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Tax and Superannuation Laws Amendment (2014 Measures No. 1) Bill 2014

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2013-2014

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

tax and superannuation laws amendment (2014 Measures N o .1) bill 2014

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

(Circulated by the authority of the

Treasurer, the Hon J. B. Hockey MP)

 



Table of contents

Glossary.............................................................................................................. 1

General outline and financial impact............................................................ 3

Chapter 1               Unlawful payments from regulated superannuation funds - promotion of illegal early release schemes........................................................ 7

Chapter 2               Administrative directions and penalties for contraventions relating to self managed superannuation funds................................... 21

Chapter 3               Phase-out of the net medical expenses tax offset....... 45

Chapter 4               Deductible gift recipients.................................................. 57

Index................................................................................................................. 61

 



The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

ABN

Australian Business Number

ATO

Australian Taxation Office

Commissioner

Commissioner of Taxation

Convention

European Convention of Human Rights 1950

DGR

deductible gift recipient

ECHR

European Court of Human Rights

FBTAA

Fringe Benefits Tax Assessment Act 1986

FCA

Federal Court of Australia

ICCPR

International Covenant on Civil and Political Rights

ITAA 1936

Income Tax Assessment Act 1936

ITAA 1997

Income Tax Assessment Act 1997

NMETO

net medical expenses tax offset

Regulator

Commissioner of Taxation as the regulator of self managed superannuation funds

SIS Act

Superannuation Industry (Supervision) Act 1993

SIS Regulations

Superannuation Industry (Supervision) Regulations 1994

SMSF

self managed superannuation fund

TAA 1953

Taxation Administration Act 1953



Unlawful payments from regulated superannuation funds — promotion of illegal early release schemes

Schedule 1 to this Bill introduces penalties to deter and penalise persons who promote illegal early release schemes.

Date of effect :  These amendments apply to actions that occur after Royal Assent.

Proposal announced :  This measure was announced by the Assistant Treasurer in a Media Release titled ‘Integrity restored to Australia’s taxation system’ on 14 December 2013.

Financial impact :  Nil.  Costs associated with implementing a range of measures relating to the self managed superannuation fund (SMSF) sector, including penalties for promoters of illegal early release schemes, were offset by a previous increase to the SMSF supervisory levy.

Human rights implications :  This Schedule does not raise any human rights issues.  See Statement of Compatibility with Human Rights paragraphs 1.30 to 1.54.

Compliance cost impact :  None. 

Administrative directions and penalties for contraventions relating to self managed superannuation funds

Schedule 2 to this Bill introduces administrative directions and penalties for contraventions relating to self managed superannuation funds (SMSFs) including:

•        rectification directions;

•        education directions; and

•        administrative penalties.

Date of effect These amendments apply to contraventions that occur on or after 1 July 2014.

Proposal announced This measure was announced by the Assistant Treasurer in a Media Release titled ‘Integrity restored to Australia’s taxation system’ of 14 December 2013.

Financial impact Nil.  Costs associated with implementing a range of measures relating to the self managed superannuation fund sector, including administrative directions and penalties, were offset by a previous increase to the SMSF Supervisory Levy.

Human rights implications :  This Schedule raises a human rights issue.  See Statement of Compatibility with Human Rights, paragraphs 2.103 to 2.118.

Compliance cost impact None.

Phase-out of net medical expenses tax offset

Schedule 3 to this Bill amends the Income Tax Assessment Act 1936 to phase-out the net medical expenses tax offset by the end of the 2018-19 income year.  During the income years 2013-14 to 2018-19 the tax offset will be subject to transitional arrangements. 

Date of effect The amendments will apply from 1 July 2013 with the transitional arrangements and the tax offset ceasing on 1 July 2019.

Proposal announced This measure was initially announced by the former Government as part of the 2013-14 Budget.  The current Government announced that it would proceed with the measure in the Treasurer’s and Assistant Treasurer’s Joint Media Release of 6 November 2013 titled ‘Restoring Integrity in the Australian tax system’.

Date of effect The amendments will apply from 1 July 2013 with the transitional arrangements and the tax offset ceasing on 1 July 2019.

Proposal announced This measure was initially announced by the former Government as part of the 2013-14 Budget.  The current Government announced that it would proceed with the measure in the Treasurer’s and Assistant Treasurer’s Joint Media Release titled ‘Restoring Integrity in the Australian tax system’ of 6 November 2013.

Financial impact In the 2013-14 Budget, this measure was estimated to have the following revenue implications:

2012-13

2013-14

2014-15

2015-16

2016-17

Nil

-$2.0m

$175.0m

$285.0m

$510.0m

This measure was estimated to provide gains to revenue of $968 million over the forward estimates.  Proceeding with this measure as announced has no additional impact over the forward estimates period. 

Human rights implications :  This Schedule is compatible with human rights.  See Statement of Compatibility with Human Rights , paragraphs 3.47 to 3.55.

Compliance cost impact None.

Deductible gift recipients

Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 to update the list of specifically-listed deductible gift recipients.

Date of effect The listing of the National Arboretum Canberra Fund applies to gifts made on or after 1 July 2013.  The existing listing for the Bali Peace Park Association Inc., which expired on 17 December 2011, has been extended to 16 December 2014.  The listing of The Prince’s Charities Australia Limited applies to gifts made on or after 1 January 2014.

Proposal announced The listing of the National Arboretum Canberra Fund was announced in the 2013 Pre-Election Economic and Fiscal Update .  The extension of the existing listing of the Bali Peace Park Association Inc. was announced in the August 2013 Economic Statement .  The listing of The Prince’s Charities Australia Limited was announced in the 2014  Mid-Year Economic and Fiscal Outlook .

Financial impact The revenue implications of this measure are as follows:

Organisation

2013-14

$m

2014-15

$m

2015-16

$m

2016-17

$m

National Arboretum Canberra Fund

Nil

-0.02

-0.02

-0.02

Bali Peace Park Association Inc.

- 0.1

- 0.2

- 0.1

Nil

The Prince’s Charities Australia Limited

Nil

- 0.3

- 0.5

- 0.5

Human rights implications :  This Schedule does not raise any human rights issue.  See Statement of Compatibility with Human Rights , paragraphs 4.21 to 4.24.

Compliance cost impact :  None.

 



Outline of chapter

                        Schedule 1 to this Bill amends the Superannuation Industry (Supervision) Act 1993 (SIS Act) to introduce penalties to deter and penalise persons who promote illegal early release schemes.

Context of amendments

1.1                   Superannuation legislation imposes restrictions on when and in what form a person can access their superannuation benefits.  Generally, access is based upon an individual attaining a certain age (‘preservation age’).  The law prescribes certain exemptions to this rule under which superannuation benefits may be released before preservation age.  Illegal early release refers to cases where superannuation benefits are withdrawn contrary to these restrictions and where the relevant exemptions do not apply.

1.2                   Illegal early release schemes are generally promoted to people as a means of accessing their superannuation benefits before they are eligible to do so.  This activity undermines the Government’s retirement income policy. 

1.3                   Illegal early release schemes commonly involve requesting a fund regulated by the Australian Prudential Regulation Authority to pay a member’s superannuation benefits to the bank account of a purported self managed superannuation fund (SMSF) that has been set up for the purpose of receiving such transfers and subsequently paying money out to participants in the scheme.

1.4                   Promoters of illegal early release schemes have in the past exploited vulnerable people within the community by encouraging members to submit applications to rollover their superannuation balances to such purported SMSFs.  In these situations the promoters have taken commissions of up to 50 per cent of the member’s superannuation balance.

1.5                   Some schemes have facilitated the illegal release of up to $8 million in superannuation benefits and generated millions in commissions for promoters.  In some cases promoters have gone further and exploited identity data for other criminal purposes or stolen the member’s entire balance. 

1.6                   There are no specific penalties for promoters of illegal early release schemes who are not themselves trustees of a regulated superannuation fund.  Often a promoter will not be a trustee of a purported superannuation fund used in a scheme, but will recruit other people for this role.  This limits the Commissioner of Taxation’s (Commissioner’s) ability to pursue existing penalties in the SIS Act.

1.7                   Schedule 1 to this Bill introduces civil and criminal penalties for illegal early release scheme promoters in order to discourage the promotion of such schemes.  This measure was previously introduced as Schedule 1 to the Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012 and implements recommendation 8.24 of the Super System Review .

Summary of new law

1.8                   Schedule 1 to the Bill provides that a person must not promote a scheme that has resulted, or is likely to result, in a payment being made from a regulated superannuation fund otherwise than in accordance with payment standards prescribed in the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations). 

1.9                   Promoting such a scheme may result in a civil penalty being imposed, as the new law is a civil penalty provision.  The SIS Act already provides for civil and criminal consequences for contravening a civil penalty provision.

Comparison of key features of new law and current law

New law

Current law

A person must not promote a scheme that has resulted, or is likely to result, in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards prescribed in the SIS Regulations.

No equivalent.

A person who promotes a scheme that has resulted, or is likely to result in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards, contravenes a civil penalty provision.  The SIS Act provides for civil and criminal consequences of contravening a civil penalty provision.

No equivalent.

Detailed explanation of new law

                        A person must not promote a scheme that has resulted, or is likely to result, in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards prescribed in the SIS Regulations.  [Schedule 1, item 1, subsection 68B(1)]

                        Person is not defined in the SIS Act; however, it takes its meaning from section 2C of the Acts Interpretation Act 1901 to include a body corporate and an individual. 

Promote

1.12               Promote in relation to a scheme includes, but is not limited to, entering into a scheme, inducing another person to enter into a scheme, carrying out a scheme, commencing to carry out a scheme, and facilitating entry into, or the carrying out of, a scheme.  [Schedule 1, item 1, subsection 68B(3)]

1.13               Whether a person promotes a scheme will be determined on an objective case-by-case basis, considering the whole of the circumstances.  Factors which may indicate that a person has promoted a scheme include, but are not limited to:

•        the person markets or encourages interest in the scheme (this may be marketing directly in the conventional sense, or otherwise).  This may include (but is not limited to) conduct such as:

-       distributing marketing material in relation to such a scheme;

-       advising persons to consider entering into the scheme; or

-       employing or recruiting other persons to conduct or market the scheme,

•        the person devises or designs the scheme or part of the scheme.  This may include (but is not limited to) conduct such as:

-       setting up the legal or financial architecture of the scheme;

-       constructing or commissioning the production of documents that are to be used as part of the scheme; or

-       establishing mechanisms to obtain, or facilitate circumstances that may allow persons involved in the scheme the ability to obtain financial or other benefits in relation to the scheme,

•        the person facilitates the means by which the participants can participate in the scheme.  This may include (but is not limited to):

-       providing some or all of the necessary paperwork for participants to sign; or

-       directing them to complete the necessary documents,

•        the person has provided information to the participants as to how to undertake activities which ultimately result in the individual accessing their superannuation benefits without meeting a condition of release; and

•        the person undertakes the relevant activities with the intention that they will result or are likely to result in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards.

