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Tax and Superannuation Laws Amendment (Better Targeting the Income Tax Transparency Laws) Bill 2015



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ISSN 1328-8091

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BILLS DIGEST NO. 24, 2015-16 16 SEPTEMBER 2015

Tax and Superannuation Laws Amendment (Better Targeting the Income Tax Transparency Laws) Bill 2015 Bernard Pulle and Jola Olender Economics Section

Contents

Purpose of the Bill ............................................................... 2

Structure of the Bill ............................................................. 2

Background ......................................................................... 2

Context of 2013 Amendments ................................................ 2

Information Published ............................................................. 4

International Developments .................................................... 4

Organisation for Economic Cooperation and Development ....................................................................... 4

Foreign Account Tax Compliance ........................................ 5

Worldwide experience of tax transparency ........................ 6

Voluntary Corporate Disclosure Code ..................................... 6

Senate Economics References Committee Inquiry into Corporate Tax Avoidance ........................................................ 6

Committee consideration .................................................... 7

Position of major interest groups ......................................... 7

Financial implications .......................................................... 8

Statement of Compatibility with Human Rights .................... 8

Key provisions ..................................................................... 8

When is a corporate tax entity not an Australian resident that is a private company ...................................................... 11

The elements of corporate residency ................................. 11

Date introduced: 20 August 2015

House: House of Representatives

Portfolio: Treasury

Commencement: The day after Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website.

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Purpose of the Bill The purpose of the Bill is to amend the Taxation Administration Act 1953 (Cth)1 (TAA 1953) to provide an additional threshold before the Commissioner of Taxation is obliged to publish information about a corporate tax entity with a total income equal to or exceeding $100 million for an income year. The additional threshold to be met must be one of three alternatives:

• the entity is not an Australian resident that is a private company or

• the entity is a member of a wholly-owned group that has a foreign resident ultimate holding company or

• the percentage of foreign shareholding in the entity is greater than 50 per cent.

Structure of the Bill The Bill has one schedule which contains the amendments.

Background Current disclosure requirements in the TAA 1953 The Bill amends the requirement for the Commissioner of Taxation to publish limited information about the tax affairs of corporate taxpayers whose total income equals or exceeds $100 million for an income year. The current requirement to publish this information was enacted on 29 June 2013 by the Tax Laws Amendment (2013 Measures No. 2) Act 2013 (Cth).2 The information that is required to be published is contained in subsection 3C(3) of the TAA 1953 and consists of the entity’s:

• ABN and name

• total income for the income year

• taxable income or net income (if any) for the income year and

• income tax payable (if any) for the financial year.

The disclosure of taxable income and income tax payable also reveals the size of an entity’s tax deductions. The information outlined above is required to be published commencing with the 2013-14 income year. Up until the time that this Digest was written, no information had been published pursuant to the existing requirement. Ernst & Young estimates that the proposed amendments to the existing requirement ‘will potentially impact over 800 private companies, the bulk of which are not currently in the public arena’, meaning that there will be over 800 fewer entities covered by the proposed requirement than the existing one.3

Disclosure requirements under the Corporations Act 2001 (Cth) Large entities, including all public companies, large proprietary companies and registered schemes are already required to disclose some tax information in their annual reports as part of a financial report.4

Context of 2013 amendments to the TAA 1953 The then Assistant Treasurer announced on 4 February 2013 that the Government intended to improve the transparency of the business tax system.5 He stated that the aim was to ‘encourage enterprises to pay their fair share of tax and discourage aggressive tax minimisation practices’ as well as to ‘allow the public to better understand the business tax system and engage in debates about tax policy’.6 Further, improving the sharing of tax information between the Australian Taxation Office (ATO) and other key corporate regulators was aimed at enhancing the administration and regulation of the tax system and capital markets.7

1. Taxation Administration Act 1953 (Cth), accessed 14 September 2015. 2. Tax Laws Amendment (2013 Measures No. 2) Act 2013 (Cth), accessed 14 September 2015. 3. Ernst & Young, Submission to Treasury, Better targeting the income tax transparency laws—Exposure Draft, 3 July 2015, p. 2, accessed 27 August 2015.

