions,
minus deductions other than deductions against assessable
contributions. In this case, the cap is the $23,000 in rental income
minus the $15,000 in deductions, giving $8,000. This cap is lower
than the non-arm's length component arrived at above, so the non-
arm's length component becomes $8,000 instead of $10,000, as
previously calculated.
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Non-arm's length expenses of superannuation funds
This leaves a low-tax component of $0. The low tax component is
any remaining taxable income after calculating the non-arm's
length component.
Example 7.3
Andrew and Stephanie are married and are trustees of their SMSF
and the only members of the fund.
Andrew is a lawyer and through his law firm, Andrew Lawyers,
provides general legal services, which the SMSF acquires at no
charge. The market rate for these services is $2,000 which is
readily apparent from the fee schedule available on Andrew's
website. These services were provided in circumstances such they
were provided in a capacity other than as a trustee and meet the
other requirements of section 17B of the SIS Act.
The acquisition of legal services by the SMSF constitutes a scheme
in which the SMSF and Andrew are not dealing with each other at
arm's length, and the expense was incurred at a value less than
what the SMSF might have been expected to have incurred at arm's
length. The legal services were general in nature and did not relate
to any particular asset or assets so are a general expense that is a
non-arm's length expense captured under subsection 295-550(9).
Stephanie is an investment advisor and through her business,
Steph's Advisory Firm, provides investment services to her SMSF.
Stephanie provides her SMSF with investment services for the fund
as a whole, not on any specific investment or pool of investments.
The market value of these services is $2,000 which the SMSF
acquires at no charge. These services were provided in
circumstances such they were provided in a capacity other than as a
trustee and meet the other requirements of section 17B of the SIS
Act.
The acquisition of investment advice for free constitutes a scheme
in which the SMSF and Stephanie are not dealing with each at
arm's length, the advice is valuable and is provided at no cost and
the facts establish that Stephanie can and does charge $2,000 for
the same service provided to unrelated parties. These services were
general in nature, being advice acquired by the SMSF on its general
investment strategies, and do not relate to any particular asset or
assets of the fund. They are therefore a general expense that is a
non-arm's length expense captured under subsection 295-550(9).
The total income from the SMSF in 2023-24 is $22,000, this is
earned from a rental property. There are $7,000 of deductions
associated with this income resulting in taxable income for 2023-24
being $15,000.
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There were two general expenses that are non-arm's length
expenses for which a total of $4,000 might have been expected to
be incurred had the parties been dealing at arm's length, but no
expense was incurred for either. The amount of non-arm's length
income would be $8,000 representing twice the amount of the
expenses that were not incurred but would have been if the parties
had been dealing at arm's length.
Applying the cap on the total non-arm's length component under
the 295-545(2A)(b), the non-arm's length component cap is
$15,000. As the cap is higher than the amount previously
calculated, the non-arm's length component remains $8,000.
This leaves a low-tax component of $7,000. The low tax
component is any remaining taxable income after calculating the
non-arm's length component.
Example 7.4
Jai is the sole director of Yellow Co. Yellow Co is the corporate
trustee of an SMSF of which Jai is the sole member. Jai is an
accountant and through his accounting firm Jai Accountants,
provides general accounting services to their SMSF worth $3,000
which the SMSF acquires free of charge. These services were
provided in circumstances such they were provided in a capacity
other than as a trustee and meet the other requirements of section
17B of the SIS Act.
The acquisition of accounting services by the SMSF constitutes a
scheme between Jai and their SMSF in which the parties were not
dealing with each other at arm's length, and no expense was
incurred when the SMSF would have been expected to have
incurred an expense had the parties been dealing at arm's length.
The accounting services were general in nature and did not relate to
any particular asset or assets so are a general expense that is a non-
arm's length expense captured under subsection 295-550(9).
The total income of the SMSF in 2023-24 is $20,000 in rent from a
rental property to which $5,000 in eligible deductions for interest
apply. No assessable contributions were made in that income year.
Jai's spouse Sam is a licensed builder and blocks time out of his
work calendar to conduct renovations on the SMSF's rental
property worth $3,000 for which nothing is charged. These services
are provided by an entity (Sam) who is separate from the SMSF
and as such, should have been on arm's length terms to avoid non-
arm's length income consequences. The renovations were an
expense incurred in deriving income from a particular asset, the
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Non-arm's length expenses of superannuation funds
asset being the rental property. The renovations are a specific non-
arm's length expense to which paragraph 295-550(1)(c) applies.
The taxable income of the fund in 2023-24 is $20,000 in rental
income minus $5,000 in deductions, which equals $15,000.
When calculating the non-arm's length component, the fund must
account for a non-arm's length specific expense related to the
$20,000 in rental income and a general expense that is a non-arm's
length expense related to the accounting services.
In relation to the specific expense, the amount under subparagraph
295-545(2A)(a)(i) is the non-arm's length income arising from the
specific non-arm's length expense under subsection 295-550(1)
minus attributable deductions, which is the $20,000 in rental
income minus the $5,000 in rental attributable deductions resulting
in $15,000.
In relation to the general expense, the amount under subparagraph
295-545(2A)(a)(ii) is the non-arm's length income arising from the
general expense that is a non-arm's length expense under
subsection 295-550(9), which in this case is 2x $3,000 which
equals $6,000.