1.14               Whether or not a person has received consideration in respect of the scheme is not determinative of whether a person has promoted the scheme.  The fact that a person has received consideration in respect of a scheme is an indication that they may have promoted a scheme, however, this is not a necessary element to establish.  Often promoters of such schemes will deduct a portion of the superannuation benefits as either a ‘fee’ or on the basis that they will remit an amount for tax on behalf of the participant in the scheme.  Amounts purportedly deducted as tax are never remitted to the Australian Taxation Office (ATO).  In some cases, a promoter may take all of the superannuation benefits and not pass on any amount to a participant.

Scheme

1.15               Scheme means any agreement, arrangement, understanding, promise or undertaking, whether express or implied, or whether or not enforceable, or intended to be enforceable by legal proceedings, or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.  [Schedule 1, item 1, subsection 68B(3)]

1.16               Whether a person has promoted a scheme will be determined on a case-by-case basis having regard to the whole of the circumstances.  In identifying whether a scheme exists, consideration should be given to a continuum, a sequence of events, a course of action or a course of conduct, rather than focusing on particular transactions at particular points in time.

Likely to result

1.17               A person will contravene the new civil penalty provision if a scheme is likely to result in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards.

1.18               Therefore, the Commissioner may seek civil and criminal penalties if a scheme is likely to result, but has not actually resulted, in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards.

1.19               Whether a scheme is likely to result in a payment being made from a regulated superannuation fund, otherwise than in accordance with the payment standards, is determined by an objective analysis.

Example 1.1  

ABC Superannuation Fund receives a rollover request from John, a member of Smith Superannuation Fund, an SMSF.  ABC Superannuation Fund, as part of the rollover process, confirms with the ATO whether John is a member of the Smith Superannuation Fund.  The ATO advise that John is not a member and, as a result, ABC Superannuation Fund rejects the rollover request.  The Commissioner obtains information under his formal powers from ABC Superannuation Fund that identifies that Mr X is behind the rollover request from John.  Neither John nor Mr X receive any money.  Despite no money having been received by John or Mr X, penalties for a contravention of section 68B of the SIS Act may still be sought by the Commissioner.

Payment standards

1.20               A person must not promote a scheme that has resulted, or is likely to result, in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards.  [Schedule 1, item 1, subsection 68B(1)]

1.21               The payment standards are prescribed in Part 6 of the SIS Regulations.  The payment standards impose restrictions on when and in what form a person can access their superannuation benefits.

1.22               This provision will apply to cases where a scheme has resulted, or is likely to result in superannuation benefits being withdrawn contrary to these restrictions.

Penalties

1.23               Prior to these changes, there are no specific penalties for promoters of illegal early release schemes who are not themselves trustees of a regulated superannuation fund.  Often promoters and those involved in promotion will not be trustees of a purported superannuation fund used in these schemes, and instead recruit parties for this role.  This limits the Commissioner’s ability to pursue existing penalties in the SIS Act.

1.24               Promoters are principally dealt with by the Australian Securities and Investments Commission which relies on its powers regarding the provision of unlicensed financial advice to take action.  The Commissioner’s current compliance activity focuses on other compliance methods that disrupt or close down schemes from operating, such as freezing the assets of the SMSF under his powers in section 264 of the SIS Act.  It is intended that the operation of these powers will remain unchanged.

1.25               A person who promotes a scheme that has resulted, or is likely to result in a payment being made from a regulated superannuation fund otherwise than in accordance with the payment standards contravenes a civil penalty provision.  [Schedule 1, item 1, subsection 68B(2), item 2, paragraph 193(ca)]

Civil penalties

1.26               The SIS Act contains a number of civil penalty provisions (see section 193 of the SIS Act).  Contravention of a civil penalty provision may result in a fine not exceeding 2,000 penalty units (see subsection 196(3) of the SIS Act).  A penalty unit is defined in section 4AA of the Crimes Act 1914 .  Subsection 4B(3) of the Crimes Act 1914 provides that where a body corporate is convicted of an offence a Court may impose a pecuniary penalty up to five times the amount of the maximum penalty.

Criminal penalties

1.27               If a person contravenes a civil penalty provision, either:

•        dishonestly, and intending to gain, whether directly or indirectly, an advantage for that, or any other person; or

•        intending to deceive or defraud someone,

the person is guilty of an offence punishable on conviction by imprisonment for not longer than five years (see subsection 202(1) of the SIS Act).

Application and transitional provisions

1.28               The amendments made by Schedule 1 to this Bill apply to actions that occur after Royal Assent.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Unlawful payments from regulated superannuation funds

1.29               Schedule 1 to this 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 .

Overview

1.30               Schedule 1 to this Bill inserts a new provision, section 68B into the Superannuation Industry (Supervision) Act 1993 (SIS Act) that prohibits a person from promoting a scheme that has resulted, or is likely to result, in the illegal early release of superannuation benefits.  The new provision is a civil penalty provision.  The consequences of contravening a civil penalty provision are provided for in Part 21 of the SIS Act under a provision of general application that applies to all civil penalty provisions.

1.31               Superannuation legislation imposes restrictions on when and in what form a person can access their superannuation benefits.  Generally, superannuation benefits can only be accessed once a person has reached their ‘preservation age’, which is between 55 of 60, depending on the person’s date of birth.  The law prescribes certain exemptions to this rule which allow superannuation benefits to be released before a person reaches their preservation age where is it considered appropriate to do so.  Illegal early release refers to cases where superannuation benefits are withdrawn contrary to these restrictions and where the relevant exemptions do not apply. 

1.32               Promoters of illegal early release schemes have in the past exploited vulnerable people by encouraging them to rollover their superannuation balances into a fraudulent superannuation fund.  Promoters have at times taken ‘commissions’ of up to 50 per cent of the member’s superannuation balance, or stolen the entire balance.

1.33               The aim of the new provision is to discourage promoters of illegal early release schemes and to provide the regulator (either the Commissioner of Taxation for self managed superannuation funds (SMSFs) or the Australian Prudential Regulation Authority for other regulated superannuation funds) with the ability to pursue penalties under the current civil penalty regime in the SIS Act. 

1.34               The Attorney-General’s Department has been consulted in the use of a civil penalty provision for this measure.

Human rights implications

1.35               This Schedule does not engage any of the applicable rights or freedoms.

1.36               In forming this view, consideration has been given as to whether the imposition of a civil penalty for a violation of the proposed section 68B in proceedings under Part 21 of the SIS Act would involve the ‘determination of a criminal charge’ within the meaning of article 14 of the International Covenant on Civil and Political Rights (ICCPR) and, if so, whether the application of the rules of evidence and of the procedure applicable in civil proceedings would be inconsistent with that article.

1.37               Article 14 of the ICCPR contains the right to a fair trial and fair hearing, and minimum guarantees in the determination of a criminal charge.

1.38               In interpreting the international human rights treaties, the views of the United Nations Committees established under the treaties, including those expressed in General Comments and Recommendations, are also generally treated as a persuasive source of guidance (although such views are not binding on State parties).

1.39               In General Comment 32, the United Nations Human Rights Committee set out its views in relation to Article 14(1) of the ICCPR.  It stated:

The right to a fair and public hearing by a competent, independent and impartial tribunal established by law is guaranteed, according to the second sentence of article 14, paragraph 1, in cases regarding the determination of criminal charges against individuals or of their rights and obligations in a suit at law.  Criminal charges relate in principle to acts declared to be punishable under domestic criminal law.  The notion may also extend to acts that are criminal in nature with sanctions that, regardless of their qualification in domestic law, must be regarded as penal because of their purpose, character or severity [citing Communication No. 1015/2001 , Perterer v.  Austria, para.  9.2]. [1]

1.40               There is little other jurisprudence from the United Nations Human Rights Committee as to when it considers that a penalty designated as civil in domestic law may be found to constitute a criminal charge because of its nature, purpose or severity.

1.41               The Committee’s general reference to international human rights bodies may encompass the European Court of Human Rights (ECHR).  Australia is not a party to the European Convention on Human Rights 1950 (Convention).  As a result, it is not bound by the jurisprudence of the ECHR.  However, the Convention protects some rights that are analogous to those in the ICCPR and therefore the case law from the ECHR may be useful in considering how the United Nations Human Rights Committee may interpret similar provisions in the ICCPR.  However, in this context, Article 6 (right to a fair trial) of the Convention does not contain the same wording as Article 14 of the ICCPR.

1.42               The ECHR has held that there are three key criteria for determining whether a matter should be characterised as a criminal charge: [2]

•        the domestic classification of the offence; [3]

•        the nature of the offence (including whether the proceedings are instituted by a public body with statutory powers of enforcement; whether the matter has a punitive, deterrent  or compensatory purpose; whether the law applies to a specific group or is generally binding in nature; whether the imposition of the penalty is dependent upon a finding of guilt; how similar procedures are treated in other Council of Europe Member States; and whether an offence creates a criminal record); [4] and

•        the nature and severity of the potential penalty (the imposition of penalties including fines which can be commuted into a period of imprisonment in particular have been found to constitute a criminal penalty by the ECHR, as has a penalty resulting in detention). [5]

1.43               The civil penalty regime in the SIS Act consists of two distinct elements. 

1.44               Firstly, the Regulator may seek a civil penalty order from the Federal Court of Australia (FCA) declaring that the person has contravened a provision and imposing a monetary penalty of up to 2,000 penalty units. [6]   The court may also or alternatively order a person to pay compensation where they are satisfied that a superannuation fund has suffered loss or damage as a result of the contravention. [7]   An application for a civil penalty order is a civil proceeding, [8] and the parties are required to comply with the civil rules of evidence and procedure.

1.45               In civil proceedings, the law provides for specific relief from liability for contravention of a civil penalty provision where a person acted honestly and having regard to all of the circumstances of the case it appears to the court that the person ought to be excused for the contravention. [9]

1.46               Secondly, contravention of a civil penalty provision may constitute an offence only where a person contravenes dishonestly, intending to gain, whether directly or indirectly, an advantage for a person, or intending to deceive or defraud someone.  The prosecution of an offence is a separate criminal proceeding conducted by the Commonwealth Director of Public Prosecutions.  The FCA does not have jurisdiction with respect to a proceeding for an offence.  A person guilty of an offence may be imprisoned for not longer than five years.

1.47               There is therefore a clear demarcation between what constitutes a civil and a criminal penalty under Part 21 of the SIS Act.