4. Corporations Act 2001 (Cth), section 292, accessed 14 September 2015. 5. D Bradbury (Assistant Treasurer and Minister Assisting for Deregulation), Greater transparency of tax paid by large and multinational businesses, media release, 4 February 2013, accessed 26 August 2015. 6. Ibid.

7. Ibid.

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Following consultation with the Specialist Reference Group on ways to address tax minimisation of multinational enterprises and key corporate regulators, the measures were canvassed in a discussion paper that was released on 3 April 2013.8 The discussion paper set out three proposals to make certain information publically available by the Commissioner of Taxation:

• transparency of tax payable by large and multinational businesses with total income of $100 million or more per year, or entities with Minerals Resource Rent Tax (MRRT) or Petroleum Resource Rent Tax (PRRT) liabilities

• publishing aggregate collections for each Commonwealth tax and

• enhanced information sharing between government agencies.9

The then Assistant Treasurer noted in the 3 April 2013 press release announcing the discussion paper:

The push to improve transparency of tax payable by large multinational companies is part of the Government’s broader efforts to maintain the integrity of Australia’s tax base and crack down on profit shifting. 10

In response to the consultation process which concluded on 24 April 2013, the Gillard Government introduced the tax transparency changes into Parliament on 29 May 2013, contained in the Tax Laws Amendment (2013 Measures No. 2) Bill 2013.11 The then Assistant Treasurer in his second reading speech on the Bill, provided the following reasons for the introduction of the transparency measures:

There is growing concern—in Australia and globally—that many of the key rules of international taxation may not have kept pace with the evolution of the global economy.

The apparent ease with which some large corporate entities can shift taxable profits and erode a country's tax base is a shared concern for this government, the G20 and most OECD countries.

Policymakers and the Australian public should have more transparency around the levels of tax being paid by large and multinational businesses in Australia to allow for an informed debate about the efficiency and equity of our tax system.

This is particularly the case when there are increasing demands for the government to provide evidence about the challenges that base erosion and profit shifting present to the sustainability of our corporate tax system. 12

It is an offence for any taxation officer, including the Commissioner of Taxation, to disclose tax information that identifies an entity, or is reasonably capable of being used to identify an entity, except in specified circumstances.13 The 2013 changes form one such specified circumstance. The changes also provided enhanced information sharing between government agencies, with amendments made to ensure that it is not an offence for a taxation officer to disclose information to the Treasury for the purposes of decision making by the Treasurer in relation to a decision under Australia’s Foreign Investment Policy or the Foreign Acquisitions and Takeovers Act 1975 (Cth).14

8. D Bradbury (Assistant Treasurer and Minister Assisting for Deregulation), Specialist Reference Group on ways to address tax minimisation of multinational enterprises, media release, 10 December 2012; Australian Government, Improving the transparency of Australia’s business tax system, Discussion paper, The Treasury, Canberra, 3 April 2013, both accessed 26 August 2015.

9. D Bradbury (Assistant Treasurer and Minister Assisting for Deregulation), Improving the transparency of Australia’s business tax system, media release, 3 April 2013, accessed 26 August 2015. 10. Ibid.

11. D Bradbury (Assistant Treasurer and Minister Assisting for Deregulation), Gillard Government to improve tax transparency, media release, 29 May 2013, accessed 26 August 2015. Parliament of Australia, ‘Tax Laws Amendment (2013 Measures No. 2) Bill 2013 homepage’, Australian Parliament website, accessed 14 September 2015.

12. D Bradbury, ‘Second reading speech: Tax Laws Amendment (2013 Measures No. 2) Bill 2013’, House of Representatives, Debates, 29 May 2013, p. 4245, accessed 14 September 2015. 13. Section 355-25, Schedule 1 to the Taxation Administration Act 1953. 14. Foreign Acquisitions and Takeovers Act 1975 (Cth), accessed 14 September 2015. This was achieved by the repeal and replacement of table

item 7 at subsection 355-65(4) at Schedule 1 of the Taxation Administration Act 1953, by item 5 of Schedule 5 to the Tax Laws Amendment (2013 Measures No. 2) Act 2013.

