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Treasury Laws Amendment (2022 Measures No. 3) Bill 2022 [and] Income Tax Amendment (Labour Mobility Program) Bill 2022



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ISSN 1328-8091

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BILLS DIGEST NO. 19, 2022-23 28 SEPTEMBER 2022

Treasury Laws Amendment (2022 Measures No. 3) Bill 2022 [and] Income Tax Amendment (Labour Mobility Program) Bill 2022 Jaan Murphy Law and Bills Digest Section Elo Guo-Hawkins and Julie Sienkowski Economic Policy Section

Key points

The Bills propose amendments to various foreign investment, taxation and superannuation law to:

• double the maximum financial penalties for contraventions of the relevant provisions relating to foreign ownership of residential land in Australia

• allow the Australian Taxation Office to share protected taxation information with an Australian government agency, for the purposes of administering major disaster support programs declared by the Minister

• extend, for a period of 12 months, a temporary mechanism for responsible Ministers to make alternative arrangements for meeting information and documentary requirements under Commonwealth legislation

• extend the current Seasonal Labour Mobility Program withholding tax regime to include the Pacific Australia Labour Mobility scheme, and any future similar temporary migration programs prescribed by the Government

• create a supplementary performance test for faith-based superannuation products.

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest. Treasury Laws Amendment (2022 Measures No. 3) Bill 2022 [and] Income Tax Amendment (Labour Mobility Program) Bill 2022 2

Contents

Purpose of the Bills ......................................................... 5

Committee consideration ................................................ 5

Senate Standing Committee for the Selection of Bills .............................................................................. 5

Senate Standing Committee for the Scrutiny of Bills .............................................................................. 5

Statement of Compatibility with Human Rights................ 5

Parliamentary Joint Committee on Human Rights ..... 6 Schedule 1 (Main Bill): Foreign acquisitions and takeovers penalties ......................................................... 6

Background: rules relating to foreign ownership of residential land in Australia .................................... 6

What is the problem? ................................................ 7

Table 1: Residential real estate compliance investigations by the ATO, 2018-19 to 2020-21 ....... 8 Table 2: Outcomes of residential real estate investigations that identified breaches, 2018-19 to 2020-21 ................................................................. 8

Table 3: Infringement notices issued in relation to residential real estate, 2018-19 to 2020-21 ......... 8 What is the proposed solution? ................................ 9

Key provisions ............................................................. 9

Table 4: Increased penalties for breaches of the FATA ........................................................................ 10

When do the changes commence? ......................... 13

Policy position of non-government parties/independents/major interest groups ........... 13 Financial implications ................................................ 13

Schedule 2 (Main Bill): Data sharing to support government responses to major disasters ...................... 13

Background ............................................................... 13

What is the problem? .............................................. 14

What is the proposed solution? .............................. 14

Key provisions ........................................................... 15

When do the changes commence? ........................... 16

Policy position of non-government parties, independents and major interest groups ................. 16 Financial implications ................................................ 16

Schedule 4 (Main Bill): Tax treatment for certain new or revised visa programs ............................................... 16

Background ............................................................... 16

Current taxation arrangements for non-residents workers generally .................................... 17

Table 5(a): Non-resident tax rates for 2021-22 and 2022-23 ............................................................ 17

Date introduced: 8 September 2022

House: House of Representatives

Portfolio: Treasury

Commencement: Various dates as set out in the main body of the digest.

Links: The links to the Treasury Laws Amendment (2022 Measures No. 3) Bill 2022, and Income Tax Amendment (Labour Mobility Program) Bill 2022,the Explanatory Memoranda and second reading speeches can be found on the Bills home pages, 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 Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at September 2022.

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Taxable Income ....................................................... 17

Tax on this income .................................................. 17

Table 5(b): Resident tax rates for 2021-22 and 2022-23 ................................................................... 17

Taxable Income ....................................................... 17

Tax on this income .................................................. 17

Current taxation arrangements for workers on temporary migration visas ...................................... 18

What are the problems that the Bills seek to address? .................................................................. 19

Who will the Bills effect? ......................................... 19

Figure 1: Distribution of workers ............................ 20

Key provisions ........................................................... 20

Ability to apply concessional tax rates to future new labour mobility programs ................................ 21

Commencement of changes to taxation of relevant visa holders ............................................... 21

Key issue 1: Horizontal equity ................................... 21

Key issue 2: Australia’s strategic objective with the Pacific and Timor-Leste nations .......................... 22

Committee consideration of the related key issue ... 22 Joint Standing Committee on Foreign Affairs, Defence and Trade .................................................. 22

Policy position of non-government parties, independents and major interest groups ................. 23 Financial implications ................................................ 24

Compliance cost impact ............................................ 24

Schedule 5 (Main Bill): Faith-based products .................. 24

Performance test for MySuper products .................. 24 Recent test results ..................................................... 25

Key issues and provisions .......................................... 26

What is a faith-based product? ............................... 26

Key issue: creating a supplementary performance test ..................................................... 27

Key issue: lack of appropriate indices ..................... 28

Current use of indices in the performance test .... 28 Concerns about appropriate indices for faith-based products ...................................................... 29

Financial implications ................................................ 30

Position of major interest groups ............................. 31

‘Equity’ of the current performance test and proposed supplementary test ................................. 31

Other issues raised by stakeholders ....................... 32

Table 6: Summary of stakeholder responses against three of the major themes ......................... 32

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Appendix A: Relevant statistical data for Schedule 1 (Main Bill) Foreign acquisitions and takeovers penalties ....................................................................... 34

Figure 2: Four-year comparison of purchase transactions by state or territory ............................ 34

Figure 3: Four-year comparison of sale transactions ............................................................. 35

Figure 4: Proportion of survey respondents’ property sales to offshore investors, by sector (Data correct for June Quarter 2022)...................... 35

Appendix B: Schedule 4 (Main Bill) - comparison between the current schedules and their corresponding schedules in lapsed Bills ......................... 36

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Purpose of the Bills

The Treasury Laws Amendment (2022 Measures No. 3) Bill 2022 (Main Bill) and the Income Tax Amendment (Labour Mobility Program) Bill 2022 (Supporting Bill) amend various foreign investment, taxation and superannuation laws for five separate purposes.