The sum of the amounts under subparagraphs 295-545(2A)(a)(i)
and (ii) is $15,000 + $6,000 which equals $21,000.
The cap on the non-arm's length component under
paragraph 295-545(2A)(b) is the entity's taxable income excluding
assessable contributions and any deductions against assessable
contributions. In this case, this is $15,000 as there are no assessable
contributions or deductions against them.
The amount of the non-arm's component is the lesser of the amount
under paragraph 295-545(2A)(a) and the amount under paragraph
295-545(2A)(b). As $15,000 is less than $21,000, the total
non-arm's length component is $15,000.
This leaves a low-tax component of $0. The low tax component is
any remaining taxable income after calculating the non-arm's
length component.
Example 7.5
Malia is one of four members of a small APRA-regulated
superannuation fund. She is not a trustee of the fund because small
APRA-regulated superannuation funds need to have a licensed
corporate trustee. Malia is an accountant and provides general
accounting services to the small superannuation fund worth
$10,000 which the small superannuation fund acquires for $5,000.
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The acquisition of accounting services by the fund constitutes a
related party scheme between Malia and the small superannuation
fund. As the amount of the expense the small superannuation fund
would have been expected to have incurred had the parties been
dealing at arm's length, the non-arm's length expense provisions
apply. The accounting services were general in nature and did not
relate to any particular asset or assets so are a general expense that
is a non-arm's length expense captured under subsection 295-
550(8).
The total income of the small superannuation fund in 2023-24 is
$23,000 in rent from a rental property which is rented to Malia's
accounting business. Had the property been rented at arm's length,
it might have been expected to receive $15,000 in rent based on
known rents for comparable tenanted commercial properties.
The rental arrangement constitutes a scheme between Malia's
accounting business and the small superannuation fund at arm's
length, resulting in a higher rental income than the rental income
that might have resulted had the property been rented at arm's
length. The non-arm's length income provisions apply under
paragraph 295-550(1)(a) to make the rental income non arm's
length income.
Maintenance was carried out on the commercial property at arm's
length constituting $10,000 in eligible deductions. No assessable
contributions were made in that income year.
The taxable income of the fund in 2023-24 is $23,000 rental
income minus $10,000 in deductions for property maintenance and
minus $5,000 incurred for accounting services, which equals
$8,000.
Under 295-550(1), the $23,000 of property income of the fund is
non-arm's length income. The non-arm's length component is
calculated by adding the non-arm's length rental income of $23,000
minus the related deduction of $10,000 plus the amount derived for
the general expense that is a non-arm's length expense, being
$10,000, giving a total of $23,000. However, the non-arm's length
component cap in paragraph 295-545(2A)(b) equivalent to taxable
income of $8,000 will limit the non-arm's length component to
$8,000.This leaves a low-tax component of $0. The low tax
component is any remaining taxable income after calculating the
non-arm's length component.
Example 7.6
Tanya is a trustee of her SMSF. Tanya is a lawyer and through her
firm Tanya Solicitors, provides general legal services to her SMSF
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Non-arm's length expenses of superannuation funds
worth $17,000, which the SMSF acquires for $12,000. These
services were provided in circumstances such that they were
provided in a capacity other than as a trustee and meet the other
requirements of section 17B of the SIS Act.
Tanya offers the same services she provides the SMSF to the
general public and the market value of these services is readily
apparent from the fee schedule available on Tanya's website.
The acquisition of legal services by the SMSF constitutes a scheme
between Tanya and their SMSF in which the parties were not
dealing with each other at arm's length, and the expense was
incurred at a value less than what the SMSF would have been
expected to have incurred as an expense had the parties been
dealing at arm's length, so the non-arm's length expense provisions
apply. The legal services were general in nature and did not relate
to any particular asset or assets so are a general expense that is a
non-arm's length expense captured under subsection 295-550(8).
The taxable income of the SMSF in 2023-24 is $34,000 in rent
from a rental property, to which $15,000 in eligible deductions for
property maintenance apply, together with a $12,000 deduction for
the legal services, plus $10,000 in assessable contributions to which
a $1,000 deduction applies. The taxable income of the fund is
$16,000.
In relation to the general expense, the approach under subsection
295-550(8) gives twice the difference between the $12,000 that was
incurred for legal services and the $17,000 value of the expense
had parties been dealing at arm's length, which gives $10,000.
The cap on the non-arm's length component for the purposes of
paragraph 295-545(2A)(b) is calculated as $16,000 in taxable
income less the $10,000 in assessable contributions plus the $1,000
deduction incurred in relation to the assessable contributions,
equalling $7,000. As this is lower than the $10,000 previously
calculated, the cap applies to limit the non-arm's length component
to $7,000.
This leaves a low-tax component of $9,000. The low tax
component is any remaining taxable income after calculating the
non-arm's length component.
The low tax component for this fund would be equal to the amount
of assessable contributions excluded from the non-arm's length
component minus deductions attributable to them. This ensures the
assessable contributions are never taxed at the highest marginal tax
rate.
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Commencement, application, and transitional
provisions
7.48 The amendments commence on the start of the first quarter after the day the
Act receives Royal Assent.