1.48               As to purpose, Australian case law indicates that a civil penalty for a contravention should be sufficiently high to demonstrate the importance of not contravening the relevant part of the SIS Act, but not so high as to be oppressive. [10]   The law specifically states that the court is not to make a civil penalty order unless it is satisfied that the contravention is a serious one. [11]   Consideration of the deterrent or compensatory purpose of the penalty applies differently in the Australian context as a civil penalty order is enforceable as a judgment of the FCA, [12] and no term of imprisonment may apply as an alternative.  By contrast, in international jurisprudence, the deterrent purpose of a monetary penalty was a relevant consideration in determining whether a penalty was the ‘determination of a criminal charge’, in the case where a monetary penalty could be converted into a term of imprisonment. [13]

1.49               Further, in the Australian context the amount of loss or damage caused (and any compensation that might already have been paid) has also been recognised as a relevant factor to consider when determining the amount of a civil penalty. [14]

1.50               Part 21 of the SIS Act specifies a maximum penalty amount of 2,000 penalty units which encompasses all types of superannuation funds in the industry, from large funds regulated by Australian Prudential Regulation Authority with more than one million members, [15] to SMSFs which may hold one individual’s retirement savings.  Whilst the maximum penalty amount applies to all types of superannuation funds, a court will determine the appropriate amount of any monetary penalty.

1.51               The case law to date indicates that the higher end monetary penalty orders, for example over $50,000, have only been applied in very serious circumstances and where multiple contraventions of the SIS Act have occurred.  The FCA has found that multiple contraventions may be properly seen as one contravening course of conduct, [16] and therefore the maximum potential penalty is not multiplied in the case of several contraventions.  Cases involving SMSFs have attracted significantly lower penalties, reflecting the size of the superannuation fund (four members or less), the value of the assets involved and the fact that the contraventions have not usually impacted on third parties. [17]

1.52               Following the analysis above, the civil penalty provisions do not involve the ‘determination of a criminal charge’ within the meaning of article 14 of the ICCPR, and consequently that Schedule 1 to this Bill does not engage any human rights.

Conclusion

1.53               This Schedule is compatible with human rights as it does not raise any human rights issues.

 



Outline of chapter

2.0                   Schedule 2 to this Bill introduces administrative directions and penalties for contraventions relating to self managed superannuation funds (SMSFs) including:

•        rectification directions;

•        education directions; and

•        administrative penalties.

2.1                   All references in this chapter are to the Superannuation Industry (Supervision) Act 1993 (SIS Act) unless otherwise indicated.

Context of amendments

2.2                   SMSFs are a type of superannuation fund where membership is restricted to a maximum of four members and all members must be trustees or directors of the corporate trustee. 

2.3                   The number of SMSFs in Australia has increased over time, from approximately 375,000 in June 2008 to 510,000 in June 2013.  Although most SMSF trustees seek to operate their funds properly to secure their own retirement, in an industry of this size there will be a proportion of SMSFs that disregard the rules.

2.4                   The Commissioner of Taxation (Commissioner) is responsible for the regulation of SMSFs (Regulator).  The Regulator needs to have and apply effective, flexible and proportionate powers to address non-compliance with superannuation laws.

2.5                   Currently, the Regulator has a limited number of tools available to deter and address instances of non-compliance including:

•        making an SMSF non-complying for taxation purposes;

•        applying to a court for civil penalties to be imposed.  A person may also face criminal penalties for more serious breaches of the law;

•        accepting  an enforceable undertaking in relation to a contravention; and

•        disqualifying a trustee of an SMSF.

2.6                   Applying current penalties can be costly and time-consuming and the potential consequences can be disproportionately high.  The Regulator is unlikely to use his existing range of powers except in cases of significant non-compliance with the law.

2.7                   The absence of graduated penalties results in a number of SMSF trustees avoiding sanction for contravening the law simply by rectifying the conduct when it is detected.  This may be appropriate in certain circumstances, however, in order to encourage greater levels of voluntary compliance, it is not appropriate that trustees can continue to contravene the law and expect their actions to have no consequences because the available enforcement remedies are not proportional to the conduct.

2.8                   The power to give directions and impose administrative penalties for contraventions of the SIS Act will provide the Regulator with additional tools, both educational and punitive, in conjunction with his existing powers.  These tools will be effective, flexible and cost-effective mechanisms for imposing sanctions that reflect the nature and seriousness of the breach, and will support the ongoing integrity of the system.

2.9                   Schedule 2 to this Bill introduces administrative directions and penalties for contraventions relating to SMSFs, which will form an integral part of the suite of options available to the Regulator to respond to non-compliance with the law.  This measure was previously introduced as Schedule 3 to the Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012 and implements recommendations 8.2 to 8.4 of the Super System Review .

Summary of new law

2.10               Schedule 2 to this Bill introduces administrative directions and penalties for contraventions relating to SMSFs including:

•        giving the Regulator the power to give rectification directions and education directions; and

•        imposing administrative penalties for certain contraventions of the superannuation law.

2.11               The amendments in Schedule 2 provide the Regulator with the ability to give a rectification direction or an education direction where it reasonably believes that a trustee or director of a corporate trustee of an SMSF has contravened a provision of the SIS Act or Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations).

2.12               A rectification direction will require a person to undertake specified action to rectify the contravention within a specified time frame and provide the Regulator with evidence of the person’s compliance with the direction.

2.13               An education direction will require a person to undertake a specified course of education within a specified time frame and provide the Regulator with evidence of completion of the course.  Trustees and directors of corporate trustees will also be required to sign or re-sign the SMSF trustee declaration form to confirm that they understand their obligations and duties as a trustee (or director of a corporate trustee) of an SMSF.

2.14               The Regulator may approve courses of education for the purposes of the education direction.  A fee must not be charged for an approved course, undertaken in compliance with an education direction.

2.15               A person will be liable to an administrative penalty if certain provisions of the SIS Act are contravened in relation to an SMSF.  The amount of the penalty is an amount specified in the law.

2.16               An administrative penalty must not be paid or reimbursed from the assets of the fund in relation to which the administrative penalty was imposed.

Comparison of key features of new law and current law

New law

Current law

A rectification direction is a written direction requiring a person to take specified action to rectify the contravention and provide the Regulator with evidence of the person’s compliance with the direction.

A rectification direction may be given to a person where the Regulator reasonably believes that person has contravened a provision of the SIS Act or SIS Regulations in relation to the fund, having regard to any financial detriment to be suffered by the fund as a result of the person’s compliance with the direction, and the nature and seriousness of the person’s contravention.

A rectification direction must not be given to a person in relation to a contravention if the Regulator has accepted an undertaking by any person under section 262A of the SIS Act in relation to the contravention and the undertaking has neither been withdrawn nor varied such that the contravention is no longer covered by it.

The rectification direction must specify the period within which the person must comply with the direction, which must be a period that is reasonable in the circumstances.

No equivalent.

 

An education direction is a written direction requiring a person to undertake a specified course of education and to provide the Regulator with evidence of completion of the course.

An education direction may be given to a person where the Regulator reasonably believes a person has contravened a provision of the SIS Act or SIS Regulations in relation to the fund.

The education direction must specify the period within which the person must comply with the direction, which must be a period that is reasonable in the circumstances.

The Regulator may approve a course, in writing, for the purpose of giving education directions.  A fee must not be charged for the course undertaken in compliance with an education direction.

No equivalent.

 

The Regulator may at any time, vary or revoke a rectification direction or an education direction by giving written notice to the person to whom the direction was given.

No equivalent.

A person to whom a rectification direction or education direction is given may request the Regulator to vary the direction.  The Regulator must make a decision within 28 days, or the Regulator is taken to have refused the request.

No equivalent.

If a person contravenes a section of the SIS Act specified in the table in section 166, the person is liable to an administrative penalty. 

An administrative penalty must not be paid or reimbursed from the assets of the SMSF. 

No equivalent.

 

Detailed explanation of new law

2.17               The Commissioner has general administration of Part 20:  Administrative directions and penalties for contraventions relating to SMSFs.  [Schedule 2, item 1, section 4; item 2, subparagraph 6(1)(e)(vii)]

Definitions

2.18               The definitions of ‘education direction’ and ‘rectification direction’ are added to the SIS Act dictionary.  [Schedule 2, item 3, subsection 10(1)]

2.19               For the purposes of the new administrative directions and penalties for contraventions relating to SMSFs, a superannuation fund is treated as an SMSF if it has ceased being a SMSF for the purposes of the rest of the SIS Act and the trustee of the fund is not a registrable superannuation entity licensee.  Administrative directions and penalties remedies may be imposed on trustees and directors of corporate trustees of funds that do not meet the definition of an SMSF in section 17A of the SIS Act, but are nonetheless treated as an SMSF and remain regulated by the Commissioner.  This will ensure that trustees and directors who contravene the SIS Act or SIS Regulations do not escape any sanction due to the fund no longer meeting the definition of an SMSF under section 17A of the SIS Act.  [Schedule 2, item 4, subsection 10(4)]

2.20               Administrative penalties are imposed for contraventions of specified provisions of the SIS Act.  Notes have been added to each provision to explain that the Act imposes an administrative penalty for contraventions of the relevant provisions in relation to an SMSF.  [Schedule 2, items 5 to 7, 9 to 14, 17 to 21, and 23 to 25, subsections 34(1) and 35B(6), section 35B, subsections 65(1), 67(1) and 84(1), section 103, subsections 104(1), 104A(2), 105(1), 106(1), 106A(1), 124(1), 254(1) and 347A(5)]

Indemnification from assets of the SMSF

2.21               A provision in the governing rules of an SMSF is void in so far as it would have the effect of exempting a trustee of the SMSF from, or indemnifying a trustee or a director of the trustee of the SMSF against:

•        liability for the costs of undertaking a course of education in compliance with an education direction; or

•        liability for an administrative penalty imposed by the new administrative penalty regime.

[Schedule 2, item 8, paragraphs 56(2)(d) and (e) and 57(2)(d) and (e)]

2.22               It is intended that any associated costs that may be incurred as a result of an education direction or a liability under the new administrative penalty regime are payable personally by the person to whom the direction is issued or who has committed the breach, and will not be paid or reimbursed from assets of the SMSF.

Trustee declaration

2.23               A trustee or a director of a corporate trustee of an SMSF who undertakes a course of education in compliance with an education direction is required to sign a declaration that he or she understands his or her duties as a trustee of a SMSF (or as director of a body corporate that is such a trustee) no later than 21 days after completing the course of education.  [Schedule 2, items 15 and 16, paragraphs 104A(1)(c) and 104A(2)(ba)]

2.24               It is intended that trustees and directors of a corporate trustee who undertake a course of education in compliance with an education direction will gain a better understanding of their obligations and responsibilities as trustees and will be less likely to contravene the law again in future.

2.25               These trustees and directors will be required to confirm that they understand their obligations and responsibilities as trustees or directors of a corporate trustee by signing a declaration to that effect.

2.26               Trustees and directors who fail to sign the declaration in accordance with section 104A will be liable to an administrative penalty.