• Schedule 1 (Main Bill) amends the Foreign Acquisitions and Takeovers Act 1975 (FATA) to double the maximum financial penalties for contraventions of the relevant provisions relating to foreign ownership of residential land in Australia..

• Schedule 2 (Main Bill) amends the tax secrecy provisions in the Taxation Administration Act 1953 (TAA) to allow a taxation officer to disclose protected taxation information to an Australian government agency for the purposes of administering a major disaster support program approved by the Minister. The current law prohibits such a disclosure.

• Schedule 3 (Main Bill) amends the Coronavirus Economic Response Package Omnibus (Measures No. 2) Act 2020 to extend, for a period of 12 months, a temporary mechanism for responsible Ministers to make alternative arrangements for meeting information and documentary requirements under Commonwealth legislation. Schedule 3 is not covered in this Bills Digest because it is adequately explained in the Explanatory Memorandum to the Bills.

• Schedule 4 (Main Bill) and Schedule 1 (Supporting Bill) amend various tax laws to:

- rename the ‘Seasonal Labour Mobility Program withholding tax’ regime as the ‘labour mobility program withholding tax’ regime - extend the current income tax treatment (including a 15% income tax rate) under the renamed ‘labour mobility program withholding tax’ to the new ‘Pacific Australia Labour

Mobility’ (PALM) scheme and any future temporary migration programs prescribed by the Australian Government. • Schedule 5 (Main Bill) amends the Superannuation Industry (Supervision) Act 1993 to create a supplementary performance test for faith-based superannuation products.

Committee consideration

Senate Standing Committee for the Selection of Bills

At the time of writing this Digest, the Senate Standing Committee for the Selection of Bills deferred consideration of the Bills.1

Senate Standing Committee for the Scrutiny of Bills

At the time of writing this Digest, the Senate Standing Committee for the Scrutiny of Bills had not considered the Bills.

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 with human rights because, to the extent that it may limit human rights, those limitations are reasonable, necessary and proportionate.’2

1. Senate Standing Committee for the Selection of Bills, Report, 4, 2022, 8 September 2022, p. 4. 2. The Statement of Compatibility with Human Rights can be found at pages 41-44 of the Explanatory Memorandum to the Treasury Laws Amendment (2022 Measures No.3) Bill 2022, Foreign Acquisitions and Takeovers Fees Imposition Amendment Bill 2022, and Income Tax Amendment (Labour Mobility Program) Bill 2022.

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Parliamentary Joint Committee on Human Rights

At the time of writing this Digest, the Parliamentary Joint Committee on Human Rights had not considered the Bills.

Schedule 1 (Main Bill): Foreign acquisitions and takeovers penalties

Schedule 1 of the Main Bill seeks to double the financial penalties for contraventions of provisions relating to foreign ownership of residential land in Australia.3

Background: rules relating to foreign ownership of residential land in Australia

The Foreign Acquisitions and Takeovers Act 1975 (FATA) and other relevant legislation regulate foreign investment in Australia in a manner consistent with the Australian Government’s Foreign Investment Policy.4 The FATA allows the Treasurer to review foreign investments proposed by a foreign person (which includes foreign corporations and governments) if the investment meets certain thresholds based on the:

• type of entity proposing the investment (for example, a foreign government)

• type of asset or business being invested in (for example, agricultural land) and

• value of the investment.5

Whilst the Treasurer is ultimately responsible for all decisions relating to foreign investment under the FATA, the Treasurer is advised and assisted by the Foreign Investment Review Board (FIRB) which administers the FATA in accordance with the Foreign Investment Policy. The Australian Taxation Office (ATO) supports the FIRB by administering foreign investment applications with respect to residential real estate.6

Under the FATA, a foreign person must seek foreign investment approval before acquiring an interest in Australian residential land and must comply with any relevant obligations imposed by the Treasurer.7 When considering an application for a foreign person to acquire an interest in

residential land, ‘the overarching principle is that the proposed acquisition should add to Australia’s housing stock.’8 The FATA also contains specific penalties for contraventions of residential land provisions.

In their 2020-21 annual report, the FIRB noted that 'as COVID-19 continued to cause economic uncertainty and impact investor confidence, foreign direct investment inflows declined across countries comparable with Australia’. The 2020-21 income year saw a decline in the number of proposals, however, the total value of approved investments increased from $195.5 billion in 2019-20 to $233.0 billion in 2020-21.9

3. Jim Chalmers and Katy Gallagher, Labor’s Plan for a Better Future: Better Budget, Better Economy, Australian Labor Party policy document, Election 2022, 7 and 16. 4. The principal regime (also known as the FIRB regime) is set out in: the Foreign Acquisitions and Takeovers Fees Imposition Act 2015,the Foreign Acquisitions and Takeovers Regulation 2015 and the Foreign Acquisitions and Takeovers Fees Imposition

Regulations 2020. 5. Jaan Murphy, Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, FlagPost (Canberra: Parliamentary Library, 8 December 2020). 6. Murphy, Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020. 7. Explanatory Memorandum, para 1.3. 8. Explanatory Memorandum, para 1.3. 9. Foreign Investment Review Board (FIRB), Annual Report, 2020-21, i to ii.

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What is the problem?

In his second reading speech, the Assistant Treasurer, Mr Stephen Jones, set out the Government’s rationale for the amendments contained in Schedule 1 to the Bill:

Noncompliance with the residential land obligations by foreign persons has flow-on implications for Australia's housing stock and housing affordability.10

Research on the impact of the foreign investment in real estate on housing prices in Australia between 2004 and 2014 suggests that:

… increases in foreign investment account for between 20% and 30% of the rise in housing prices between 2004 and 2014 in Sydney and Melbourne. In other capital cities the effects appear to be negligible … foreign investment only plays a moderate role in Australia’s property boom. This implies that other factors such as CPI inflation, changes in domestic demand and supply constraints are likely to account for much greater proportions of the trends that we have observed, especially in cities outside of Sydney and Melbourne…11

Further, research suggests that foreign investment in the residential real estate sector is around 5-10% of the value of annual dwelling turnover in Australia, and perhaps half that share of the total number of dwellings turned over.12

The ATO is responsible for compliance and enforcement activities for residential real estate, the vacancy fee and some commercial land proposals.13 In 2020-21, the ATO reported that there were approximately 5,310 residential real estate purchase transactions involving a level of foreign ownership.14 Out of the 5,310 purchases, there were 711 established dwellings, 3,644 new dwellings and 955 vacant land.15 In the same period, there were 3,103 residential real estate sale transactions by foreign persons, including the sales of 858 established dwellings, 1,415 new dwellings and 830 vacant land.16 The total number of residential real estate properties and land (including purchases and sales) involving foreign persons was 8,413 in 2020-21.