[Schedule 7, item 5, Application provision]
7.49 These amendments apply to income derived in the 2018-19 income year or
later years, and any expense incurred, or not incurred but which might have
been expected to have been incurred, in the 2018-19 income year or later.
7.50 To avoid doubt, although the amendments apply to income derived in the
2018-19 income year or a later year, they do not apply if that income is derived
in relation to an expense that is incurred, or was not incurred but might have
been expected to have been incurred, prior to the 2018-19 income year.
7.51 For the avoidance of doubt, because of Schedule 7 to the Bill there is no time
at which the amendments made by Schedule 2 to the Treasury Laws
Amendment (2018 Superannuation Measures No. 1) Act 2019 apply.
7.52 When the non-arm's length expense rules were introduced, they applied to
income derived in the 2018-19 and later income years. Schedule 7 to the Bill
amends the non-arm's length expense rules retrospectively from their first
operation. This retrospectivity was requested by taxpayers during consultation
on the draft legislation, to provide certainty and to ensure that the benefits of
the amendments are backdated. Under Schedule 7 to the Bill, the non-arm's
length expense rules will never have applied to large APRA-regulated funds or
exempt public sector superannuation funds, PSTs and ADFs and the
consequences of a general non-arm's length expense for small APRA-
regulated funds and SMSFs will always be limited to the approach set out in
Schedule 7 to the Bill.
7.53 As these changes are to the benefit of taxpayers compared with the 2018-19
amendments this retrospectivity does not disadvantage any taxpayers.
7.54 Accepting the concerns raised by stakeholders as outlined in para 7.10 about
the potential for harsh consequences as a result of the amendments made by
Treasury Laws Amendment (2018 Superannuation Measures No.1) Act 2019,
making these changes retrospective ensures there is no period where those
harsh consequences apply and provides consistency by ensuring the new
approach to non-arm's length expenses applies instead.
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Table of Contents:
Outline of chapter ................................................................................ 83
Context of amendments ....................................................................... 83
Comparison of key features of new law and current law ...................... 84
Detailed explanation of new law .......................................................... 85
'Superannuation complaints' and 'superannuation-related
complaints' .................................................................................... 86
Consequential amendments ................................................................ 88
Commencement, application, and transitional provisions .................... 88
Outline of chapter
8.1 Schedule 8 to the Bill amends the Corporations Act to reinstate AFCA's
jurisdiction to hear complaints relating to superannuation, whether or not they
meet the definition of superannuation complaint in the Corporations Act. This
reinstates the original policy intent, following the MetLife decision.
8.2 All legislative references in this Chapter are to the Corporations Act unless
otherwise stated.
Context of amendments
8.3 Part 7.10A of the Corporations Act established the AFCA scheme to resolve
disputes about products and services provided by financial firms. The AFCA
scheme replaced several other dispute resolution bodies, including the
Superannuation Complaints Tribunal.
8.4 The AFCA scheme is an external dispute resolution scheme for consumers
unable to resolve complaints with member financial services organisations.
All Australian financial services licensees, Australian credit licensees,
authorised credit representatives and superannuation trustees (other than
trustees of SMSFs) are required to be members of AFCA.
AFCA determinations are binding on members of the scheme.
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AFCA scheme
8.5 The AFCA scheme is largely governed by the AFCA Rules, which form part
of a contract between AFCA and participating financial firms. However,
Division 3 of Part 7.10A of the Corporations Act provides AFCA with certain
statutory powers to allow it to manage superannuation complaints effectively.
These mirror the former powers of the Superannuation Complaints Tribunal.
The statutory powers are required because some superannuation complaints
cannot be resolved by relying on contractual obligations - for example, they
may involve third parties.
8.6 On 27 October 2022, the Full Federal Court found in MetLife that, due to the
operation of section 1053 of the Corporations Act, a complaint relating to
superannuation could only be brought under the AFCA scheme if it fell within
one of the categories identified in subsection 1053(1). That is, a complaint
relating to superannuation could only be brought to AFCA if it met the
definition of superannuation complaint.
8.7 This is contrary to the original policy intent. The policy intent of Division 3 of
Part 7.10A of the Corporations Act is to provide AFCA with additional
statutory powers to manage superannuation-related complaints effectively. It
was not intended to limit the complaints that may be brought under the AFCA
scheme.
8.8 The MetLife decision has led to AFCA being unable to consider certain
complaints about insurance policies held inside superannuation, which it would
otherwise be able to determine.
8.9 Schedule 8 to the Bill reinstates the original intent of Division 3 of Part 7.10A
of the Corporations Act, allowing consumers to bring superannuation-related
complaints to AFCA.
Comparison of key features of new law and
current law
Table 8.1 Comparison of new law and current law
New law Current law
A complaint relating to superannuation A complaint relating to superannuation may
may be made to AFCA even if the only be made to AFCA if it meets the
complaint does not meet the definition of a definition of a superannuation complaint.
superannuation complaint. Special rules Special rules apply to superannuation
apply to superannuation complaints. complaints.