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In debating the Tax Laws Amendment (2013 Measures No. 2) Bill 2013, which introduced the transparency measure, the then Shadow Treasurer Joe Hockey stated that the Coalition had ‘deep concerns’ about the Bill. Further, Mr Hockey stated:

I have no problems with disclosure, and I certainly want companies that earn money in Australia to pay tax in Australia. But I am not sure that these things are being redressed. Again, I think the risk of this schedule is that the government is like a bull at the gate. It is just going down the process of taking on business—a war with business. For all of its years it has been at war with business. After the first 12 months of the Rudd government, Labor has been at war with business. But the worst part is that it then introduces legislation that has unintended consequences and then… we have business sitting on its hands for new investment—or, worse, pulling out.

15

Information required to be published The information that the Commissioner of Taxation is required to publish under section 3C of the TAA 1953 can only be sourced from the information that the taxpayer has reported to the Commissioner in its relevant tax return.16 The Commissioner of Taxation is only able to correct a published error relating to an entity’s total income for the income year, where the relevant taxpayer gives a notice in writing that there is such an error and the notice includes a correction.17 Further, a correction is at the discretion of the Commissioner of Taxation.

Subsection 3C(2) prescribes that the Commissioner of Taxation must publish the required information ‘as soon as practicable after the end of the income year’, but there is no period within which the information must be published. The Explanatory Memorandum to the Tax Laws Amendment (2013 Measures No. 2) Bill 2013 notes that there is no prescribed period so as to allow ‘a flexible approach that accommodates organisational capabilities and priorities’.18 To date, no information required under section 3C has been published. The ATO is undertaking a consultation process as to the administrative arrangements for reporting the required information.19

The Explanatory Memorandum to the Tax Laws Amendment (2013 Measures No. 2) Bill 2013 envisaged that the Commissioner of Taxation would:

… publish one annual report encompassing all relevant taxpayers, and including all the information affecting income tax, MRRT and PRRT. This would likely be released several months after the date for the lodgement of the final company income tax returns for an income year. 20

International developments

Organisation for Economic Cooperation and Development The Australian transparency measures introduced in 2013 preceded the recommendations made by the Organisation for Economic Cooperation and Development (OECD) and the Group of Eight (G8) in relation to tax transparency. The G8 agreed to a number of specific tax commitments in the Lough Erne Declaration during the G8 Summit in June 2013.21 The commitments included actions to raise the standards of transparency in the extractive sector and to develop common global reporting standards.22

The OECD’s Base Erosion and Profit Shifting (BEPS) plan is an initiative of the OECD and the Group of 20 (G20) to develop policy options that address corporate tax avoidance. The OECD website states:

15. J Hockey, ‘Second reading speech: Tax Laws Amendment (2013 Measures No. 2) Bill 2013’, Senate, Debates, 6 June 2013, p. 5551, accessed 16 September 2015. 16. Taxation Administration Act 1953 (Cth), subsections 3C(1) and 3E(3), accessed 15 September 2015. 17. Ibid., subsection 3C(4), accessed 15 September 2015. 18. Revised Explanatory Memorandum, Tax Laws Amendment (2013 Measures No. 2) Bill 2013, p. 81, accessed 14 September 2015. 19. ATO, ‘Tax secrecy and transparency: administrative arrangements for reporting entity information’, consultation paper, ATO, 13 March 2015,

accessed 26 August 2015. 20. Revised Explanatory Memorandum, Tax Laws Amendment (2013 Measures No. 2) Bill 2013, op. cit., p. 81. 21. G8, ‘Lough Erne Declaration’, UK Government website, 18 June 2013, accessed 28 August 2015. 22. Ibid.

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BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. 23

At the request of the G20, the OECD published its Action Plan on Base Erosion and Profit Shifting (Action Plan) in July 2013.24 The BEPS Action Plan includes 15 actions to address BEPS and sets deadlines to implement these actions. Of these actions, seven have deliverables that were due for completion in September 2014 with the remaining deliverables to be completed by December 2015.25 The Action Plan highlighted the importance of developing means to address tax transparency, also noting the need for taxpayer confidentiality to be respected and administrative burdens on businesses to be considered.