The FIRB has reported the ATO’s investigations (and the outcomes) into non-compliant residential land or property transactions by foreign persons (see Tables 1 and 2 below). In 2020-21, the ATO identified 487 cases (including 126 cases carried forward from the previous year) requiring

investigation, completed 404 such investigations and found 100 properties in breach of FATA, which is approximately 1.2% of the total number of residential real estate involving foreign persons.17

10. S Jones (Assistant Treasurer and Minister for Financial Services), ‘Second Reading Speech: Treasury Laws Amendment (2022 Measures No. 3) Bill 2022’, House of Representatives, Debates, (proof), 8 September 2022, 8. 11. Ross Guest and Nicholas Rohde, ‘The Contribution of Foreign Real Estate Investment to Housing Price Growth in Australian Capital Cities’, Abacus 53, no. 3 (September 2017): 1, 15. 12. M. Gauder, C. Houssard, and D. Orsmond, ‘Foreign Investment in Residential Real Estate’, Reserve Bank of Australia Bulletin

(June 2014), 11. 13. Foreign Investment Review Board (FIRB), Annual Report, 2020-21, 41. 14. Australian Taxation Office (ATO), ‘Register of Foreign Ownership of Residential Land. Insights into Foreign Purchases and Sales of Residential Real Estate for the Period 1 July 2020 to 30 June 2021’, 2. Please note, care should be taken in comparing the

Insights data with the FIRB Annual Reports. The FIRB Annual Reports contain proposed investment information. The Insights data reflects confirmed real estate transactions and is not a full stocktake of foreign ownership in residential land. 15. ATO, Insights, 7. 16. ATO, Insights, 2 and 9. 17. The ‘1.2%’ is calculated by 100 (properties in breach of FATA) over 8,413 (total number of residential properties and land

(including sales and purchases) involving foreign persons).

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Table 1: Residential real estate compliance investigations by the ATO, 2018-19 to 2020-21

2018-19 2019-20 2020-21

Investigations No. No. No.

Identified 1,220 746 487

Completed 1,068 620 404

Properties in breach 600 259 100

The total number of identified cases includes new cases identified in the prior financial year which remained open at the end of that financial year. In 2020-21 there were 126 cases carried forward from 2019-20 year included in the identified count. At the close of the 2020-21 year there were 83 cases that will be carried forward into 2021-22.

Source: FIRB, Annual Report, 2020-21, Table 4.5, 46.

Table 2: Outcomes of residential real estate investigations that identified breaches, 2018-19 to 2020-21

2018-19 2019-20 2020-21

Compliance outcome No. Percenta ge No.

Percenta ge

No.

Percent age

Divestment (a) 83 13.8 70 27 57 57.0

Retrospective approval (b) 79 13.2 49 18.9 24 24.0

Change of conditions (c) 220 36.7 57 22 2 2.0

Retrospective approval during FIRB consideration (d) 213 35.5 62 23.9 17 17.0

Vacancy fee raised* 5 0.8 21 8.1 - -

Total outcomes 600 100 259 100 100 100.0

* Refers to situations where a compliance review was undertaken following the lodgement of a vacancy fee return and a vacancy fee liability was raised for a dwelling that was found to be occupied for fewer than 183 days during a vacancy year. Source: FIRB, Annual Report, 2020-21, Table 4.6, 47.

Table 3: Infringement notices issued in relation to residential real estate, 2018-19 to 2020-21

2018-19 2019-20 2020-21

Penalty type No.

Total value $

No.

Total value $

No.

Total value $

Tier 1 infringement 346 1,288,000 140 499,360

37 375,336

Tier 2 infringement 169 2,267,320 36 804,600

20 1,217,040

Total 515 3,555,320 176 1,303,960 57 1,592,376

Tier 1 infringement notices are issued where the breach is self-reported. Tier 2 infringement notices are issued where the breach is identified by the ATO’s compliance activity. Source: FIRB, Annual Report, 2020-21, Table 4.9, 49.

Further statistics on foreign ownership of Australian residential property or land are provided in Appendix A of this Digest.

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The ATO has stated that its compliance approach:

• ‘recognises that most foreign investors are willing to do the right thing and meet their foreign investment obligations’

• ‘acknowledges there is a small proportion that either don’t want to comply or have decided not to.’18

Where breaches of the FATA are investigated, a range of enforcement measures, including litigation, can be applied. In this regard the ATO notes:

In 2022, we welcomed the decision handed down by the Federal Court of Australia in relation to breaches of the FATA.

Using sophisticated compliance data-matching systems, our investigations into tax evasion and fraud identified several concerning activities by some investors.

In this instance, an individual investor purchased 4 properties without first applying for and receiving FIRB approval. The investor also held 2 established residential properties. These actions are considered serious breaches of the law and warranted a 'high touch' approach in treatment.

The landmark decision handed down in the Federal Court attracted penalties of $250,000. It sent a strong message to investors on the importance of understanding and complying with their foreign investment obligations. See Federal Court’s decision in Commissioner of Taxation v Balasubramaniyan [2022] FCA 374 (8 April 2022). 19

What is the proposed solution?