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Detailed explanation of new law
8.10 Section 1053 of the Corporations Act defines superannuation complaint as a
complaint made under the AFCA scheme that:
• the trustee of a regulated superannuation fund or ADF has made a
decision relating to a particular member or beneficiary (or particular
former member or beneficiary) that was unfair or unreasonable;
• a decision by a trustee maintaining a life policy to admit a member to
the life policy fund was unfair or unreasonable;
• the conduct of an insurer, or of a representative of an insurer, in
relation to the sale of an annuity policy was unfair or unreasonable;
• a decision of an insurer under an annuity policy is or was unfair or
unreasonable;
• a decision of a superannuation provider in relation to certain
information provided to the Commissioner was unfair or unreasonable;
• the conduct or decision of a retirement savings account provider, or of
a representative of a retirement savings account provider, relating to
the opening of a retirement savings account was unfair or
unreasonable;
• a decision of a retirement savings account provider relating to a
particular retirement savings account holder or former retirement
savings account holder is or was unfair or unreasonable;
• the conduct of an insurer, or of a representative of an insurer, relating
to the sale of insurance benefits in relation to a contract of insurance
where the premiums are paid from a retirement savings account, was
unfair or unreasonable;
• a decision of an insurer relating to a contract of insurance where the
premiums are paid from a retirement savings account is or was unfair
or unreasonable; or
• a decision by a death benefit decision-maker relating to the payment of
a death benefit is or was unfair or unreasonable.
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AFCA scheme
8.11 Schedule 8 to the Bill preserves this definition of superannuation complaint.
However, this Schedule clarifies the policy intent that other types of
superannuation-related complaints may also be made under the AFCA scheme.
That is, a person may make a superannuation-related complaint under the
AFCA scheme even if it does not meet the definition of superannuation
complaint in section 1053.
[Schedule 8, items 1, 2, 6, 9 and 10, section 9 (definition of superannuation
complaint), section 761A (definition of superannuation complaint),
subsections 1053(1) and 1053(3) and section 1053B of the Corporations Act]
'Superannuation complaints' and 'superannuation-
related complaints'
8.12 AFCA has a general remit to deal with complaints about financial firms in
relation to the provision of financial products and services, credit, and similar
matters. The Corporations Act imposes mandatory requirements on AFCA for
dealing with complaints in general (under sections 1051 and 1052).
8.13 The Corporations Act imposes additional legislative requirements on AFCA,
and provides AFCA with additional powers, for dealing with specified
superannuation complaints as listed in section 1053.
8.14 AFCA sets its own rules for dealing with complaints, in accordance with its
constitution and any legislative requirements. Any material changes to the
AFCA Rules must be approved by ASIC (under section 1052D of the
Corporations Act).
8.15 If a complaint meets the legislative definition of superannuation complaint,
it must be dealt with by AFCA in accordance with the legislative requirements
set out in Division 3 of Part 7.10A.
8.16 Any other complaint about a financial firm - including a
superannuation-related complaint which does not meet the definition of
superannuation complaint in s1053 - is not subject to the requirements in
Division 3. It is open to AFCA to otherwise deal with these complaints as
appropriate under its general remit.
Example 8.1 Superannuation complaint
Jennifer is a member of JPZ Super, which is a regulated
superannuation fund (not an SMSF). As a member of JPZ Super,
Jennifer is entitled to default total and permanent disability
insurance cover. The insurance policy is held by the trustee of JPZ
Super under a group policy with the Purple Insurance Company.
Following a serious accident, Jennifer contacts JPZ Super to lodge
a claim for a benefit under the superannuation group policy.
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Purple Insurance Company denies the claim and refuses to pay the
total and permanent disability benefit in respect of Jennifer.
Jennifer complains about this decision to the trustee of JPZ Super
and is disappointed when the trustee decides not to seek a review of
Purple Insurance Company's decision not to pay the claim. Still
dissatisfied with JPZ Super's decision after going through their
internal dispute resolution process, Jennifer decides to lodge a
complaint with AFCA.
Jennifer makes a complaint against the trustee of JPZ Super, on the
basis that the trustee's decision was unfair or unreasonable. This
complaint satisfies the definition of a superannuation complaint
(see paragraph 1053(1)(a) of the Corporations Act) and therefore
must be considered by AFCA as a superannuation complaint.
If Jennifer's complaint meets the AFCA Rules for dealing with
superannuation complaints, AFCA could then (under section 1054
of the Corporations Act) join the Purple Insurance Company to
Jennifer's complaint against the trustee of JPZ Super. This would
enable AFCA to deal with the complaint as it relates to both the
decision of the Purple Insurance Company, and the decision of the
trustee of JPZ Super.
Example 8.2 Superannuation-related complaint
If Jennifer's complaint against the trustee of JPZ Super cannot be
heard by AFCA as a superannuation complaint, for example in the
event it does not meet the AFCA Rules for dealing with
superannuation complaints, then AFCA cannot consider Jennifer's
complaint against the trustee.
However, Jennifer could consider lodging a complaint with AFCA
about the decision of the Purple Insurance Company to deny her
claim. Such a complaint would relate to superannuation but would
not satisfy the definition of superannuation complaint in s1053 of
the Corporations Act.
Therefore, this complaint could be considered by AFCA as a
complaint other than a superannuation complaint, provided the
AFCA Rules permit such a complaint to be considered.