Country-by-Country reporting derives from action item 13 in the BEPS. The 2015-16 Budget noted that the Country-by-Country reporting will be implemented in Australia from 1 January 2016.26 The consequence of this will be that ‘multinationals will be required to provide tax authorities with a global picture of their operations including income and tax paid in every country they operate in’.27

The Treasury released its scoping paper on the risks to the sustainability of Australia’s corporate tax base soon after the OECD’s BEPS Action Plan.28 The scoping paper made additional recommendations to address BEPS but did not outline further changes to the transparency measures. It did contain a recommendation that the public release of taxation statistics (containing aggregate tax data for taxpayer groups, different types of tax and certain items of income tax) should be expanded to cover international dealings of multinational corporations.29

A package of measures that establish a framework for the automatic exchange of tax information between countries has been developed by the OECD with the aim of increasing tax transparency internationally.30 The measures consist of the Common Reporting Standard (CRS) for automatic exchange of tax information. The OECD notes that the standard ‘provides for annual automatic exchange between governments of financial account information, including balances, interest, dividends, and sales proceeds from financial assets, reported to governments by financial institutions and covering accounts held by individuals and entities, including trusts and foundations’.31

Foreign Account Tax Compliance The US Foreign Account Tax Compliance Act (FATCA) regime has been implemented in Australia since 1 July 2014.32 FATCA imposes reporting and due diligence obligations on non-US financial institutions which are ‘required to report to the US Internal Revenue Service (IRS) information on US citizens with financial accounts’.33 Obligations on ‘Reporting Australian Financial Institutions’ to provide information on accounts held by US citizens, tax residents and certain other entities arise from amendments to the Taxation Administration Act 1953.34 The FATCA regime was used as a model for the automatic exchange of CRS information developed by the OECD.35

23. OECD, ‘About BEPS’, OECD website, accessed 31 August 2015. 24. OECD, ‘Action Plan on Base Erosion and Profit Shifting’, OECD website, accessed 31 August 2015. 25. Ibid.

26. Australian Government, ‘Leading the global fight against tax avoidance’, Budget Overview 2015-16, accessed 14 September 2015. 27. Ibid.

28. The Treasury, ‘Scoping paper on risks to the sustainability of Australia’s corporate tax base’, The Treasury, July 2013, accessed 4 September 2015. 29. Ibid., recommendation 1, p. 45. 30. OECD, ‘Automatic exchange of information’, OECD website, August 2015, accessed 31 August 2015. 31. Ibid.

32. ATO, ‘Foreign Account Tax Compliance Act’, ATO website, accessed 28 August 2015. 33. Ibid.

34. Tax Laws Amendment (Implementation of the FATCA Agreement) Act 2014 (Cth), accessed 15 September 2015. 35. OECD, ‘Automatic exchange of financial account information’, OECD website, 4 June 2015, p. 2, accessed 31 August 2015.

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Worldwide experience of tax transparency There have been public tax exposure regimes in the US, Italy, Japan and France.36 In the US, public disclosure of certain tax information was required for wealthy taxpayers from 1923-26.37 In 2008, the Italian tax authority briefly published the declared earnings and tax paid by every Italian in 2005 on its website but quickly took the information down.38 Japan implemented a public tax disclosure system in 1950, but abolished the third-party reporting system in 1954 and abolished the high-income taxpayer notification in 2004 for individuals and 2005 for corporations.39

Corporate tax information is available publically in Sweden, Denmark, Finland and Norway.40 Additionally, in Sweden, Finland and Iceland an application can be made to the tax authorities for tax information about individuals.41

Voluntary Corporate Disclosure Code The Government proposed a voluntary corporate disclosure code in the Federal Budget on 12 May 2015.42 The voluntary corporate disclosure code is currently being developed by the Board of Taxation.43 The Code is expected to be released by the end of 2015 and initial consultation occurred in August and September 2015.44

The Treasurer’s media release notes:

The voluntary code will highlight companies that are paying their fair share of tax. It will also discourage companies from engaging in aggressive tax avoidance.

The Board of Taxation will provide a business and broader community perspective to the development of a voluntary corporate disclosure code.