The Government made an election commitment to ‘increase foreign investment fees and penalties’.20

The amendments to the Foreign Acquisitions and Takeovers Fees Imposition Regulations 2020 made by the Government on 29 July 2022 doubled the fee amounts, implementing the fee component of that commitment.21 The Foreign Acquisitions and Takeovers Fees Imposition Amendment Bill 2022 (not examined in this Digest) makes additional changes, in relation to the way the relevant fees are indexed.22

Schedule 1 to the Main Bill implements the penalty component of the Government’s 2022 election commitment for residential land only. In his second reading speech on the Bill, the Assistant Treasurer advised:

This increase to residential penalties will ensure that these penalties effectively deter foreign persons from contravening the residential land provisions in the Foreign Acquisitions and Takeovers Act 1975. 23

Key provisions

As discussed earlier, the Government has expressed concern about the effect of non-compliance with Australia’s foreign investment laws by temporary or foreign residents on Australia’s housing stock and affordability, despite available evidence suggesting high rates of compliance.

18. ‘Foreign investment in residential real estate: Our compliance approach’, ATO website, 5 July 2022. 19. ‘Foreign investment in residential real estate’, ATO website. 20. Chalmers and Gallagher, Labor’s Plan for a Better Future, 7 and 16. 21. Explanatory Memorandum, para 1.19. 22. Explanatory Memorandum, para 1.19. 23. Jones, ‘Second Reading Speech: Treasury Laws Amendment (2022 Measures No. 3) Bill 2022’, 8.

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As such, the key issue that Schedule 1 to the Main Bill attempts to address is ensuring that the applicable penalties ‘effectively deter foreign persons from contravening the residential land provisions in the FATA’ and ‘will deter and punish illegal behaviour’.24 It is further noted that

‘Residential land is land in Australia where there is at least one dwelling on the land (or the number of dwellings that could reasonably be built on the land is less than 10) and does not include land that is used wholly and exclusively for a primary production business or on which the only dwellings are commercial residential premises.’25

Penalties (including infringement notices, civil and criminal penalties) may apply for breaches of the FATA in relation to residential land.26 For breaches occurring on or after 1 July 2020, the current value of a penalty unit is $222 - meaning that 100 penalty units, for instance, equals $22,200.27

Schedule 1 to the Main Bill deals with three groups of penalties:

• financial penalties for criminal offences relating to developers selling a dwelling to a foreign person without advertising the dwelling in Australia

• civil penalties relating to residential land acquisitions by foreign persons in particular circumstances

• civil penalties relating to failures by a foreign person to lodge tax returns, keep various records and provide various notices.

The proposed changes will increase the penalty units for following three groups of penalties by 100%, as set out in Table 4 below.

Table 4: Increased penalties for breaches of the FATA

FATA section

Prohibited conduct

Current penalty Proposed penalty

Group 1: Penalties for criminal offence provision relating to developers

88 A person is a

developer and sells a new dwelling to a foreign investor without complying with a condition in an exemption certificate to advertise the dwelling in Australia.

• imprisonment for 10 years • 15,000 penalty units (150,000

penalty units if the developer is a corporation) or both28

• imprisonment for 10 years • 30,000 penalty units (300,000 penalty units if the developer is a corporation)

or both29

Group 2: Civil penalties relating to real estate acquisitions by foreigners

24. EM, paras 1.5, 1.11, 1.12. 25. Explanatory Memorandum, para 1.3, 7. 26. The current Main Bill concerns the residential real estate related penalty provisions under Part 5 (offences and civil penalties), Part 6A (vacancy fees for foreign acquisitions of residential land) and Subdivision 3C (civil penalties relating to residential land)

of the FATA. 27. Crimes Act 1914, section 4AA and Notice of Indexation of the Penalty Unit Amount. See also: FIRB, Compliance and Penalties with Respect to Residential Land, Guidance 14, 9 July 2021, 3. 28. See subsection 88(1) of the FATA. 29. Items 1 and 2 of Schedule 1.

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FATA section

Prohibited conduct

Current penalty Proposed penalty

94 A foreign person

fails to notify the Treasurer before acquiring an interest in residential land or acquires the residential land before the relevant time period specified in section 82.30

The greatest of: • the amount of the capital gain that was made or

would be made on the disposal of the relevant residential land or established dwelling • 25% of the

consideration of the relevant residential land or established dwelling and • 25% of the

market value of the relevant residential land or established dwelling31

The greatest of: • double the amount of the capital gain that was made or would be made on the disposal

of the relevant residential land or established dwelling • 50% of the consideration of the relevant residential land or

established dwelling and • 50% of the market value of the relevant residential land or

established dwelling32

95 A temporary

resident breaches the rules by holding an interest in more than one established dwelling at the same time unless an exception applies. A foreign person, who is not a temporary resident, breaches the rules by acquiring an interest in an established dwelling, unless an exception applies.

95A A foreign person

fails to comply with a national security call-in notice from the Treasurer relating to residential land (for example, prohibiting an acquisition of residential land while a national security review is completed).33

30. See FIRB, Compliance and Penalties with Respect to Residential Land. 31. See subsections 94(4), 95(7), 95A(3) and 96(4) of the FATA. 32. Items 3 to 10 of Schedule 1. 33. See FIRB, Compliance and Penalties with Respect to Residential Land, 7.

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FATA section

Prohibited conduct

Current penalty Proposed penalty

96 A foreign person

contravenes a condition in a no objection notification, notice imposing conditions or exemption certificate relating to a residential land acquisition (for example, requiring a purchaser of vacant land to begin to build a dwelling before a particular time).34

Group 3: Civil penalties relating to failures by a foreign person to lodge tax returns, keep various records and provide various notices

97 A foreign person

fails to notify of an approved acquisition or sale, or fails to advertise the sale in Australia.35

A maximum civil penalty of 250 penalty units36

A maximum civil penalty of 500 penalty units37

115D A foreign person fails to lodge a vacancy fee return on-time.38

115DA A foreign person provides a false or misleading vacancy fee return.

115G A foreign person fails to keep records. Source: As per footnotes above.

34. See FIRB, Compliance and Penalties with Respect to Residential Land, 6. 35. See also FIRB, Compliance and Penalties with Respect to Residential Land, 6. 36. FATA, subsections 97(1), (1A) and (2), 115D(1), 115DA(1) and 115G(1). See also FIRB, Compliance and Penalties with Respect to Residential Land, 6-8. 37. Item 11 of Schedule 1 increases the penalty units from 250 to 500 under subsections 97(1), (1A) and (2), 115D(1), 115DA(1)

and 115G(1) of the FATA. 38. See also FIRB, Compliance and Penalties with Respect to Residential Land, 8.