8.17 Schedule 8 amends the headings for section 1053 and Subdivision A of
Division 3 of Part 7.10A of the Corporations Act. This reflects that the purpose
of section 1053 is to define superannuation complaint, rather than restricting
the types of superannuation complaints that may be made under the AFCA
scheme.
[Schedule 8, items 4 and 5, headings to Subdivision A of Division 3 of
Part 7.10A and section 1053 of the Corporations Act]
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AFCA scheme
Contingent amendments
8.18 While the substantive definition of superannuation complaint is at
section 1053 of the Corporations Act, a signpost to that definition currently
appears in a list of definitions at section 761A of the Act. Schedule 8 amends
the definition of superannuation complaint in section 761A to reflect the
amendments to the substantive definition in section 1053.
[Schedule 8, item 2, section 761A (definition of superannuation complaint)
of the Corporations Act]
8.19 Schedule 2 to the Treasury Laws Amendment (2023 Law Improvement
Package No. 1) Act 2023 (if enacted) relocates a number of definitions in the
Corporations Act from section 761A to section 9. Schedule 8 to the Bill
includes a contingent amendment, in the event that the definition of
superannuation complaint has been relocated to section 9 before Schedule 8 to
the Bill commences.
[Schedule 8, item 1, section 9 (definition of superannuation complaint) of the
Corporations Act]
Consequential amendments
8.20 Schedule 8 to the Bill amends a note about the AFCA scheme's operational
requirements to avoid confusion about the types of complaints that can be
made to AFCA.
[Schedule 8, item 3, subsection 1051(4) (Note) of the Corporations Act]
8.21 Schedule 8 to the Bill also removes an unnecessary note to the definition of
superannuation complaint.
[Schedule 8, items 7 and 8, subsection 1053(1) (Note 1) and (Note 2) of the
Corporations Act]
8.22 Item 555 of Schedule 2 to the Treasury Laws Amendment (2023 Law
Improvement Package No. 1) Act 2023 (if enacted) amends the note to
subsection 1053(1). Schedule 8 to the Bill includes a contingent amendment,
amending the heading for item 555 to reflect there is now only one note to
subsection 1053(1).
[Schedule 8, item 12, item 555 of the Treasury Laws Amendment (2023 Law
Improvement Package No. 1) Act 2023]
Commencement, application, and transitional
provisions
8.23 Other than the contingent amendments (amendments to the definition of
superannuation complaint (items 1 and 2 in Schedule 8 to the Bill) and the
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amendment to the Treasury Laws Amendment (2023 Law Improvement
Package No. 1) Act 2023 (item 12 in Schedule 8 to the Bill), the amendments
in Schedule 8 to the Bill commence on the day after Royal Assent.
8.24 The amendments apply to complaints made, or purported to have been made,
to AFCA before, on or after the date of commencement. This means that if a
superannuation-related complaint had purportedly been made to AFCA prior to
commencement of these amendments, and that complaint had been outside
AFCA's jurisdiction as a result of the MetLife decision, that complaint is now
taken to be a valid complaint within AFCA's general remit. This allows AFCA
to deal with any superannuation-related complaints in accordance with its
rules, irrespective of when those complaints were made to AFCA (subject to
any necessary changes to the AFCA Rules).
[Schedule 8, item 11, section 1703 of the Corporations Act]
8.25 This retrospective application is necessary to ensure that if a person has already
made a complaint to AFCA (and for example their complaint was put on hold
by AFCA due to the MetLife proceedings), the complainant will now be able to
have their complaint considered by AFCA. This is important to ensure that
individuals are not disadvantaged by the MetLife decision based on the timing
of their complaint to AFCA, so that they can continue to have access to free
and independent dispute resolution for those complaints.
8.26 While the amendments apply to a complaint purportedly made to AFCA prior
to commencement, they do not validate a determination purportedly made by
AFCA in relation to that complaint. Instead, if a determination purportedly
made by AFCA was invalid due to MetLife, AFCA may redetermine the
complaint on or after commencement (subject to any necessary changes to the
AFCA Rules).
[Schedule 8, item 11, subsection 1703(3) of the Corporations Act]
Contingent amendments
8.27 If Schedule 8 to the Bill commences before Schedule 2 to the Treasury Laws
Amendment (2023 Law Improvement Package No. 1) Act 2023, the contingent
amendments at items 1 and 2 in Schedule 8 commence as follows:
• the amendment to the definition of superannuation complaint in
section 761A of the Corporations Act (item 2) commences on the day
after Royal Assent; and
• the amendment to the definition of superannuation complaint in
section 9 of the Corporations Act (item 1) never commences.
8.28 However, if Schedule 2 to the Treasury Laws Amendment (2023 Law
Improvement Package No. 1) Act 2023 commences before Schedule 8 to the
Bill:
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AFCA scheme
• the amendment to the definition of superannuation complaint in
section 9 of the Corporations Act (item 1) commences on the day after
Royal Assent; and
• the amendment to the definition of superannuation complaint in
section 761A of the Corporations Act (item 2) never commences.
8.29 The contingent amendment at item 12 in Schedule 8 to the Bill commences
immediately before commencement of Schedule 2 to the Treasury Laws
Amendment (2023 Law Improvement Package No. 1) Act 2023. However, this
amendment never commences if Schedule 2 to the Treasury Laws Amendment
(2023 Law Improvement Package No. 1) Act 2023 does not commence or if it
commences on or before the day the Bill receives the Royal Assent.