The Government would like more companies, particularly large multinationals operating in Australia, to publicly disclose their tax affairs. In developing the code they will need to consider what information is disclosed and how it is disclosed. 45

Senate Economics References Committee Inquiry into Corporate Tax Avoidance On 18 August 2015, the Senate Economics References Committee released its interim report on its inquiry into corporate tax avoidance.46 The majority report (Government Senators dissenting) considers that the ‘relatively basic information which will be released by the ATO [under section 3C of the TAA 1953] is a good first step to facilitating greater transparency and public awareness of corporate tax issues’. 47 Additionally, the report noted

36. K Devos and M Zackrisson, ‘Tax compliance and the public disclosure of tax information: an Australia/Norway comparison’, eJournal of Tax Research, 13(1), March 2015, p. 115. 37. E Brownlee, Federal taxation in America: a short history, Cambridge University Press, Cambridge, 1996, p. 97, accessed 14 September 2015. 38. T Bovaird, Public management and governance, 2nd edn, Routledge, Oxford, 2009, p. 323. 39. M Hasegawa et al, ‘The effect of public disclosure on reported taxable income: evidence from individuals and corporations in Japan’, National

Tax Journal, 66(3), September 2013, pp. 571-608, ProQuest database, accessed 11 September 2015. 40. PricewaterhouseCoopers (PwC), Tax transparency and country-by-country reporting: an ever changing landscape: an update, PwC, October 2013, pp. 35-36; J Bundgaard et al, ‘Tax risk management - country chapter - Denmark’, Corit Academic website, September 2013,

p. 7; Ernst & Young (EY), ‘Denmark: tax information made available to the public’, EY website, 10 December 2014, accessed 16 September 2015. 41. E Bo, J Slemrod and T Thoresen, ‘Taxes on the Internet: deterrence effects of public disclosure’, American Economic Journal. Economic Policy, 7(1), February 2015, p. 40, EBSCOhost database, accessed 15 September 2015. 42. J Hockey (Treasurer), Voluntary Corporate Disclosure Code, media release, 12 May 2015, accessed 14 September 2015. 43. Board of Taxation, ‘Voluntary tax transparency code’, Board of Taxation website, 2015, accessed 1 September 2015. 44. Ibid.

45. J Hockey (Treasurer), Voluntary Corporate Disclosure Code, op. cit. 46. Senate Standing Committee on Economics, Corporate tax avoidance, part 1: you cannot tax what you cannot see, Interim report, 18 August 2015, accessed 3 September 2015. 47. Senate Standing Committee on Economics, Corporate tax avoidance, part 1: you cannot tax what you cannot see: chapter 5 - potential areas

of unilateral action to protect Australia’s revenue base, Interim report, 18 August 2015, accessed 3 September 2015, p. 54.

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that the current $100 million reporting threshold could be lowered.48 The Committee’s final report is due by 30 November 2015.49

Committee consideration The Senate Standing Committee for the Scrutiny of Bills had no comment on the Bill.50 The Bill was referred to the Senate Economics Legislation Committee on 10 September 2015.51 The Committee is due to report on 12 October 2015.52 At the time of writing this Digest, no submissions to the Committee have been published.

Position of major interest groups The Tax Justice Network Australia supports the current disclosure provision and does not support the proposed amendment to reduce its scope, stating in its submission to the Treasury consultation that the current legislation:

…evens up the playing field between publicly listed domestic companies (whose financial reporting gives a clearer picture of the risks related to such companies) and private companies (whose lack of reporting may conceal the true risks associated with the entire company). 53

It also stated that the current legislation ‘will boost confidence in the broader community’ in terms of corporations paying the taxes they are required to pay.54

Other interest groups have been supportive of the proposed amendments. In the Tax Institute’s submission to the Treasury consultation, it is noted that it is supportive of the proposed amendment for reasons of ‘privacy and commercial sensitivity’.55 The Tax Institute raises concerns regarding the current law, stating that the information could be used to determine a company’s net profit margin which ‘can be highly sensitive for businesses and can impact on their business dealings’.56 Further, the submission notes that the current disclosure regime ‘risks disclosing the tax circumstances of the ultimate individual owners (via searches of the [Australian Securities and Investments Commission] ASIC public registers)’.57