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When do the changes commence?

The amendments made by Schedule 1 to the Main Bill will commence on 1 January 2023 and will generally apply to contraventions of the relevant provisions that occur on or after 1 January 2023.

However, the increase to the civil penalty for contraventions of subsection 95(1) (which prohibits a temporary resident from holding an interest in one or more established dwelling at the same time) will also apply to contraventions that started before 1 January 2023 and continue after 1 January 2023.39 The Explanatory Memorandum sets out the Government’s justification for these amendments to apply retrospectively:

A higher penalty for a continuing contravention of subsection 95(1) reflects the seriousness of continuing to contravene the provision and will better deter temporary residents from continuing to hold an interest in multiple established dwellings, which has a direct impact on Australia’s housing market. 40

Policy position of non-government parties/independents/major interest groups

At the time of writing, non-government parties, independents and major interest groups had not commented publicly on the measures contained in Schedule 1.

Financial implications

The Government estimates that this measure will increase receipts by $2.3 million over the four years from 2022-23.

All figures in this table represent amounts in $m, rounded to the nearest $0.1m each year.41

2022-23 2023-24 2024-25 2025-26

0.3 0.7 0.7 0.7

Source: Explanatory Memorandum, 1.

Schedule 2 (Main Bill): Data sharing to support government responses to major disasters

Schedule 2 to the Main Bill amends tax law secrecy provisions to allow certain tax information about taxpayers to be disclosed to Australian government agencies for the purposes of administering major disaster support programs approved by the Minister.

Background

One of the barriers identified by the Royal Commission into National Natural Disaster Arrangements for accessing financial assistance for recovery from a disaster was ‘the inability, or perceived inability, of different levels of government, organisations, and non-government organisations to share information with each other’ (page 466).

39. Item 12 of Schedule 1. 40. Explanatory Memorandum, para 1.26. 41. Explanatory Memorandum, 1.

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What is the problem?

The current tax secrecy provisions within Schedule 1 to the Taxation Administration Act 1953 (TAA) prohibit a taxation officer from disclosing protected information acquired as a taxation officer to an Australian government agency for the purpose of administering a major disaster support program.42 Such disclosure is an offence and can attract a maximum penalty of 2 years imprisonment.43 This can slow down the administration of such programs by, for example, slowing down the verification of an applicant’s eligibility to access a range of support payments.

Protected information is information that was disclosed, or obtained under, or for the purposes of a taxation law, and:

• relates to the affairs of a taxpayer and

• identifies, or is reasonably capable of being used to identify, the taxpayer.44

Examples of ‘protected information’ include details about the income tax and related liabilities of a taxpayer and of assets and liabilities disclosed to the ATO for the purposes of settlement negotiations.45

There are exceptions to the general offence.46 For example, a taxation officer can disclose protected information to certain government organisations (such as ASIC, APRA, Industry Innovation and Science Australia, the ACNC and Services Australia) for certain specified government purposes.47 However, disclosure of protected information to an Australian government agency for the purpose of administering a major disaster support program is not currently a specified government purpose.

What is the proposed solution?

Schedule 2 to the Main Bill proposes to amend the tax secrecy provisions to allow the ATO to disclose or record protected information with an Australian government agency, for the purposes of administering a major disaster support program as declared by the Minister by legislative instrument. The amendments in Schedule 2 to the Main Bill aim to reduce red tape related to major disaster support programs to improve the timeliness of major disaster recovery efforts.

In his second reading speech on the Bill, the Assistant Treasurer advised:

The sharing of [protected] taxation information will only be authorised if the Treasurer [or Minister] is satisfied that the [major disaster support] program supports individuals and businesses affected by a major disaster.48

The Explanatory Memorandum states that the amendments:

… will assist Australian government agencies to address the needs of individuals and businesses significantly disrupted by a major disaster event more efficiently and effectively and reduce the risk of those individuals and businesses receiving inadequate or inappropriate support.49

42. ITAA1997, section 995-1(1): an ‘Australian government agency’ is defined as: (a) the Commonwealth, a State or a Territory; or (b) an authority of the Commonwealth or of a State or a Territory. 43. TAA, subsection 355-25(1). 44. TAA, subsection 355-30(1). 45. Binqld Finances Pty Ltd (In Liq) v Israel Discount Bank Ltd [2019] FCA 1186 as per Foster J at [86] to [88]. See, Deutsch et al,

Australian Tax Handbook, Tax Return edition (Sydney: Thomson Reuters, 2022), 17. 46. TAA, Schedule 1, sub-division 355-B. 47. TAA, Schedule 1, section 355-65. 48. Jones, ‘Second Reading Speech: Treasury Laws Amendment (2022 Measures No. 3) Bill 2022', 8. 49. Explanatory Memorandum, paragraph 2.3, 15-16.

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The proposed amendments will allow for disclosures for the purpose of any compliance action undertaken by the agency administering the disaster support program.50

Key provisions

Schedule 2 to the Main Bill adds a new exception to the tax secrecy provisions in Division 355 of Schedule 1 to the TAA. The new exception will allow (but does not require) a taxation officer to disclose or record protected information to an Australian Government agency for the purpose of administering a major disaster support program declared by the Minister.51

Under proposed section 355-66 in Schedule 1 to the TAA, the Minister can declare a program to be a major disaster support program by making a legislative instrument.52 The Minister can make the declaration when a program administered by an Australian government agency is in effect responding to the impacts of an event that:

• has developed rapidly and resulted in the death, serious injury or other physical suffering of large number of individuals or

• has developed rapidly and resulted in widespread damage to property or the natural environment or

• relates to an emergency which has been declared, or no longer in force, under the National Emergency Declaration Act 2020 (the NED Act 2020);53

and the program is directed at supporting individuals significantly impacted by the event or ‘businesses’ the operations of which the event has significantly disrupted.54