Administrative directions and penalties for contraventions relating to SMSFs

2.27               This Bill inserts a new Part into the SIS Act relating to administrative directions and penalties for contraventions relating to SMSFs.  [Schedule 2, item 22, Part 20]

Object and scope of administrative directions and penalties

2.28               The object of the new regime is to provide administrative directions and penalties for contraventions of the SIS Act or the SIS Regulations that relate to SMSFs.  The new regime:

•        gives the Regulator power to give rectification directions and education directions; and

•        imposes administrative penalties for certain contraventions of the SIS Act. 

[Schedule 2, item 22, section 157]

2.29               The new regime only applies to SMSFs that are regulated superannuation funds.  ‘Regulated superannuation fund’ is defined in section 19.  [Schedule 2, item 22, section 158] 

Directions

Rectification directions

2.30               Currently, rectification of contraventions commonly occurs through the enforceable undertaking process under section 262A of the SIS Act.  Enforceable undertakings rely on a person initiating the enforceable undertaking with the Regulator.  The Regulator then has the ability to accept or decline the enforceable undertaking that has been offered.  If accepted and not complied with, the Regulator must apply to the Court to have it enforced.

2.31               A rectification direction may be given if the Regulator reasonably believes that a person who is a trustee, or a director of a body corporate that is a trustee of an SMSF, has contravened the SIS Act (other than Part 3B which relates to superannuation data and payment standards) or the SIS Regulations in relation to the fund.  [Schedule 2, item 22, subsection 159(1)]

2.32               Provisions contained in the SIS Act and SIS Regulations must be adhered to by all trustees (individual trustees and corporate trustees) of SMSFs.  Additionally, certain provisions in the SIS Act, for example section 104A (about trustee declarations), or the SIS Regulations may apply directly to directors of body corporates that are trustees of SMSFs.  A trustee or director who does not adhere to these provisions and contravenes the Act may be given a rectification direction.

2.33               A rectification direction may therefore be given to:

•        an individual trustee of an SMSF that has contravened the SIS Act or SIS Regulations;

•        a body corporate that is the trustee of an SMSF that has contravened the SIS Act or SIS Regulations; or

•        a director of a body corporate trustee of an SMSF who has contravened the SIS Act or SIS Regulations.

2.34               The Regulator may give a person a rectification direction requiring the person to take a specified action to rectify the contravention and to provide the Regulator with evidence of the person’s compliance with the direction.  [Schedule 2, item 22, subsection 159(2)]

2.35               The term ‘rectify’ is defined in subsection 10(1) of the SIS Act and will generally involve putting into operation managerial or administrative arrangements that could reasonably be expected to ensure that there are no further contraventions of a similar kind.

2.36               Some contraventions only occur in the year of income a particular transaction took place.  However, certain transactions, if not rectified, may cause trustees to contravene the SIS Act or SIS Regulations over a number of income years.  For example:

•        section 67 of the SIS Act prohibits an SMSF trustee from borrowing money or maintaining an existing borrowing of money except in limited circumstances.  Trustees may contravene this provision in:

-       the year of income that the borrowing is undertaken (this will result in a contravention of paragraph 67(1)(a)); and

-       each year of income the borrowing is maintained (this will result in contraventions of paragraph 67(1)(b)).

In these circumstances, it may be appropriate for the Regulator to give a rectification direction to the trustee of the SMSF specifying that the trustee must ensure that the borrowing is paid off over a specified period of time.  Such action will ensure that the trustee does not continue to maintain a borrowing in contravention of paragraph 67(1)(b).

•        where the market value of a fund’s in-house assets exceeds five per cent at the end of an income year, subsection 82(1) requires the trustees of a fund to prepare a written plan before the end of the following income year that sets out:

-       the amount by which the market value ratio of the fund’s in-house assets exceeds 5 per cent; and

-       the steps that the trustees will take to ensure that in-house assets are disposed of and that the value of those assets disposed of will return the fund to a market value ratio of five per cent or less.

If the Regulator determines that the trustees have not carried out the steps of the plan they prepared within the relevant time period, the Regulator may issue a direction to dispose of assets in accordance with the plan prepared by the trustees.

2.37               In deciding whether to give a person a rectification direction, the Regulator should have regard to:

•        any financial detriment that might reasonably be expected to be suffered by the fund as a result of the person’s compliance with the direction;

•        the nature and seriousness of the person’s contravention; and

•        any other relevant circumstances.

These factors do not limit the matters that the Regulator may have regard to in determining whether to issue a rectification direction.  [Schedule 2, item 22, subsection 159(3)]

2.38               The Regulator is required to have regard to any financial detriment that might reasonably be expected to be suffered by the fund as a result of the person’s compliance with the rectification direction.  This includes consideration of the significance of the financial detriment, for example, whether issuing a rectification direction will have a major impact on the retirement savings of the members of the fund, and whether there are other compliance mechanisms that might be more appropriate in the circumstances.  [Schedule 2, item 22, paragraph 159(3)(a)]

2.39               In deciding to give a person a rectification direction, the Regulator is to also have regard to the nature and seriousness of the person’s contravention.  [Schedule 2, item 22, paragraph 159(3)(b)]

2.40               The nature and seriousness of a contravention will always be a question of fact and degree and each case will need to be considered in light of its particular circumstances.  The Regulator should consider all the facts relating to the contravention including but not limited to:

•        the provision contravened and the nature of the contravention;

•        the behaviour and circumstances of the person who contravened the Act, including the past compliance history; and

•        the value of the assets involved.

2.41               In considering all the relevant facts, the Regulator may determine that a rectification direction is not the appropriate action.  The Regulator may consider that another action, such as issuing a notice of non-compliance under section 40 of the SIS Act, is more appropriate.

2.42               A rectification direction must specify the period within which the person must comply with the direction, which must be reasonable in the circumstances.  [Schedule 2, item 22, subsection 159(4)]

2.43               In determining the period of time to specify in the direction, the Regulator should have regard to factors including, but not limited to:

•        the type of action specified in the direction; and

•        the circumstances of the person to whom the direction is issued. 

2.44               The Regulator must not give a rectification direction in relation to a particular contravention if the Regulator has accepted an enforceable undertaking given by a person in relation to the contravention, the contravention is covered by that undertaking and the undertaking has neither been withdrawn nor varied in a way that means the contravention is no longer covered by it.  [Schedule 2, item 22, subsection 159(5)]

2.45               The introduction of rectification directions does not affect the operation of enforceable undertakings under section 262A.  However, if an enforceable undertaking has been accepted by the Regulator in relation to a contravention, the Regulator cannot subsequently issue a rectification direction in relation to that same contravention unless the undertaking has been withdrawn or varied in a way that means the contravention is no longer covered by the undertaking.

2.46               A person to whom a rectification direction is given must comply with the direction before the end of the period specified in the direction.  If the person fails to comply with the direction within that period, the person commits an offence of strict liability and is liable for a maximum of 10 penalty units.  [Schedule 2, item 22, subsections 159(6) and (7)]

2.47               Making a failure to comply with a rectification direction an offence of strict liability is consistent with offences relating to the contravention of other regulatory provisions contained in the SIS Act and SIS Regulations and is necessary to ensure the integrity of the regulatory regime. 

2.48               ‘Strict liability’ is defined in section 6.1 of the Criminal Code Act 1995 .  The strict liability relates to the lack of action by a person to whom the direction was issued, and who is personally liable for the offence.  This is designed to discourage careless non-compliance.  Additionally, the penalty is less than 60 penalty units and does not include imprisonment. 

2.49               The Regulator is not prevented from giving a rectification direction in relation to a contravention even if an administrative penalty also applies in relation to a particular contravention under the administrative penalty regime.

2.50               Additionally, the Regulator is not prevented from imposing or applying for other sanctions for a contravention, such as giving an education direction or issuing a notice of non-compliance, if the rectification direction is not complied with.

Education directions

2.51               An education direction may be given to:

•        a trustee of an SMSF, if the Regulator reasonably believes that the trustee has contravened a provision of the SIS Act (other than Part 3B which relates to superannuation data and payment standards) or the SIS Regulations in relation to the fund; or

•        a director of a body corporate that is trustee of an SMSF if the Regulator reasonably believes that:

-       the director has contravened a provision of the SIS Act (other than Part 3B) or the SIS Regulations in relation to the fund; or

-       the trustee which is a body corporate has contravened a provision of the SIS Act (other than Part 3B) or the SIS Regulations in relation to the fund. 

[Schedule 2, item 22, subsection 160(1)]

2.52               Provisions contained in the SIS Act and SIS Regulations must be adhered to by all trustees (individual trustees and corporate trustees) of SMSFs.  Additionally, certain provisions in the SIS Act or SIS Regulations may apply directly to directors of a body corporate that is the trustee of an SMSF.  A trustee or director who does not adhere to these provisions and contravenes the Act may be given an education direction.

2.53               The Regulator may give a person an education direction requiring the person to undertake a specified approved course of education and provide the Regulator with evidence of completion of the course.  [Schedule 2, item 22, subsection 160(2)]

2.54               It would be appropriate for the Regulator to issue an education direction to a person where the person’s lack of knowledge or understanding of their obligations has contributed to a contravention of the SIS Act or the SIS Regulations.

2.55               It is intended that an approved course of education will provide trustees and directors with appropriate knowledge relating to the contravention that has occurred.  It will also provide an opportunity for trustees and directors to improve and refresh their overall knowledge of relevant superannuation laws and should reduce the likelihood of trustees and directors committing contraventions in the future.

2.56               An education direction must specify the period within which the person must comply with the direction, which must be a period that is reasonable in the circumstances.  [Schedule 2, item 22, subsection 160(3)]

2.57               In determining the period of time to specify in the direction, the Regulator should have regard to factors including, but not limited to:

•        the nature of the education course specified in the direction; and

•        the circumstances of the person to whom the direction is issued. 

2.58               A person to whom an education direction is given must comply with the direction before the end of the specified period.  If the person fails to comply with the direction within that period, the person commits an offence of strict liability and is liable for a maximum of 10 penalty units.  [Schedule 2, item 22, subsections 160(4) and (5)]

2.59               Making a failure to comply with an education direction an offence of strict liability is consistent with offences relating to the contravention of other regulatory provisions contained in the SIS Act and SIS Regulations and is necessary to ensure the integrity of the regulatory regime.

2.60               ‘Strict liability’ is defined in section 6.1 of the Criminal Code Act 1995 .  The strict liability relates to the lack of action by a person to whom the direction was issued, and who is personally liable for the offence.  This is designed to discourage careless non-compliance.  Additionally, the penalty is less than 60 penalty units and does not include imprisonment.

2.61               The Regulator is not prevented from giving an education direction in relation to a contravention even if an administrative penalty is also imposed for that contravention under the administrative penalty regime.

2.62               Additionally, the Regulator is not prevented from imposing or applying for other sanctions for a contravention, such as giving a rectification direction or issuing a notice of non-compliance, if a contravention of the same kind occurs in the future. 