The Ernst & Young submission raises similar concerns with the current disclosure requirements and supports the proposed changes to exempt certain Australian owned private companies. Ernst & Young states that the current disclosure ‘might actually be misleading, because it does not outline the many legitimate reasons for a company in business to have low tax payable.’58 It is stated:

If details of turnover and taxable income for private companies are published, then competitors, customers (including large business customers) and other stakeholders may obtain information which can be used to exert commercial pricing or other leverage or advantages over private companies. 59

John Keeves, Chairman of the Business Law Section of the Law Council of Australia welcomed the proposed amendment:

The Committee welcomes the amendments contained in the Draft Bill, as they will alleviate distinctly discriminatory provisions which inappropriately overturn fundamental rights of taxpayer privacy for private Australian companies and their shareholders. 60

48. Ibid.

49. Senate Standing Committee on Economics, Corporate tax avoidance inquiry, accessed 15 September 2015. 50. Senate Standing Committee for the Scrutiny of Bills, Alert digest, 9, 2015, The Senate, Canberra, 9 September 2015, p. 23, accessed 14 September 2015. 51. Selection of Bills Committee, Report, 11, 2015, The Senate, 10 September 2015, accessed 16 September 2015. 52. Senate Economics Legislation Committee, Inquiry into the Tax and Superannuation Laws Amendment (Better Targeting the Income Tax

Transparency Laws) Bill 2015 [Provisions], The Senate, Canberra, 2015, accessed 16 September 2015. 53. Tax Justice Network Australia, Submission to Treasury, Better targeting the income tax transparency laws—Exposure Draft, 3 July 2015, p. 1, accessed 27 August 2015. 54. Ibid.

55. The Tax Institute, Submission to Treasury, Better targeting the income tax transparency laws—Exposure Draft, 1 July 2015, p. 1, accessed 27 August 2015. 56. Ibid.

57. Ibid.

58. Ernst & Young, Submission to Treasury, Better targeting the income tax transparency laws—Exposure Draft, op. cit., p. 3. 59. Ibid., p. 2.

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Michael Croker, Tax Australia Leader of Chartered Accountants Australia and New Zealand supports the narrowing of the scope of the current measures:

When we consider the outcomes of the ATO public reporting which has been already legislated we see limited actual usefulness of the disclosed information and its potential for misinformation of the public. 61

Financial implications There are no financial implications.62

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.63

The Parliamentary Joint Committee on Human Rights (PJCHR) has concluded that the Bill does not raise human rights concerns.64

Key provisions As mentioned above, current section 3C of the TAA 1953 requires the Tax Commissioner to make the following information publically available in relation to certain entities:

• ABN and name

• total income for the income year

• taxable income or net income (if any) for the income year and

• income tax payable (if any) for the financial year (subsection 3C(3)).

Section 3C currently applies to corporate tax entities that have income of $100 million or more for an income year (subsection 3C(1)).

To give effect to the proposed changes described above, item 1 of Schedule 1 repeals existing subsection 3C(1) of the TAA 1953 and substitutes proposed subsection 3C(1), which reduces the scope of the entities to which section 3C applies by adding additional qualifying requirements. Proposed paragraph 3C(1)(a) provides that, as in the current subsection 3C(1), the section will apply to an entity that has total income equal to or exceeding $100 million for the year.

Proposed paragraph 3C(1)(b) provides that an entity must also satisfy one of three additional threshold requirements. These requirements are that:

• the entity is not an Australian resident that is a private company

• the entity is a member of a group with a foreign owned holding company or

• the foreign shareholding of the entity is more than 50 per cent.