The Minister needs only be satisfied that the program meets the eligibility criteria, and the program ‘does not need to explicitly address the criteria’.55 In relation to this, the Explanatory Memorandum notes:

2.19 A program that is directed entirely at supporting other entities or activities (such as not-for-profit organisations or employees who would not otherwise be eligible for support as an individual) would not be able to be the subject of a declaration. However, a program that applies to different types of entities could still be characterised as being directed at businesses if it substantially relates to supporting business entities. For example, a program that is directed at supporting businesses but also supports not-for profit organisations that are not also characterised as businesses could be a program that is directed at supporting businesses.56

A declaration made by the Minister under proposed subsection 355-66(1) must specify the period for which the declaration is in force, which cannot be more than 2 years.57

To support the amendments, Schedule 2 makes a consequential amendment to the definition of ‘national emergency law’ in the NED Act 2020, so that proposed section 355-66 in Schedule 1 to TAA is also a national emergency law.58

50. Explanatory Memorandum, paragraph 2.9, 17. 51. Explanatory Memorandum, paragraph 2.14, 18; proposed item 13 in Table 7 under subsection 355-65(8) Schedule 1 to TAA (item 2 of Schedule 2). 52. Item 3 of Schedule 2. 53. Proposed paragraph 355-66(1)(a) and subsection 355-66(2) of Schedule 1 to TAA (Item 3 of Schedule 2). 54. Proposed paragraph 355-66(1)(b) of Schedule 1 to TAA (Item 3 of Schedule 2). ITAA 1997, subsection 995-1(1) defines

‘business’ to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee. 55. Explanatory Memorandum, paragraph 2.17, 18. Proposed subsection 355-66(1) of Schedule 1 to TAA (Item 3 of Schedule 2). 56. Explanatory Memorandum, paragraph 2.19, 18. 57. Proposed subsection 355-66(3) of Schedule 1 to TAA (Item 3 of Schedule 2). 58. Proposed paragraph 10(zda) definition of ‘national emergency law’ (Item 1 of Schedule 2).

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When do the changes commence?

The amendments made by Schedule 2 to the Main Bill will commence on the day after Royal Assent and apply in relation to records and disclosures of information made on or after the commencement of the amendments, whether the information was obtained before, on or after that commencement.59

Policy position of non-government parties, independents and major interest groups

At the time of writing, non-government parties, independents and major interest groups had not commented publicly on the measures contained in Schedule 2.

Financial implications

The Government has stated that the Bill will have no financial impact.60

Schedule 4 (Main Bill): Tax treatment for certain new or revised visa programs

A Bills Digest was written for two lapsed Bills introduced by the previous Government (the Treasury Laws Amendment (Enhancing Tax Integrity and Supporting Business Investment) Bill 2022 and the Income Tax Amendment (Labour Mobility Program Bill) 2022) before the 46th Parliament was dissolved for the May 2022 Federal Election and is complementary to the current Digest.61 (See Appendix B to this Digest for further detail).

Background

Starting from 4 April 2022, the Pacific Australia Labour Mobility (PALM) visa scheme has become the primary temporary migration program to address unskilled, low-skilled, and semi-skilled workforce shortages in rural and regional Australia among all sectors of the economy.62

The PALM scheme is built on strong partnerships among Australia, Pacific Island nations and Timor-Leste.63 The ten participating countries include Fiji, Kiribati, Nauru, Papua New Guinea, Samoa, Solomon Islands, Timor-Leste, Tonga, Tuvalu and Vanuatu.64

The PALM scheme consolidated, reformed and replaced the previous two Pacific worker visa programs, namely the

• Seasonal Labour Mobility Program (otherwise known as the Seasonal Worker Programme (SWP)) which started from 1 July 2012

59. Explanatory Memorandum, 2. 60. Explanatory Memorandum, 2. 61. Jaan Murphy, ‘Treasury Laws Amendment (Enhancing Tax Integrity and Supporting Business Investment) Bill 2022 [and] Income Tax Amendment (Labour Mobility Program) Bill 2022’, Bills Digest, 59, 2021-22, (Canberra: Parliamentary Library,

30 March 2022), 10, 37-42. Note that these Bills also included amendments related to previous Government’s Australian Agricultural Worker Program. 62. Pacific Australia Labour Mobility (PALM), Expanding and Improving Labour Mobility: the PALM [Pacific Australia Labour Mobility] Scheme at a Glance, n.d., 1. See also: Pacific Australia Labour Mobility (PALM), Frequently Asked Questions, under

question ‘what industries can I recruit workers in?’, PALM website, n.d. 63. PALM, Expanding, 1. 64. PALM, Expanding, 2.

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• Pacific Labour Scheme (PLS) which started from 1 July 2018.65

While the SWP or PLS visa streams will no longer be available from 4 April 2022, workers who have already been granted or submitted these visas before 4 April will be able to arrive and remain in Australia on those visas.66 That means the SWP, PLS and the new PALM schemes will exist concurrently for some time.

Current taxation arrangements for non-residents workers generally

Under Australia’s tax laws, only tax residents can access the tax-free threshold.67 A tax ‘resident’ of Australia is defined by reference to four tests:

• the resident according to ordinary concepts test

• the domicile and permanent abode test

• the 183-day test - unless the Commissioner is satisfied that the person’s usual place of abode is outside Australia and that the person does not intend to take up residence in Australia and

• the Commonwealth superannuation fund test.68

A person only needs to satisfy one of the above tests in order to be taxed as an Australian resident. Generally foreign residents on short-term work visa are not considered tax residents and are subject to the non-resident tax rates. For the 2022-23 and 2023-24 income years, a tax rate of 32.5% applies from the first dollar of income earned up to $120,000.69 From the 2024-25 income year onwards, a tax rate of 30% applies from the first dollar of income earned up to $200,000.70

Table 5(a): Non-resident tax rates for 2021-22 and 2022-23

Taxable Income Tax on this income

0 - $120,000 32.5 cents for each $1

$120,001 - $180,000 $39,000 plus 37 cents for each $1 over

$120,000

$180,001 and over $61,200 plus 45 cents for each $1 over

$180,000

Source: Tax rates - foreign resident, Australian Taxation Office website (updated on 1/07/2022).