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Statement of Compatibility with Human
Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny)
Act 2011.
Treasury Laws Amendment (Support for Small Business and Charities
and Other Measures) Bill 2023
Table of Contents:
Schedule 1 - $20,000 instant asset write-off for small business entities92
Overview ....................................................................................... 92
Human rights implications ............................................................. 92
Conclusion .................................................................................... 93
Schedule 2 - Small business energy incentive ..................................... 93
Overview ....................................................................................... 93
Human rights implications ............................................................. 93
Conclusion .................................................................................... 93
Schedule 3 - Deductible gift recipients--specific listings ..................... 94
Overview ....................................................................................... 94
Human rights implications ............................................................. 95
Conclusion .................................................................................... 95
Schedule 4 - Deductible gift recipients--specific listings ..................... 95
Overview ....................................................................................... 95
Human rights implications ............................................................. 96
Conclusion .................................................................................... 96
Schedule 5 - Exemption for Global Infrastructure Hub Ltd ................... 96
Overview ....................................................................................... 96
Human rights implications ............................................................. 96
Conclusion .................................................................................... 97
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Statement of Compatibility with Human Rights
Schedule 6 - Income tax amendments for updates to accounting
standards for general insurance contracts ........................................... 97
Overview ....................................................................................... 97
Human rights implications ............................................................. 97
Conclusion .................................................................................... 97
Schedule 7 - Non-arm's length expenses of superannuation funds ..... 98
Overview ....................................................................................... 98
Human rights implications ............................................................. 99
Conclusion .................................................................................... 99
Schedule 8 - AFCA scheme................................................................. 99
Overview ....................................................................................... 99
Human rights implications ........................................................... 100
Conclusion .................................................................................. 100
Schedule 1 - $20,000 instant asset write-off for
small business entities
Overview
9.1 Schedule 1 to the Bill is compatible with the human rights and freedoms
recognised or declared in the international instruments listed in section 3 of the
Human Rights (Parliamentary Scrutiny) Act 2011.
9.2 Schedule 1 to the Bill amends the IT(TP) Act to temporarily increase the
instant asset write-off threshold (the threshold below which amounts can be
immediately deducted under the simplified depreciation rules) from $1,000 to
$20,000. This increased threshold will allow small businesses (with an
aggregated annual turnover of less than $10 million) to immediately deduct the
full cost of eligible depreciating assets costing less than $20,000 that are first
used or installed ready for use for a taxable purpose between 1 July 2023 and
30 June 2024.
Human rights implications
9.3 Schedule 1 to the Bill does not engage any of the applicable rights or freedoms.
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Conclusion
9.4 Schedule 1 to the Bill is compatible with human rights as it does not raise any
human rights issues.
Schedule 2 - Small business energy incentive
Overview
9.5 Schedule 2 to the Bill is compatible with the human rights and freedoms
recognised or declared in the international instruments listed in section 3 of the
Human Rights (Parliamentary Scrutiny) Act 2011.
9.6 Schedule 3 to the Bill amends the IT(TP) Act to provide small and medium
businesses (with an aggregated annual turnover of less than $50 million) with
access to a bonus deduction equal to 20 per cent of the cost of eligible assets or
improvements to existing assets that support electrification or more efficient
energy use.
9.7 This is a temporary measure to support small and medium businesses to
electrify, improve their energy efficiency and save on their energy bills. The
bonus deduction applies to the cost of eligible assets and improvements up to a
maximum amount of $100,000, with the maximum bonus deduction being
$20,000.
Human rights implications
9.8 Schedule 2 to the Bill does not engage any of the applicable rights or freedoms.
Conclusion
9.9 Schedule 2 to the Bill is compatible with human rights as it does not raise any
human rights issues.
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Statement of Compatibility with Human Rights
Schedule 3 - Deductible gift recipients--specific
listings
Overview
9.10 Schedule 3 to the Bill is compatible with the human rights and freedoms
recognised or declared in the international instruments listed in section 3 of the
Human Rights (Parliamentary Scrutiny) Act 2011.
9.11 Schedule 3 to the Bill creates a new class of community charities that may
apply for DGR endorsement by the Commissioner. The class consists of
community charity trusts and community charity corporations.
9.12 Part 1 of Schedule 3 to the Bill specifies the class of community charities in
Subdivision 30-B of the ITAA. This new class listing does not confer DGR
status in and of itself. Rather, it allows entities in the specified class to apply
for DGR endorsement under Division 426 in Schedule 1 to the TAA.
9.13 The new listing item applies only to community charities that meet certain
conditions, as discussed below. The conditions relate to entity purposes,
registration under the Australian Charities and Not-for-profits Commission Act
2012, financial obligations set out in entity governing rules, and compliance
with the community charity guidelines.
9.14 Part 2 of Schedule 3 to the Bill amends Subdivision 426-D in Schedule 1 to the
TAA in order to:
• empower the Minister to make a declaration setting out community
charity trusts by name;
• create a ministerial obligation to make guidelines;
• require the Australian Business Register to show community charity
trust status;
• impose civil liability for misrepresenting endorsement status;
• empower the Commissioner to suspend, remove and replace trustees of
community charity trusts; and
• limit certain transfers between community charity trusts and other
entities.