Approval of courses of education

2.63               The Regulator may, in writing, approve one or more courses of education for the purpose of giving education directions.  [Schedule 2, item 22, subsection 161(1)]

2.64               An approved course may be provided by the Regulator or another entity whose course has been approved by the Regulator.  However, it must be a course for which no fees are charged in respect of persons who undertake the course.  [Schedule 2, item 22, subsection 161(2)]

2.65               An approved course of education is intended to provide trustees and directors of a corporate trustee with knowledge relevant to their compliance obligations under SIS Act and SIS Regulations, and not to impose a monetary penalty.  Other sanctions, such as administrative penalties imposed under the Act impose a monetary penalty for a contravention.  It is therefore considered appropriate that trustees and directors of a corporate trustee should not be subject to fees from providers for undertaking an education course specified in the direction. 

2.66               The amendments make it clear that an approval of an education course given by the Regulator is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003 [Schedule 2, item 22, subsection 161(3)]

Costs of course of education

2.67               Trustees and directors may incur costs in complying with the education direction such as travel costs, costs incurred in notifying the Regulator that the education direction has been complied with and expenses related to using the internet if the course is undertaken on-line. 

2.68               The amendments clarify that although an approved course must be a course for which no fees are charged, none of the costs that may be associated with undertaking the course may be paid or reimbursed from the assets of the fund in relation to which the education direction was given. 

2.69               This is in keeping with the broad intention that costs incurred under the new administrative penalty regime are payable personally by the person who has committed the breach and not paid or reimbursed from assets of the SMSF.  [Schedule 2, item 22, section 162]

Review rights

Variation or revocation on the Regulator’s own initiative

2.70               The Regulator may, at any time, vary or revoke a rectification direction or an education direction by written notice given to the person to whom the direction was given.  [Schedule 2, item 22, section 163]

2.71               The Regulator is not limited in when he or she may vary or revoke a rectification direction or an education direction.  This provision is intended to give the Regulator flexibility in administering the law.

Variation on request

2.72               The amendments allow a person to whom rectification direction or an education direction is given, to request the Regulator to vary the direction.  [Schedule 2, item 22, subsection 164(1)]

2.73               A request to vary a direction does not affect the ability of a person to object to the Regulator’s decision to give or vary the direction.

2.74               A person may request the Regulator to vary the direction in any way.  For example, the person may request a variation to the period specified in the notice if the person requires more time to undertake a course of education or take action to rectify a contravention.

2.75               The request must be made by written notice to the Regulator before the end of the period specified in the rectification direction or education direction within which the person must comply with the direction.  [Schedule 2, item 22, subsection 164(2)]

2.76               A person cannot request the Regulator to vary the direction if the period specified in the rectification direction or education direction has passed.

2.77               The request must set out the reasons for making the request.  This will assist the Regulator in making a decision on the request.  [Schedule 2, item 22, subsection 164(3)]

2.78               The Regulator must decide whether to:

•        vary the direction in accordance with the request; or

•        vary the direction otherwise than in accordance with the request; or

•        refuse to vary the direction. 

[Schedule 2, item 22, subsection 164(4)] 

2.79               If the Regulator does not make a decision on the request before the end of the period of 28 days after the day on which the request was made, the Regulator is taken, at the end of that period to have refused the request.  The time for compliance with the direction in this case will be affected by Regulator’s written notification of the deemed decision.  [Schedule 2, item 22, subsection 164(5)]

2.80               If the Regulator makes a decision within 28 days the Regulator must notify the person of his or her decision.  If the decision is to vary the direction, the Regulator must give the person a copy of the varied direction.  If the decision is to refuse to vary the direction, or to vary the direction otherwise than in accordance with the request, the Regulator must give the person written reasons for the decision.  [Schedule 2, item 22, subsection 164(6)]

2.81               If a person makes a request to vary a direction, then the period specified in a rectification direction or an education direction within which the person must comply with the direction is extended by one day for each day in the period:

•        beginning at the start of the day on which the request was made; and

•        ending at the end of the day that the Regulator notifies the person of the decision that has been made on the request. 

[Schedule 2, item 22, subsection 164(7)]  

Example 2.1 :  Request to vary a direction

Liz and Aaron are members and individual trustees of Pink SMSF.  The Commissioner issues Liz and Aaron with an education direction on 1 January 2014 that specifies the direction must be complied with by 30 June 2014. 

Liz and Aaron request on 5 May 2014 for the period specified in the direction to be extended to 31 December 2014.  The Commissioner notifies Liz and Aaron on 31 May 2014 that the request to extend the period for compliance to 31 December 2014 has been refused and that the education direction must be complied with by 27 July 2014.

2.82               The Regulator does have the power to vary or revoke the direction on their own initiative if the Regulator considers that the period for compliance with the direction following the decision on the request is unreasonable in the circumstances.

Taxation objections

2.83               A person may object against a decision of the Regulator in the manner set out in Part IVC of the Taxation Administration Act 1953 (TAA 1953) (about objections, review and appeals).  [Schedule 2, item 22, section 165]

2.84               A person may lodge an objection if they are dissatisfied with a decision of the Regulator:

•        to give a rectification direction or education direction;

•        to refuse to vary a direction; or

•        to vary a direction otherwise than in accordance with a request.

2.85               The manner and timeframe within which an objection must be made is provided for in Part IVC of the TAA 1953. 

Administrative penalties

2.86               If a person contravenes a specified provision of the SIS Act, the person is liable to an administrative penalty.  The amount of the penalty is the amount specified in the table for the provision.  [Schedule 2, item 22, subsection 166(1)]

2.87               An administrative penalty is not imposed for all contraventions of the SIS Act, only those included in a table in the Act.  Additionally, administrative penalties are only imposed in relation to SMSFs.

2.88               Persons on whom an administrative penalty may be imposed on are:

•        a trustee of an SMSF (including an individual trustee or a corporate trustee); or

•        a director of a body corporate that is a trustee of an SMSF.

[Schedule 2, item 22, subsection 166(2)]

2.89               The specified provisions in relation to which an administrative penalty may be applied must be adhered to by all trustees (individual trustees and corporate trustees) of SMSFs.  Additionally, certain provisions in the table apply directly to directors of body corporates that are trustees of SMSFs, for example, section 104A (about trustee declarations).  A trustee or director who contravenes these provisions will be liable to an administrative penalty.

2.90               Collection and recovery of administrative penalties is dealt with in Part 4-15 in Schedule 1 to TAA 1953.  Division 298 in Schedule 1 to the TAA 1953 provides machinery provisions for penalties.  The term ‘entity’, used in Schedule 1 of the TAA 1953, is defined by section 960-100 of the Income Tax Assessment Act 1997 , which provides that ‘entity’ may refer to the different capacities in which a person does things.  Subsection 166(3) clarifies that if a trustee of an SMSF on whom a penalty is imposed by section 166 is an individual, a reference in Part 4-15 of Schedule 1 or Division 298 in Schedule 1 to the TAA 1953 to an entity is taken to be a reference to that individual in their personal capacity.  [Schedule 2, item 22, subsection 166(3)]

Administrative penalty and civil penalty

2.91               The Regulator may commence proceedings against a person for contravention of a civil penalty provision (Part 21 of the SIS Act).  If an administrative penalty has been imposed for the contravention, then (whether or not the proceedings are withdrawn), the person is not liable to pay the administrative penalty.  If an amount of the administrative penalty has been paid, then it is to be refunded or applied by the Regulator in total or partial discharge of another tax-related liability.  [Schedule 2, item 22, section 167]

2.92               For the avoidance of doubt, section 8ZE of the TAA 1953 deals with the situation of a person against whom a criminal prosecution is instituted. 

Penalty must not be reimbursed from the fund

2.93               An administrative penalty must not be paid or reimbursed from the assets of the fund in relation to which the administrative penalty was imposed.  [Schedule 2, item 22, section 168]

2.94               Penalties imposed under the new administrative penalty regime are payable personally by the person who has committed the breach and therefore must not be paid or reimbursed from assets of the SMSF.

Joint and several liability of directors of corporate trustees

2.95               If a trustee that is a body corporate becomes liable to an administrative penalty, then the directors of that body corporate are jointly and severally liable to pay the amount of the penalty.  [Schedule 2, item 22, section 169]

2.96               The power to control the management of a company, its property and affairs is vested collectively in the board of directors.  Directors are therefore responsible for the actions of a corporate trustee, and it is appropriate that they are jointly and severally liable to an administrative penalty.  This is consistent with the treatment of a corporate trustee of a SMSF in section 284-95 in Schedule 1 to the TAA 1953.

Example 2.2 :  Corporate trustee that contravenes a provision

Stuart and Alison are members and the directors of a body corporate that is the trustee of Green SMSF.  Stuart and Alison fail to ensure that accounts and statements for Green SMSF are prepared for the 2014-15 year of income.  As a result, the corporate trustee has contravened section 35B.

An administrative penalty of 10 penalty units is imposed on the body corporate that is the trustee of the Green SMSF.  Stuart and Alison as directors of the body corporate become jointly and severally liable to an administrative penalty of 10 penalty units imposed on the body corporate.

Example 2.3 :  Individual trustees who contravene a provision

Jill and Merryn are members and individual trustees of Yellow SMSF.  Jill and Merryn fail to ensure that accounts and statements for Yellow SMSF are prepared for the 2014-15 year of income.  As a result, each individual trustee has contravened section 35B.

An administrative penalty of 10 penalty units is imposed on each individual trustee of Yellow SMSF in their personal capacity.  Jill and Merryn are each liable to an administrative penalty of 10 penalty units.

Example 2.4 :  Director of corporate trustee that contravenes a provision

Marita and Peter become directors of a body corporate that is trustee of Blue SMSF.  Peter fails to sign a trustee declaration and contravenes subsection 104A(2).

An administrative penalty of 10 penalty units is imposed on Peter, as a director of the corporate trustee.  Peter is liable to an administrative penalty of 10 penalty units.

Example 2.5 :  Individual trustees that contravene a provision

Cameron and Rohan are individual trustees of Red SMSF.  Cameron fails to sign a trustee declaration and contravenes subsection 104A(2).

An administrative penalty of 10 penalty units is imposed on Cameron in his personal capacity.  Cameron is liable to an administrative penalty of 10 penalty units.

Taxation Administration Act 1953

2.97               The machinery provisions for penalties in Division 298 in Schedule 1 to the TAA 1953 will apply to an administrative penalty imposed by the SIS Act.  [Schedule 2, item 26, Schedule 1, paragraph 298-5(d)]

2.98               The machinery provisions in Division 298 deal with:

•        how the Regulator must notify a person of their liability to an administrative penalty;

•        the due date for payment of the administrative penalty;

•        the ability of the Regulator to remit all or part of the administrative penalty;

•        objection, review and appeal rights; and

•        the imposition of the general interest charge on unpaid penalties.