Table 5(b): Resident tax rates for 2021-22 and 2022-23

Taxable Income Tax on this income

0 - $18,200 Nil

65. Marise Payne (Minister for Foreign Affairs) and Zed Seselja (Minister for International Development and the Pacific), ‘Streamlining and Strengthening Pacific Labour for a New Era’, joint media release, 23 November 2021. 66. PALM, Frequently Asked Questions, under questions ‘will there be changes to the visa class under the new PALM scheme once it commences on 4 April 2022?’ and ‘how do I apply for a PALM scheme visa?’. 67. Income Tax Rates Act 1986 (ITAA 1986), Schedule 7; Income Tax Assessment Act 1997 (ITAA 1997), subsections 6-5(2) and (3),

6-10(4) and (5). 68. Income Tax Assessment Act 1936, subsection 6(1), definition of resident or resident of Australia; ATO, Taxation Ruling: Income Tax: Residency Status of Individuals Entering Australia, TR 98/17, paras 31-32. 69. ITAA 1986, Schedule 7, Part II, table item 1 in table 1, paragraph 1(b). 70. ITAA 1986, Schedule 7, Part II, table item 1 in table 2, paragraph 1(b).

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Taxable Income Tax on this income

$18,201 - $45,000 19 cents for each $1 over $18,200

$45,001 - $120,000 $5,092 plus 32.5 cents for each $1 over

$45,000

$120,001 - $180,000 $29,467 plus 37 cents for each $1 over

$120,000

$180,001 and over $51,667 plus 45 cents for each $1 over

$180,000

The above rates do not include the Medicare levy of 2%. Source: Tax rates - resident, Australian Taxation Office website (updated on 1/07/2022).

Current taxation arrangements for workers on temporary migration visas

Different taxation arrangements currently apply to visa-holders in the SWP, the PLS and the PALM scheme.

For workers in the SWP, a tax rate of 15% applies,71 and is substantially lower than the starting marginal tax rate of 32.5% that applies to other non-resident workers but:

• higher than the 0% tax rate which applies to the first $18,200 earned by tax residents - the $18,200 is known as the tax-free threshold amount which is not available for non-residents such as SWP workers72 and

• lower than the 19% for each dollar over $18,200 and 32.5% for each dollar over $45,000 up to $120,000, earned by tax residents.

Example 1 - Income tax treatment for a foreign resident under the Seasonal Worker Programme (SWP)

John comes to Australia for 6 months on a 403 visa issued prior to 4 April 2022 under the SWP to pick walnuts in rural and regional locations. John is a foreign resident for tax purposes in Australia.

John takes up employment at a walnut farm in Moree in northern New South Wales. He is paid $21 per hour and guaranteed 10 hours for 6 days each week. As John is a foreign resident working for an approved employer under the SWP, his employer will withhold 15% final tax from his salary and wages. John’s weekly salary is calculated as:

>$21 per hour × 10 hours × 6 days = $1,260 per week

His employer withholds 15% = $189

John’s take home pay each week is $1,071

Because John is a foreign resident working under a 403 visa in the SWP and he does not earn income from any other sources in Australia, he is not required to lodge a tax return in Australia.

Source: Australian Taxation Office, Seasonal Worker Programme and Pacific Labour Scheme

Foreign workers in the PLS are taxed at resident rates, as PLS workers are considered to be residents for tax purposes (because they can work in Australia between a minimum of one year and up to three years or longer).73 This means they benefit from the tax-free threshold discussed above and can claim deductions.

Example 2 - Australian resident in the PLS

71. Income Tax (Seasonal Labour Mobility Program Withholding Tax) Act 2012, section 4 provides that the rate of tax for SWP visa stream is 15%. 72. ITAA 1997, sections 26-25A, 840-905 to 840-920; Subdivision 12-FC in Schedule 1 to the TAA 1953. 73. ‘Seasonal Worker Programme and Pacific Labour Scheme’, ATO.

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Joe comes to Australia for 4 years on a 403 visa issued prior to 4 April 2022 under the PLS to pick fruit and nuts in rural and regional locations. Joe is an Australian resident for tax purposes in Australia.

Joe works at a cherry farm in Wangaratta, Victoria. He is paid $21 per hour and guaranteed 10 hours for 6 days each week. As Joe is an Australian resident, his employer will withhold tax from his salary and wages based on the resident tax rates. Joe’s weekly salary is calculated as:

$21 per hour × 10 hours × 6 days = $1,260 per week

His employer withholds tax and an amount for the Medicare levy = $251 per week

Joe’s take home pay each week is $1,009

Joe is required to lodge a tax return at the end of the tax year.

Source: Australian Taxation Office, Seasonal Worker Programme and Pacific Labour Scheme

However, foreign workers in the PALM visa scheme are currently generally taxed as non-residents, at a tax rate of 32.5% for the first $120,000 earned, 37% for income earned between $120,001 and $180,000, 45% for income earned over $180,000.74

What are the problems that the Bills seek to address?

As noted above, the PALM visa scheme consolidated, reformed and replaced the SWP and PLS visa schemes. This means the PALM scheme will seek to attract similar Pacific and Timor-Leste workers to those under the previous SWP and PLS visa streams to work in all sectors of Australia’s economy.75 However, these groups of foreign workers, who perform similar work (with some differences across the three programs), are taxed differently, depending on the type of visa they hold.

The Government argues that the higher tax rates currently applied to visa holders under the PALM scheme will discourage workers’ participation in the program and therefore mean the program would defeat its dual purposes of addressing Australia’s workforce shortages and maintaining good relations with participating nations by helping the Pacific and Timor-Leste workers to send homes savings and remittance.76

In addition, the current legislation does not have the flexibility to allow the Australian Government to, by regulations, provide concessional taxation rates to future visa programs for foreign workers. Instead, the Government needs to amend the legislation to apply concessional tax rates each time a new visa program is introduced.

Who will the Bills effect?