9.15 Part 2 of Schedule 3 to the Bill also creates a new Subdivision in Schedule 1 to
the TAA in order to achieve the same suite of objectives listed above in
relation to community charity corporations (other than the suspension, removal
and replacement of trustees, which is not relevant to corporations).
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Human rights implications
9.16 Schedule 3 to the Bill engages the right to a fair trial or the presumption of
innocence in Articles 14 and 15 of the ICCPR. Article 14(2) of the ICCPR
recognises that all people have the right to be presumed innocent until proven
guilty according to the law. Articles 14 and 15 apply only in relation to the
rights of natural persons, not legal persons such as companies.
9.17 However, Schedule 3 to the Bill only engages those rights under the ICCPR by
extending existing offence provisions in the TAA to the new class of DGRs
created by this Schedule. Those offence provisions are proportionate to the
wrongdoing in question, and no modifications to the offences themselves have
been made.
9.18 Schedule 3 to the Bill also extends an existing administrative penalty provision
in Schedule 1 to the TAA to apply to community charity trusts, without
changing the settings of the existing enforcement regime. Existing penalty
amounts are set out in legislative guidelines. Those guidelines are the models
for new community charity guidelines, which will also set penalty amounts.
This allows penalty quanta to be appropriately tailored to the nature and size of
the breach as well as the level of culpability.
9.19 A new administrative penalty provision in respect of community charity
corporations is modelled on the above-mentioned existing provision of the
TAA. The community charity guidelines will also set amounts for the purposes
of this new provision. This is appropriate for the reason set out above.
9.20 Other existing administrative penalty provisions in the TAA may apply to
entities endorsed under the new pathways set out in Schedule 3 to the Bill.
Proportionality criteria were considered when setting penalty amounts for
those provisions.
Conclusion
9.21 Schedule 3 to the Bill is compatible with human rights as it does not raise any
human rights issues.
Schedule 4 - Deductible gift recipients--specific
listings
Overview
9.22 Schedule 4 to the Bill amends the ITAA 1997 to:
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Statement of Compatibility with Human Rights
• list Justice Reform Initiative Limited and Transparency International
Australia as DGRs; and
• extend the DGR listing of the Victorian Pride Centre Ltd and the
Australian Sports Foundation Charitable Fund.
Human rights implications
9.23 Schedule 4 to the Bill does not engage any of the applicable rights or freedoms.
Conclusion
9.24 Schedule 4 to the Bill is compatible with human rights as it does not raise any
human rights issues.
Schedule 5 - Exemption for Global Infrastructure
Hub Ltd
Overview
9.25 Schedule 5 to the Bill is compatible with the human rights and freedoms
recognised or declared in the international instruments listed in section 3 of the
Human Rights (Parliamentary Scrutiny) Act 2011.
9.26 Schedule 5 to the Bill amends the ITAA 1997 to continue to provide the GI
Hub with an exemption from the liability to pay income tax on its ordinary and
statutory income.
9.27 The GI Hub was established by G20 Leaders at the 2014 Brisbane Summit,
with a mandate to advance international efforts to lift infrastructure investment.
In October 2021, G20 decided to extend the GI Hub's mandate for a further
period to 2024. As a result, the GI Hub's tax-exempt status under Division 50
of the ITAA 1997 will be continued for a further year to 30 June 2024.
Human rights implications
9.28 Schedule 5 to the Bill does not engage any of the applicable rights or freedoms.
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Conclusion
Schedule 6 - Income tax amendments for
updates to accounting standards for general
insurance contracts
Overview
9.29 Schedule 6 to the Bill is compatible with the human rights and freedoms
recognised or declared in the international instruments listed in section 3 of the
Human Rights (Parliamentary Scrutiny) Act 2011.
9.30 Schedule 6 to the Bill amends the income tax law with respect to general
insurance to provide broad alignment with the new accounting standard,
AASB 17. The amendments reduce the income tax compliance burden on the
general insurance industry caused by the misalignment between the income tax
law and the adoption of the new AASB 17.
9.31 The main changes under the amendments include:
• Subdivision 321-A - 'outstanding claims liabilities' is updated to
'adjusted liability for incurred claims';
• Subdivision 321-B - 'unearned premium reserve' is updated to
'adjusted liability for remaining coverage'; and
• The respective method statements are updated to broadly align with
AASB 17.
Human rights implications
9.32 Schedule 6 to the Bill does not engage any of the applicable rights or freedoms.
Conclusion
9.33 Schedule 6 to the Bill is compatible with human rights as it does not raise any
human rights issues.
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Statement of Compatibility with Human Rights
Schedule 7 - Non-arm's length expenses of
superannuation funds
Overview
9.34 Schedule 7 to the Bill is compatible with the human rights and freedoms
recognised or declared in the international instruments listed in section 3 of the
Human Rights (Parliamentary Scrutiny) Act 2011.
9.35 Schedule 7 to the Bill makes changes to the rules for non-arm's length
expenses for superannuation entities.
9.36 These changes improve the operation of the rules in relation to expenses that
are incurred on non-arm's length basis.