2.99               A liability to an administrative penalty is a tax-related liability for the purposes of Subdivision 255-A in Schedule 1 to the TAA 1953 and can therefore be collected by the Commissioner like any other tax debt.

2.100           The general collection and recovery rules contained in Part 4-15 in Schedule 1 to the TAA 1953 will apply to administrative penalties.

Application and transitional provisions

2.101           The amendments made by Schedule 2 apply to contraventions that occur on or after 1 July 2014.  [Schedule 2, item 27]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011  

Administrative directions and penalties for contraventions relating to self managed superannuation funds

2.102           Schedule 2 to this 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 .

Overview

2.103           Schedule 2 to this Bill amends the Superannuation Industry (supervision) Act 1993 (SIS Act) to give the Commissioner of Taxation the power to issue directions and impose administrative penalties on trustees and directors of corporate trustees of self managed superannuation funds (SMSFs).

2.104           SMSFs are a type of superannuation fund where membership is restricted to a maximum of four members and all members must be trustees or directors of the corporate trustee. 

2.105           The number of SMSFs in Australia has increased over time, from approximately 375,000 in June 2008 to 510,000 in June 2013.  Although most SMSF trustees seek to operate their funds properly to secure their own retirement, in an industry of this size there will be a proportion of SMSFs that disregard the rules.

2.106           The Commissioner of Taxation (as Regulator) is responsible for the regulation of SMSFs.  The Regulator needs to have and apply effective, flexible and proportionate powers to address non-compliance with superannuation laws.

2.107           Currently, the Regulator has a limited number of tools available to deter and address instances of non-compliance including:

•        making an SMSF non-complying for taxation purposes;

•        applying to a court for civil penalties to be imposed.  A person may also face criminal penalties for more serious breaches of the law;

•        accepting an enforceable undertaking in relation to a contravention; and

•        disqualifying a trustee of an SMSF.

2.108           Applying current penalties can be costly and time-consuming and the potential consequences can be disproportionately high.  The Regulator is unlikely to use his existing range of powers except in cases of significant non-compliance with the law.

2.109           The absence of graduated penalties results in a number of SMSF trustees avoiding sanction for contravening the law simply by rectifying the conduct when it is detected.  This may be appropriate in certain circumstances, however, in order to encourage greater levels of voluntary compliance, it is not appropriate that trustees can continue to contravene the law and expect their actions to have no consequences because the available enforcement remedies are not proportional to the conduct.

2.110           The power to give directions and impose administrative penalties for contraventions of the SIS Act will provide the Regulator with additional tools, both educational and punitive, in conjunction with his existing powers.  These tools will be effective, flexible and cost-effective mechanisms for imposing sanctions that reflect the nature and seriousness of the breach, and will support the ongoing integrity of the system.

2.111           An education direction will require a person to undertake a specified course of education within a specified time period that is reasonable in the circumstances.  A rectification direction will require a person to undertake specified action to rectify a contravention of the superannuation law within a specified time period that is reasonable in the circumstances.  A person commits an offence of strict liability if they do not comply with an education or rectification direction within the specified time period.  The penalty is 10 penalty units.  A person who is dissatisfied with a decision of the Regulator to issue a direction may object against the decision in the manner set out in Part IVC of the Taxation Administration Act 1953 (TAA 1953), which provides the general framework for taxation objections.

2.112           A trustee or director of a corporate trustee is liable to an administrative penalty for the contravention of specified provisions in the SIS Act.  The amount of the administrative penalty is specified in the law.  Collection and recovery of administrative penalties is dealt with under the general framework contained in Part 4-15 of Schedule 1 to the TAA 1953. 

Human rights implications

                        Schedule 2 to this Bill engages the right to be presumed innocent.

Presumption of innocence

2.114           Article 14(2) of the International Covenant on Civil and Political Rights protects the right of a person charged with a criminal offence ‘to be presumed innocent until proved guilty according to law’.

2.115           The use of strict liability offences in respect of education and rectification directions in Schedule 2 to this Bill interacts with this presumption as there are no fault elements for any of the physical offences of a strict liability offence.

2.116           A strict liability offence is considered appropriate in the case of non-compliance with an education or rectification direction as the offence is regulatory and the regulatory supervision of SMSFs is compliance based.  Further, the level of the penalty is at the lower end of the penalty scale and does not include imprisonment.  The guidelines provided by the Criminal Justice Division of the Attorney-General’s Department have been considered and applied in framing the offence.

Conclusion

2.117           This Schedule is compatible with human rights because to the extent that it engages right to be presumed innocent, any limitation on that right is reasonable, necessary and proportional to a legitimate aim of encouraging trustees and directors of corporate trustees of SMSFs to comply with their obligations under the superannuation law.

 



Outline of chapter

3.1                   Schedule 3 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to phase-out the net medical expenses tax offset (NMETO) by the end of the 2018-19 income year.  During the income years 2013-14 to 2018-19 the tax offset will be subject to transitional arrangements.  The rebate for medical expenses is commonly referred to as NMETO.

3.2                   References in this chapter are to the ITAA 1936 unless otherwise indicated.

Context of amendments

3.3                   The NMETO provides taxpayers with a non-refundable tax offset for eligible out-of-pocket medical expenses (that is, medical expenses less available reimbursements, such as those through the Medicare Benefits Schedule, the Pharmaceutical Benefits Scheme, the Repatriation Pharmaceutical Benefits Scheme, Government aged care subsidies and private health insurance refunds) above the NMETO claim threshold.

3.4                   Eligible medical expenses are defined in section 159P of the ITAA 1936 and broadly include an expense related to an illness or operation which has been paid to a legally qualified doctor, nurse, pharmacist or hospital.  The cost of the purchase and maintenance of medical aids and artificial limbs, artificial eyes and hearing aids are also eligible expenses for NMETO.  However, expenses incurred as a result of cosmetic operations are considered to be ineligible medical expenses.

3.5                   There is no monetary limit to the total offset a taxpayer is eligible for, but the amount of offset received is effectively limited by the taxpayer’s tax liability.  That is, a taxpayer cannot receive a greater amount of offset than their basic income tax liability.

3.6                   Where a taxpayer has paid eligible medical expenses for themselves or their Australian resident dependants, the taxpayer totals those expenses to reach the claim threshold.

3.7                   From 1 July 2012, the threshold above which a taxpayer may claim the offset and the rate at which the offset applies was means tested.

3.8                   In 2012-13, the offset was 20 per cent of net medical expenses over $2,120 for single taxpayers with adjusted taxable income for rebates of $84,000 or less, and families with a combined adjusted taxable income for rebates of $168,000 or less.  For taxpayers with adjusted taxable income for rebates over these income thresholds, the offset was 10 per cent of net medical expenses over $5,000.

3.9                   The 2013-14 Budget included a measure phasing out NMETO, with transitional arrangements for those currently claiming the offset. 

3.10               The NMETO is being phased out as it has a number of shortcomings.  First, as it can only be claimed at the end of the financial year, it does not provide financial assistance when the medical expense is incurred.  Secondly, only taxpayers who have a tax liability receive a benefit from the offset.  Individuals with high out-of-pocket medical expenses and little or no tax liability gain no benefit from this offset as it is not refundable.

3.11               The Government will continue to provide a range of subsidies for medical expenses via the Medicare Safety Net as the primary support mechanism, supplemented by Medicare, the National Disability Insurance Scheme and other benefits, rebates and safety nets through the health care system.

Summary of new law

3.12               Under this measure the NMETO will be phased out between the 2013-14 and 2018-19 income years and ultimately be repealed on 1 July 2019. 

3.13               During that period there will be two sets of transitional arrangements in place:

•        Category A transitional arrangements: 

The NMETO will continue to be available for out-of-pocket medical expenses (as defined currently) from the 2012-13 income year until the end of the 2018-19 income year, but only for those medical expenses relating to disability aids, attendant care or aged care.

•        Category B transitional arrangements: 

Taxpayers who receive an amount of the NMETO for the 2012-13 income year will be eligible to claim the full range of medical expenses (as defined currently) for the 2013-14 income year.

Taxpayers who receive an amount of the NMETO for both the 2012-13 and 2013-14 income years will then also be eligible to claim the full range of medical expenses (as defined currently) for the 2014-15 income year.

3.14               This measure will also make a number of consequential amendments to the income tax law as well as the fringe benefits tax law to facilitate the phase-out of the NMETO.

Comparison of key features of new law and current law

New law

Current law

From the 2013-14 income year until the end of the 2018-19 income year the NMETO will be phased out through two sets of transitional arrangements.

•                From the 2013-14 income year until the end of the 2018-19 income year, taxpayers can only claim the NMETO for medical expenses that both meet the current definition and eligibility requirements and relate to disability aids, attendant care or aged care.

•                For the 2013-14 income year and 2014-15 income year, taxpayers will be eligible to claim the full range of medical expenses (as defined currently) but only if they have received an amount of the NMETO in the previous income year (or in both 2012-13 and 2013-14 in respect to claims in the 2014-15 income year).

From 1 July 2019 the NMETO will be repealed.

Taxpayers can claim the NMETO for medical expenses that meet the definition and eligibility requirements.

Detailed explanation of new law

3.15               The phase-out of the NMETO will apply from the 2013-14 income year and be fully phased-out by the end of the 2018-19 income year.  The phase-out will involve two categories of transitional arrangements that operate during different periods and apply differently in respect to which eligible medical expenses can be claimed.

Category A transitional arrangements

3.16               Under the Category A transitional arrangements, from 1 July 2013 to 30 June 2019, NMETO is only available for out-of-pocket expenses that meet the definition of ‘medical expenses’ (as defined currently in section 159P) and relate to certain types of medical care and support (broadly, disability aids, attendant care or aged care). [Schedule 3, item 1, subsection 159P(1B)]

3.17               These arrangements limit which medical expenses can be used to claim NMETO during the phase-out period.  This measure tightens what can be claimed for the NMETO by adding further conditions that must also be met before a medical expense can be claimed.

3.18               Under Category A transitional arrangements a medical expense may only be claimed under the NMETO if it:

•        would be an eligible medical expense under the existing section 159P; and

•        relates to disability aids, attendant care or aged care.

Diagram 3.1  

3.19               As illustrated in Diagram 3.1, prior to the phase-out of the NMETO all medical expenses that were not ineligible medical expenses as defined in section 159P were potentially claimable under the NMETO.

Diagram 3.2  

3.20               Diagram 3.2 illustrates that the Category A transitional arrangements limit what can be claimed by adding the additional requirement that those ordinarily eligible medical expenses need to be related to either disability aids, attendant care or aged care in order to be claimed under the NMETO. 

Is the expense an eligible medical expense under existing section 159P?