Definitions of terms It must be noted that proposed subsection 3C(1) also provides that an expression used therein that is also used in the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) has the same meaning as in that Act.65 Many of the

60. Law Council of Australia, Submission to Treasury, Better targeting the income tax transparency laws—Exposure Draft, 3 July 2015, p. 1, accessed 31 August 2015. 61. Chartered Accountants Australia and New Zealand, Submission to Treasury, Better targeting the income tax transparency laws—Exposure Draft, The Treasury website, 3 July 2015, p. 2, accessed 1 September 2015. 62. Explanatory Memorandum, Tax and Superannuation Laws Amendment (Better Targeting the Income Tax Transparency Laws) Bill 2015, p. 7,

accessed 31 August 2015. 63. The Statement of Compatibility with Human Rights can be found at page 16 of the Explanatory Memorandum to the Bill. 64. Parliamentary Joint Committee on Human Rights, Twenty-seventh report of the 44th Parliament, The Senate, Canberra, 8 September 2015,

p. 1, accessed 11 September 2015. 65. Income Tax Assessment Act 1997 (Cth), accessed 15 September 2015.

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definitions in the ITAA 1997 further refer to the meanings given by the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).66 ‘Total income’ is not defined in the legislation, but the Explanatory Memorandum to the Tax Laws Amendment (2013 Measures No. 2) Bill 2013, the Bill that introduced section 3C into the TAA 1953, states that ‘it is based on accounting concepts, and refers to gross income’.67 The Commissioner does not publish the quantum of a loss for an entity with a tax loss.68

That Explanatory Memorandum further notes:

‘Taxable income’ refers to the amount a taxpayer returns as its assessable income less deductions.

‘Income tax payable’ refers to the amount a taxpayer returns as its income tax liability (if any) for the income year after applying the relevant tax rate to its taxable income and applying available tax offsets. Pay as You Go instalments do not affect the income tax payable amount but rather count as a prepayment against the tax payable liability.

69

‘Corporate tax entity’ is defined in section 960-115 of the ITAA 1997 and includes all taxpayers treated as corporations for the purposes of taxation.70 In consequence, proposed subsection 3C(1) will apply to a:

• company

• corporate limited partnership

• corporate unit trust and

• public trading trust.

Company ‘Company’ has the meaning given by the definition at subsection 995-1(1) of the ITAA 1997:

[C]ompany means: (a) a body corporate; or (b) any other unincorporated association or body of persons; but does not include a partnership or a non-entity joint venture.

Note 1: Division 830 treats foreign hybrid companies as partnerships.

Note 2: A reference to a company includes a reference to a corporate limited partnership: see section 94J of the Income Tax Assessment Act 1936. 71

Corporate limited partnership Under the definition at subsection 955-1(1) ITAA 1997, ’corporate limited partnership’ has the meaning given by section 94D of the ITAA 1936.72 For the purposes of taxation, most limited partnerships are corporate limited partnerships and as such are effectively treated as companies by way of section 94D of the ITAA 1936.73 The ATO defines a corporate limited partnership in the following way:

A corporate limited partnership is a partnership that is comparable to a limited liability company in that there are limited partners who are similar to shareholders in a company - they do not take part in the management of the business, and their liability generally is limited to the extent of their investment.

Certain limited partnerships are corporate limited partnerships and are taxed as companies.

66. Income Tax Assessment Act 1936 (Cth), accessed 15 September 2015. 67. Revised Explanatory Memorandum, Tax Laws Amendment (2013 Measures No. 2) Bill 2013, op. cit., p. 80. 68. Ibid.

69. Ibid.

70. Income Tax Assessment Act 1997 (Cth), section 960-115, accessed 14 September. 71. Ibid., definition of ‘company’ at subsection 955-1(1), accessed 15 September. 72. Income Tax Assessment Act 1936 (Cth), section 94D, accessed 15 September 2015. 73. CCH Australia, ‘Taxation of corporate limited partnerships’, CCH commentary: Australian premium master tax guide, ¶3-475, CCH Australia,

30 June 2015, accessed 11 September 2015. For the full legislative definition see Income Tax Assessment Act 1936 (Cth), section 94D.

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The following limited partnerships (including incorporated limited partnerships) are not corporate limited partnerships:

• a venture capital management partnership

• a venture capital limited partnership

• an early stage venture capital limited partnership

• an Australian venture capital fund of funds.