9.37 The non-arm's length expense rules prevent complying superannuation entities
inflating their earnings by entering into schemes involving non-arm's length
expenditure (including where expenses are not incurred). They ensure income
derived from a transaction involving non-arm's length expenses that is not on
unrelated party, commercial terms does not receive concessional treatment in
superannuation.
9.38 Schedule 7 to the Bill exempts large APRA-regulated funds and exempt public
sector superannuation funds from the rules related to non-arm's length
expenses, although these funds are still subject to rules for income derived on a
non-arm's length basis.
9.39 For SMSFs and small APRA-regulated funds these amendments will apply
different treatment depending on the type of expense that is incurred on a non-
arm's length basis.
9.40 Expenses are be classified as either specific expenses or general expenses. A
general expense is an expense that is not related to gaining or producing
income from a specific asset of the fund and a specific expense is any other
expense. An expense incurred in gaining or producing income as the
beneficiary of the fixed entitlement to a trusts' income or capital is always a
specific expense.
9.41 For specific expenses the existing treatment continues to apply, and the amount
of income that is taxed as non-arm's length income is the amount of income
earned from the scheme in which the parties were not dealing at arm's length.
9.42 For general expenses the amount of income that is taxed as non-arm's length
income is limited to twice the difference between the amount of the expense
that would have been expected to have been incurred and the amount of the
expense actually incurred. With a non-arm's length general expense the
amount actually incurred cannot be deducted against the non-arm's length
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component because it has already been recognised under this approach. It can
still be deducted against the low tax component of a fund.
9.43 There is an overall cap on the non-arm's length component of a small fund as
the total of the fund's income for the year less any assessable contributions and
any deductions against those contributions.
9.44 These changes apply to the 2018-19 income year and later income years and to
expenses incurred or expected to have been incurred on or after 1 July 2018.
This retrospectivity ensures that the benefits of the amendments apply from the
date the non-arm's length expenses rules were first introduced as was requested
by stakeholders.
9.45 As these changes are to the benefit of taxpayers compared with the 2018-19
amendments this retrospectivity does not disadvantage any taxpayers.
9.46 Accepting the concerns raised by stakeholders as outlined in para 7.10 about
the potential for harsh consequences as a result of the amendments made by
Treasury Laws Amendment (2018 Superannuation Measures No.1) Act 2019
making these changes retrospective ensures there is no period where those
harsh consequences apply and provides consistency by ensuring the new
approach to non-arm's length expenses applies instead.
Human rights implications
9.47 Schedule 7 to the Bill does not engage any of the applicable rights or freedoms.
Conclusion
9.48 Schedule 7 to the Bill is compatible with human rights as it does not raise any
human rights issues.
Schedule 8 - AFCA scheme
Overview
9.49 Schedule 8 to the Bill is compatible with the human rights and freedoms
recognised or declared in the international instruments listed in section 3 of the
Human Rights (Parliamentary Scrutiny) Act 2011.
9.50 AFCA is authorised under the Corporations Act as the dispute resolution
scheme overseen by ASIC for the purpose of resolving financial services
disputes in Australia. AFCA's jurisdiction to receive and resolve certain
complaints had been negatively impacted by the MetLife decision.
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Statement of Compatibility with Human Rights
9.51 Schedule 8 to the Bill amends the Corporations Act to restore AFCA's
jurisdiction to validly receive and resolve complaints which relate to
superannuation, irrespective of whether the complaint falls within the
definition of a 'superannuation complaint' in the Corporations Act.
9.52 By restoring AFCA's jurisdiction to deal with superannuation-related
complaints, these amendments are consistent with the policy approach prior to
the decision of MetLife and AFCA's practice of receiving and resolving
(including by determination) superannuation-related complaints before the
MetLife decision was handed down.
9.53 The amendments contained in Schedule 8 to the Bill ensure complainants have
access to free and independent dispute resolution for their superannuation-
related complaints, notwithstanding the impact of the MetLife decision.
9.54 The amendments apply to complaints made to AFCA before, on or after the
date of commencement. This ensures that complainants have access to free and
independent dispute resolution no matter when the person with the
superannuation-related complaint applied to AFCA to resolve the dispute.
Human rights implications
9.55 Schedule 8 to the Bill promotes the right to a fair hearing by allowing
individuals to bring complaints relating to superannuation to AFCA.
Right to a fair hearing
9.56 Schedule 8 to the Bill engages a person's right to equality before courts and
tribunals and protects their entitlement to a fair and public hearing under
Article 14(1) of the ICCPR. Article 14 of the ICCPR provides that everyone
shall be entitled to a fair and public hearing by a competent, independent and
impartial tribunal established by law.
9.57 Schedule 8 to the Bill promotes the right to a fair hearing by rectifying the
exclusion of a class of complainants who were not able to apply to the AFCA
scheme for dispute resolution due to the MetLife decision. As a result, the
AFCA scheme continues to be available to people with superannuation-related
complaints.
Conclusion
9.58 Schedule 8 to the Bill is compatible with the human rights and freedoms
recognised or declared in the international instruments listed in section 3 of the
Human Rights (Parliamentary Scrutiny) Act 2011 as it promotes the right to a
fair hearing.
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