3.21               ‘Medical expenses’ is currently defined in subsection 159P(4).  A medical expense is a payment falling under one of the categories listed in that definition, unless it is an ‘ineligible medical expense’, also defined in that subsection.  Ineligible medical expenses generally relate to cosmetic operations and treatment. 

3.22               For the purpose of determining when a payment is made, the meaning of medical expenses and ineligible medical expenses are modified by subsections 159P(5) to (8). 

3.23               Given the history of case law and administrative decisions issued by the Commissioner of Taxation on the definition of what constitutes a ‘medical expense’, the Category A transitional arrangements do not alter the existing meaning, modifications or limitations within section 159P.

Does the expense relate to disability aids, attendant care or aged care?

3.24               In determining whether a medical expense can be claimed for NMETO under the Category A transitional arrangements, it will be necessary to consider whether the expense is related to:

•        an aid for a person with a disability [Schedule 3, item 1, paragraph 159P(1B)(a)] ;

•        services rendered by a person as an attendant of a person with a disability [Schedule 3, item 1, paragraph 159P(1B)(b)] ; or

•        care provided by an approved provider (within the meaning of the Aged Care Act 1997 ) of a person who is a care recipient or continuing care recipient (within the meaning of that Act) [Schedule 3, item 1, paragraph 159P(1B)(c)]

3.25               Whether an expense is related to disability aids, attendant care or aged care will largely be a matter of fact and circumstance.  During the phase-out period, additional guidance will be provided by the Australian Taxation Office to assist people with determining whether their expense is eligible to be claimed under the NMETO.

3.26               The words used in the amendments to describe disability aids, attendant care and aged care take their commonly understood meaning within the context of section 159P and the existing history of case law and administrative decisions.  However, to provide additional clarity on the policy intent underlining these concepts, further explanation is provided at paragraphs 3.27 to 3.34.

Disability aids

3.27               The concept of a disability aid , for the purpose of these amendments, is intended to mean an instrument, apparatus, assistance device or any other item of property that is manufactured as, distributed as, or generally recognised to be, an aid to the function or capacity of a person with a disability. 

Example 3.1 :  Purchase of a wheelchair

A person with paraplegia purchases a wheelchair to assist with mobility.  The wheelchair is a disability aid as it is an assistance device that is manufactured to aid the capacity of people with a disability.

Example 3.2 :  Maintenance of a guide dog

A person that is blind maintains a guide dog to achieve independence through access and mobility.  The expenses associated with maintaining that guide dog, assuming they are eligible medical expenses under section 159P, would be related to an aid for a person with a disability.

This is because the guide dog would be considered an item of property that is generally recognised to be an aid to the function and capacity of a person that is blind.

3.28               A disability aid would be considered to be an aid to function or capacity if it helps a person in performing activities of daily living or provides assistance to alleviate the effect of the disability. However, generally speaking, an ordinary or general household or commercial appliance is not a disability aid, even if it helps a disabled person.

Example 3.3 :  Purchase of an air conditioner

A person that is bed ridden with a disability has a particular sensitivity to heat (that is unrelated to the disability) and purchases an air conditioner for their house.

Even though the air conditioner would help the person and relieve discomfort it is not a disability aid as it does not alleviate the effect of the disability and is not manufactured as, distributed as, or generally recognised to be, an aid to the function or capacity of a person with a disability.

Attendant care

3.29               The concept of attendant care, for the purpose of this measure, is explained in the amendments as services rendered by a person as an attendant of a person with a disability.  [Schedule 3, item 1, paragraph 159P(1B)(b)]

3.30               The concept includes services and care provided to a person with a disability who needs personal assistance to complete activities of daily living, who is able to manage living in the community and who lives in their own home or in their own leased accommodation. 

3.31               Attendant care services provide assistance with everyday tasks and include, for example, personal assistance, home nursing, home maintenance and domestic services.

Example 3.4 :  Attendant care services

A person has an acquired brain injury and pays for an attendant to come to their home to assist with grooming, clothing and feeding activities during the day.

The expenses for the services provided by the attendant would be considered related to attendant care under this measure.

Aged care

3.32               The concept of aged care, for the purpose of these amendments, predominantly takes its meaning from the Aged Care Act 1997 which regulates the provision of aged care and provides Government subsidies to approved aged care providers.

3.33               To that end, under these amendments, medical expenses related to aged care means care provided by an approved provider (within the meaning of the Aged Care Act 1997 ) of a person who is a care recipient or continuing care recipient (within the meaning of that Act).   [Schedule 3, item 1, paragraph 159P(1B)(c)]

3.34               The term care takes its ordinary meaning and is consistent with the definition in the Aged Care Act 1997 wherein care means ‘services, or accommodation and services, provided to a person whose physical, mental or social functioning is affected to such a degree that the person cannot maintain himself or herself independently’.

Category B transitional arrangements

3.35               The Category B transitional arrangements are intended to act as an exception to the Category A transitional arrangements and allow taxpayers to claim the NMETO for medical expenses unrelated to disability aids, attendant care or aged care until the end of the 2014-15 income year.

3.36               Under the Category B transitional arrangements, taxpayers who receive an amount of the NMETO for the 2012-13 income year will be eligible to claim the NMETO for the full range of medical expenses (as defined currently in section 159P) for the 2013-14 income year.  [Schedule 3, item 1, paragraph 159P(1C)(a)]

Example 3.5 :  Claiming in 2013-14 income year

In respect of the 2012-13 income year, Jemma received the NMETO to the value of $3,000 as part of her income tax assessment relating to various types of medical expenses incurred over the income year including expenses for pharmaceuticals, surgery costs for having her wisdom teeth removed and for expenses relating to IVF treatment. 

As Jemma had received an amount of NMETO for the 2012-13 income year, she will be able to claim NMETO in the 2013-14 income year for the entire range of medical expenses that are eligible under section 159P, not just those for disability aids, attendant care or aged care.

3.37               Additionally, taxpayers who receive an amount of the NMETO for both the 2012-13 and 2013-14 income years will also be eligible to claim the NMETO for the full range of medical expenses (as defined currently in section 159P) for the 2014-15 income year. [Schedule 3, item 1, paragraph 159P(1C)(b)]

Example 3.6 :  Unable to claim in 2014-15 income year

When completing his tax return for the 2014-15 income year Ross determines that he is unable to claim the NMETO for that year because he did not receive an amount of the NMETO in the 2013-14 income year (as his expenses were under the relevant thresholds for that year) and because his medical expenses for the 2014-15 income year were for major dental work and not related to disability aids, attendant care or aged care.

Even though he received an amount of NMETO in 2012-13, he did not receive an amount in the 2013-14 income year and is therefore not eligible to claim the NMETO in the 2014-15 income year. 

3.38               The amendments also make it clear that where a trustee has received an amount of the NMETO in respect to a beneficiary in the 2012-13 income year (or both 2012-13 and 2013-14 income years if the claim is for the 2014-15 year), the Category B transitional arrangements will extend to the trustee as well in respect of a particular beneficiary.  [Schedule 3, item 1, paragraph 159P(1D)]

3.39               The last income year for which medical expenses can be claimed under the Category B transitional arrangements using the current definition of medical expenses in section 159P will be 2014-15. 

Consequential amendments

Consequential amendments to the Fringe Benefits Tax Assessment Act 1986

3.40               Subsection 58L(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) refers to the definition of medical expenses as currently defined in section 159P. However, as section 159P will be significantly altered as part of the transitional arrangements and ultimately repealed from 1 July 2019, the current definitions of ‘medical expense’ and ‘ineligible medical expense’ are preserved by rewriting them into section 58L of the FBTAA. [Schedule 3, item 2]

3.41               The definitions of ‘medical expense’ and ‘ineligible medical expense’ have been modified slightly to improve readability but continue to have the same meaning as they did in section 159P. 

3.42               Accordingly, the intent of this consequential amendment is to preserve the current operation of subsection 58L(2) of the FBTAA.

Consequential amendments that apply from 1 July 2019

3.43               From 1 July 2019 the NMETO will be repealed as the transitional arrangements will have concluded.

3.44               Accordingly a number of consequential amendments will be required to facilitate the repeal of the NMETO provisions.  [Schedule 3, items 3 to 8]

Commencement and application date

3.45               The Category A transitional amendments apply from 1 July 2013 until 30 June 2019 and the Category B transitional arrangements apply from 1 July 2013 until 30 June 2015.  Both the transitional amendments and the consequential amendments to the FBTAA commence on Royal Assent.

3.46               The amendments repealing the NMETO provisions and associated consequential amendments will commence and apply on 1 July 2019. 

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Phase-out of rebate for medical expenses

3.47               This Schedule 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 .

Overview

3.48               Schedule 3 to this Bill amends the tax law to phase-out the net medical expenses tax offset (NMETO) by the end of the 2018-19 income year.  During the income years 2013-14 to 2018-19 the tax offset will be subject to transitional arrangements.

Human rights implications

3.49               This Schedule engages the ‘Right to Health’ and the ‘Rights of people with a disability.

‘Right to Health’

3.50               Article 12(1) of the International Covenant on Economic, Social and Cultural Rights (ICESCR) recognises the right to the enjoyment of the highest attainable standard of physical and mental health.

3.51               While ICESCR contains no definition of health, the United Nations Committee on Economic Social and Cultural Rights has stated that the right to health is not to be understood as a right to be healthy.  The Committee has stated that the right to health contains both freedoms and entitlements, and the entitlements include the right to a system of health protection which provides equality of opportunity for people to enjoy the highest attainable level of health. 

3.52               The phase-out of the NMETO is consistent with the right to health as it merely removes an ineffective offset that is only really available to particular claimants for particular medical expenses.  Individuals with high out-of-pocket medical expenses and little or no tax liability gain no benefit from this offset as it is not refundable.  Individuals remain entitled to the core government health schemes and systems such as the Medicare Safety Net, which is supplemented by Medicare, the National Disability Insurance Scheme and the Pharmaceutical Benefits Scheme to provide an equal opportunity for people to enjoy the highest attainable level of health.  The phase-out and eventual repeal of this offset will allow for further funding of other Government priorities, including health care.

‘Rights of people with a disability’

3.53               Articles 9 and 19 of the Convention on the Rights of Persons with Disabilities recognise the need to allow persons with a disability to live independently and participate fully in all aspects of life.

3.54               The phase-out of the NMETO is consistent with this right as the transitional arrangements allow for taxpayers to claim medical expenses under the NMETO where they relate to disability aids and attendant care.

Conclusion

3.55               This Schedule is compatible with human rights because it is consistent with the right to health and the rights of people with a disability by removing an ineffective offset to allow for further funding of other Government priorities, including health care.  Through the main health schemes individuals are still provided equal opportunity for people to enjoy the highest attainable level of health.



Chapter 4          

Deductible gift recipients

Outline of chapter

4.1                   Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to update the list of specifically-listed deductible gift recipients (DGRs).