For a partnership to be a corporate limited partnership, it needs to meet the requirements of the relevant state law. 74

Additionally, a foreign hybrid partnership is not a corporate limited partnership.75

Corporate unit trust Subsection 995-1(1) of the ITAA 1997 states that ‘corporate unit trust’ has the meaning given by section 102J of the ITAA 1936.76 The ATO states:

A trust is a corporate unit trust for an income year if:

 the trust is a public unit trust

 under an arrangement, a business or property previously carried on or owned by a company is transferred to the unit trust and the shareholders of the company are entitled to take up units in the unit trust, and

 the trust is either a resident unit trust or was a corporate unit trust in a previous income year.

A public unit trust for this purpose is a trust whose units are listed on a stock exchange or offered to the public or held by 50 or more persons. A unit trust is not a public unit trust if 20 or fewer persons hold 75% or more of the beneficial interest of the income or the property of the trust. 77

Public trading trust Subsection 995-1(1) of the ITAA 1997 states that ‘public trading trust’ has the meaning given by section 102R of the ITAA 1936.78 The ATO states:

A trust is a public trading trust, if:

 the trust is a public unit trust

 the trust is a trading trust

 either

- the trust is a resident unit trust… or

- the trust was a public trading trust in a previous income year

and

74. ATO, ‘What is a corporate limited partnership and how is it taxed?’, ATO website, 15 July 2010, accessed 15 September 2015. 75. CCH Australia, ‘Taxation of corporate limited partnerships’, op. cit. 76. Income Tax Assessment Act 1997 (Cth), definition of ‘company’ at subsection 955-1(1); Income Tax Assessment Act 1936 (Cth), section 102J, accessed 15 September.

77. ATO, ‘Trusts’, ATO website, 5 July 2014, accessed 4 September 2015. 78. Income Tax Assessment Act 1936 (Cth), accessed 15 September 2015.

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 the trust is not a corporate unit trust.

A public unit trust for this purpose is a trust any of whose units are listed on a stock exchange or offered to the public or whose units are held by 50 or more persons, except where 20 or fewer persons hold or have the right to hold 75% or more of the beneficial interests in the income or property of the trust, and the Commissioner does not consider it reasonable to treat the trust as a public unit trust.

79

Issue - When is a corporate tax entity not an Australian resident that is a private company This threshold requirement involves the interaction of two definitions namely, the definition of a resident Australian company and the definition of private company.

The elements of corporate residency

Australian resident Paragraph (b) of the definition of ‘resident or resident of Australia’ at subsection 6(1) of the ITAA 1936 states that a company is resident in Australia if it is incorporated in Australia, or where it is not incorporated in Australia, carries on business in Australia and has either:

• its central management and control in Australia or

• its voting power controlled by shareholders who are residents of Australia.

If these conditions are not satisfied a corporate tax entity will not be an Australian resident. 80

Corporate non-resident There is no definition of corporate non-resident in the ITAA 1936.81 However, if the conditions for corporate residency are not satisfied, a corporate tax entity will not be an Australian resident.

Public and private companies The distinction between private and public company is provided in section 103A of the ITAA 1936. Subsection 103A(1) of the ITAA 1936 states that a company is a private company in relation to a year of income if the company is not a public company in relation to the year of income. Very basically, the following are public companies for tax purposes:

• a company whose shares are listed on the stock exchange in Australia or elsewhere on the last day of the income year

• a company that is a “co-operative company” at all times during the income year…

• a non-profit company

• a company that is:

(a) a mutual life insurance company

(b) a friendly society dispensary

(c) a government body established for public purposes or a company controlled by a government or a government body; or

(d) a public company subsidiary. 82

79. Ibid.

80. Ibid., subsection 6(1). 81. Ibid.

82. CCH Australia, ‘Public and private companies’, CCH commentary: Australian premium master tax guide, ¶3-015, CCH Australia, 30 June 2015, accessed 16 September 2015.

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There are a number of exceptions to when a company is considered a public company, for the full legislative definition see section 103A of the ITAA 1936.

Application of amendment Item 2 of Schedule 1 states that the amendment made by this Schedule applies in relation to an entity for the 2013-14 income year and later income years unless the Commissioner has already made public information about the entity under existing subsection 3C(2) of the TAA 1953.

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