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 entity must fall within one of the general categories set out in Division 30 of the ITAA 1997 or be specifically listed by name in that Division.

4.3                   DGR status helps eligible entities and funds attract public financial support for their activities.

Summary of new law

4.4                   The amendments add the National Arboretum Canberra Fund and The Prince’s Charities Australia Limited as specifically-listed DGRs, and extend the existing listing of the Bali Peace Park Association Inc..

                        Further, the amendments change the name for the specific listing of the Sir William Tyree Foundation of The Australian Industry Group to the Sir William Tyree Foundation.

Detailed explanation of new law

National Arboretum Canberra Fund (ABN 92 277 326 035)

4.6                   Taxpayers may claim a tax deduction for gifts made to the National Arboretum Canberra Fund on or after 1 July 2013.  [Schedule 4, item 3, item 12.2.4 in the table in subsection 30-100(2) of the ITAA 1997]

                        The National Arboretum Canberra Fund is a charitable trust maintained exclusively to support the National Arboretum Canberra.

Bali Peace Park Association Inc. (ABN 97 562 887 842)

                        Taxpayers may claim a tax deduction for gifts made to the Bali Peace Park Association Inc. after 15 December 2009.  The current DGR specific listing for the Bali Peace Park Association Inc. covers the period after 15 December 2009 to before 17 December 2011.  The amendment extends the time limitation from 17 December 2011 to 16 December 2014.  [Schedule 4, item 2, item 9.2.23 in the table in subsection 30-80(2) of the ITAA 1997]

                        The Bali Peace Park Association Inc. aims to raise funds to acquire the Sari Club site, Bali, Indonesia, and create a ‘peace park’ on the land where the terrorist bomb was detonated on 12 October 2002 and to create an annual national awareness day on 12 October to allow for reflection and acknowledgement of the terrorist attack while promoting tolerance and understanding across cultures and religions.

Sir William Tyree Foundation (ABN 55 067 867 510)

                        Taxpayers may claim a tax deduction for gifts made to the Sir William Tyree Foundation from 1 March 1999.  The current DGR specific listing for the Sir William Tryee Foundation is being updated to reflect a change of name of the Foundation from the Sir William Tyree Foundation of The Australian Industry Group to Sir William Tyree Foundation.  [Schedule 4, item 1, item 2.2.18 in the table in subsection 30-25(2) of the ITAA 1997]

                        The Sir William Tyree Foundation funds certain academic positions within Australian universities or other appropriate educational institutions.  The academic positions funded are directed at advancing knowledge in Australia in areas of innovation such as in general industry, engineering, electronics, construction, information technology, business and management practice, public or industry policy development and employer and employee relations.

The Prince’s Charities Australia Limited (ABN 73 161 872 993 )

4.12               Taxpayers may claim a tax deduction for gifts made to The Prince’s Charities Australia Limited on or after 1 January 2014.  [Schedule 4, item 4, item 13.2.20 in the table in section 30-105 of the ITAA 1997]

                        The Prince’s Charities Australia Limited is a charitable institution maintained to coordinate the Prince of Wales’ Australian and international charitable endeavours in Australia, and undertake a broad range of activities, modelled on those of the Prince’s Trust in the United Kingdom.

                        These activities include supporting disadvantaged young people and veterans, the preservation of the built environment (particularly Australia’s heritage buildings), promoting environmental sustainability, education and corporate social responsibility.

                        A condition on The Prince’s Charities Australia Limited’s listing is that it must not use tax deductible donations for activities stated in clause 2.1.3 of its constitution, namely to ‘promote the development of sustainable communities including through the preservation and regeneration of the built environment, particularly Australia’s heritage buildings’.  This condition is enforceable under paragraph 353-20(4)(c) of the Taxation Administration Act 1953 .

Consequential amendments

4.16               The amendments have also updated the index in Division 30 to the ITAA 1997 to add or correct the new listings.  [Schedule 4, items 5 to 7]

Application and transitional provisions

4.17               The listing of the National Arboretum Canberra Fund applies to gifts made on or after 1 July 2013.

4.18               The existing listing for the Bali Peace Park Association Inc., which expired on 17 December 2011, has been extended to 16 December 2014.

4.19               The listing of The Prince’s Charities Australia Limited applies to gifts made on or after 1 January 2014.

4.20               These amendments commence on Royal Assent.

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Deductible gift recipients

4.21               This Schedule 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 .

Overview

4.22               Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 to update the list of specifically-listed deductible gift recipients.

Human rights implications

4.23               This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

4.24               This Schedule is compatible with human rights as it does not raise any human rights issues.



Schedule 1:  Unlawful payments from regulated superannuation funds

Bill reference

Paragraph number

Item 1, subsection 68B(1)

1.11, 1.21

Item 1, subsection 68B(2), item 2, paragraph 193(ca)

1.26

Item 1, subsection 68B(3)

1.13, 1.16

Schedule 2:  Administrative directions and penalties for contraventions relating to self managed superannuation funds

Bill reference

Paragraph number

Item 1, section 4; item 2, subparagraph 6(1)(e)(vii)

2.18

Item 3, subsection 10(1)

2.19

Item 4, subsection 10(4)

2.20

Items 5 to 7, 9 to 14, 17 to 21, and 23 to 25, subsections 34(1) and 35B(6), section 35B, subsections 65(1), 67(1) and 84(1), section 103, subsections 104(1), 104A(2), 105(1), 106(1), 106A(1), 124(1), 254(1) and 347A(5)

2.21

Item 8, paragraphs 56(2)(d) and (e) and 57(2)(d) and (e)

2.22

Items 15 and 16, paragraphs 104A(1)(c) and 104A(2)(ba)

2.24

Item 22, Part 20

2.28

Item 22, section 157

2.29

Item 22, section 158

2.30

Item 22, subsection 159(2)

2.35

Item 22, subsection 159(3)

2.38

Item 22, paragraph 159(3)(a)

2.39

Item 22, paragraph 159(3)(b)

2.40

Item 22, subsection 159(4)

2.43

Item 22, subsection 159(5)

2.45

Item 22, subsections 159(6) and (7)

2.47

Item 22, subsection 160(1)

2.52

Item 22, subsection 160(2)

2.54

Item 22, subsection 160(3)

2.57

Item 22, subsections 160(4) and (5)

2.59

Item 22, subsection 161(1)

2.64

Item 22, subsection 161(2)

2.65

Item 22, subsection 161(3)

2.67

Item 22, section 162

2.70

Item 22, section 163

2.71

Item 22, subsection 164(1)

2.73

Item 22, subsection 164(2)

2.76

Item 22, subsection 164(3)

2.78

Item 22, subsection 164(4)

2.79

Item 22, subsection 164(5)

2.80

Item 22, subsection 164(6)

2.81

Item 22, subsection 164(7)

2.82

Item 22, section 165

2.84

Item 22, subsection 166(1)

2.87

Item 22, subsection 166(2)

2.89

Item 22, subsection 166(3)

2.91

Item 22, section 167

2.92

Item 22, section 168

2.94

Item 22, section 169

2.96

Schedule 3:  Phase-out of rebate for medical expenses

Bill reference

Paragraph number

Item 1, subsection 159P(1B)

3.16

Item 1, paragraph 159P(1B)(a)

3.24

Item 1, paragraph 159P(1B)(b)

3.24, 3.29

Item 1, paragraph 159P(1B)(c)

3.24, 3.33

Item 1, paragraph 159P(1C)(a)

3.36

Item 1, paragraph 159P(1C)(b)

3.37

Item 1, paragraph 159P(1D)

3.38

Item 2

3.40

Items 3 to 8

3.44

Schedule 4:  Deductible gift recipients

Bill reference

Paragraph number

Item 1, item 2.2.18 in the table in subsection 30-25(2) of the ITAA 1997

4.10

Item 2, item 9.2.23 in the table in subsection 30-80(2) of the ITAA 1997

4.8

Item 3, item 12.2.4 in the table in subsection 30-100(2) of the ITAA 1997

4.6

Item 4, item 13.2.20 in the table in section 30-105 of the ITAA 1997

4.12

Items 5 to 7

4.16

 




[1] Human Rights Committee, General Comment 32 , Right to equality before courts and tribunals and to a fair trial , UN Doc CCPR/C/GC/32, 23 August 2007.

[2] Engel and Others v the Netherlands , Application no. 5100/71, 5101/71, 5102/71, 5354/72, 5370/72, 8 June 1976.

[3] See, for example, Ozturk v The Federal Republic of Germany , Application no. 8544/79, 21 February 1984 and Ezeh and Connors v United Kingdom , Applications no. 39665/98 and 40086/98, 15 July 2002.

[4] See, for example, Jussila v Finland , Application no. 73053/01, 23 November 2006, Bendenoun v France , Application no. 12547/86, 24 February 1994, Benham v United Kingdom , Application no. 1380/92, 10 June 1996, Ozturk v The Federal Republic of Germany , Application no. 8544/79, 21 February 1984 and Ravnsborg v Sweden , Application no. 14220/88, 23 March 1994.

[5] Ezeh and Connors v United Kingdom , Applications no. 39665/98 and 40086/98, 15 July 2002, Ozturk v The Federal Republic of Germany , Application no. 8544/79, 21 February 1984, and also Lutz v Germany , Application no. 9912/82, 25 August 1987; these factors are noted in the Committee’s interim practice note on Civil Penalties, paragraph 1.7.

[6] Subsection 196(3) of the SIS Act.

[7] Section 215 of the SIS Act.

[8] Section 199 of the SIS Act.

[9] Section 221 of the SIS Act.

[10] APRA v Holloway (2000) 45 ATR 278, [12]; citing NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 141 ALR 640, 648.

[11] Subsection 196(4) of the SIS Act.

[12] Section 200 of the SIS Act.

[13] Case of T v Austria, Applications no. 27783/95, 14 November 2010 at [66].

[14] Olesen v Eddy (2011) 81 ATR 763, [18]; APRA v Derstepanian (2005) 60 ATR 518 at [40].

[15] APRA, Superannuation Fund-level Rates of Return (issued 9 January 2013) available at: http://www.apra.gov.au/Super/Publications/Pages/superannuation-fund-level-publications.aspx; the top 10 funds have total assets in the range of $22 to $51 billion.

[16] Oleson v Eddy (2011) 81 ATR 763, [32]: Mansfield J combined 160 contraventions into ‘one contravening course of conduct’ such that Eddy was only liable to a single maximum penalty of 2,000 penalty units.

[17] For example, Olesen v Eddy (2011) 81 ATR 763, [35]: $15,000; Oleson v MacLeod [2011] FCA 229, [81]: $12,500; Olesen v Parker [2011] FCA 1096 , [86]: penalties of $35,000 and $15,000 were imposed on the first and second respondents respectively; Vivian v Fitzgeralds (2007) 69 ATR 834, [46]: penalties of $20,000 and $10,000 were imposed on the first and second respondents respectively.