As at 31 July 2022, there are 26,500 workers in the PALM visa scheme.77 The Government has stated that ‘there are currently more Pacific and Timor-Leste PALM scheme workers in Australia than there have ever been before’.78

There are also 40,108 pre-screened workers awaiting job offers from approved PALM scheme employers as at 31 July 2022 (see Figure 1 below).79

74. Explanatory Memorandum, 27. 75. Foreign workers in the Seasonal Labour Mobility Program hold either a Temporary Work (International Relations) Visa (subclass 403) - Seasonal Labour Mobility Program, or a Temporary Activity Visa (subclass 408) having previously held a Temporary Work (International Relations) Visa (subclass 403) - Seasonal Labour Mobility Program: section 840-900 of ITAA

1997. Foreign workers in the PALM scheme will hold a new Temporary Work (International Relations) - Pacific Australia Labour Mobility Visa (subclass 403). 76. PALM, Expanding, 2. 77. PALM, Expanding, 2. 78. PALM, Expanding, 2. 79. PALM, Expanding, 2.

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Figure 1: Distribution of workers

Source: PALM, Expanding, 2.

As at 31 July 2022, there are 387 PALM approved employers.80 Employers will also be impacted by the measures proposed in the Bills as they are required to withhold the correct tax rate using the PAYG withholding system and claim the correct deduction amounts for salaries, et cetera.

Key provisions

Schedule 4 to the Main Bill and Schedule 1 to the Supporting Bill will rename the current ‘Seasonal Labour Mobility Program withholding tax’ regime as the ‘labour mobility program withholding tax’ regime.81 Further, the Main Bill defines a labour mobility program as including:

• the Seasonal Labour Mobility Program

• the Pacific Australia Labour Mobility (PALM) program and

• any future program(s) that the Government prescribes by regulations.82

The effect of the other amendments in Schedule 4 to the Main Bill and Schedule 1 to the Supporting Bill is that foreign workers

• participating in a labour mobility program

• will pay an income tax rate of 15% on the salary, wages, commission, bonuses or allowances received as an employee of an Approved Employer when they held a relevant temporary work visa and was a foreign resident.83

This would mean that from 1 July 2022 foreign workers under the new PALM scheme visa will receive similar taxation treatments as those under the SWP visa scheme.

80. PALM, Expanding, 2. 81. Schedule 4 to the Main Bill, items 20 and 21. And Schedule 1 to the Supporting Bill, items 1 and 2. 82. Proposed new section 840-906 ‘covered labour mobility programs’ of ITAA 1997 (item 13 of Schedule 4 to the Main Bill); amended paragraph 840-905(a) of ITAA 1997 (item 10 of Schedule 4 to the Main Bill); proposed new subparagraph 840-

905(b)(iii) of ITAA 1997 (item 11 of Schedule 4 to the Main Bill); and proposed new paragraph 12-319A(a) and subparagraph 12-319A(b)(iii) of Schedule 1 of the TAA (items 26 and 27 of Schedule 4 to the Main Bill). See also Explanatory Memorandum, paragraphs 4.11 to 4.12, 28. 83. Schedule 4, Main Bill, items 10 and 17; Explanatory Memorandum, paragraphs 4.13, 4.21-4.22.

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Ability to apply concessional tax rates to future new labour mobility programs

The Main Bill also ensures that any future Government can expand the concessional tax treatment by applying it to new types of visas via regulations, rather than being required to amend the Income Tax Assessment Act 1997.84

The Explanatory Memorandum argues:

This will increase flexibility to update the tax law in response to future changes, such as changes to program names or the creation of new programs for foreign residents for which this tax treatment is appropriate. It will also allow flexibility to update the tax law in response to changes to visa names by regulations.

This will provide the Government with the necessary flexibility to make timely changes to tax arrangements to support the success of Australia’s existing and future labour mobility programs. The regulations would be subject to disallowance and therefore will be subject to appropriate parliamentary scrutiny.85

These amendments were not included in the lapsed Treasury Laws Amendment (Enhancing Tax Integrity and Supporting Business Investment) Bill 2022 introduced by the previous Morrison Government.

Commencement of changes to taxation of relevant visa holders

The Supporting Bill commences on 1 July 2022 and the amendments in Schedule 4 to the Main Bill will either commence at the same time, or do not commence at all, if the Supporting Bill does not commence.86

The amendments apply retrospectively in relation to salary, wages, commission, bonuses and allowances paid on or after 1 July 2022. The Explanatory Memorandum notes that the retrospective amendments are ‘wholly beneficial to or do not disadvantage anyone affected by the amendments’ due to a lower income tax rate applicable to the foreign worker employees and a lower withholding tax rate applicable to the employers.87

Key issue 1: Horizontal equity

One of the criteria of good tax design is ‘horizontal equity’. The notion of horizontal equity requires taxpayers in the same position be taxed the same.88

In that regard, the Bill raises two horizontal equity issues.

The first - which the Bill seeks to address - is ensuring that workers in the PALM visa stream, the Seasonal Labour Mobility Program (or SWP) and other future similar programs, pay the same rate of tax (15%). If there are no changes to the current tax arrangements, workers in the PALM scheme will pay more than twice the amount of the income tax (32.5% as a starting rate) than

84. Schedule 4, Main Bill, items 11, 13 and 27. 85. Explanatory Memorandum, paragraphs 4.26-4.27. 86. Schedule 4, Main Bill, item 38; Item 2 of the Income Tax Amendment (Labour Mobility Program) Bill 2022. See also the Explanatory Memorandum, paragraph 4.33, 31. 87. Explanatory Memorandum, paragraphs 4.35 to 4.37, 31-32. 88. P Kenny, ‘Australia’s capital gains tax discount: more certain, equitable and durable?’, Journal of the Australasian Tax

Teachers Association 1, no. 2, 2005, 39; A Morgan, ‘The institutional framework of taxation in Australia’, Tax Institute, ConTax Newsletter May 2013, 4; South Australian Department of Treasury and Finance, Horizontal Fiscal Equalisation and Equity, (February 2012), 1.

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workers in the SWP (15%), and such a difference in tax treatment under the two visa schemes may appear to be unfair.

The second - which the Bill does not address - is that the measures in the Bill, if passed, would result in non-resident workers without a labour mobility program or Working Holiday Maker (WHM) visa being taxed at a higher rate than non-resident workers that do hold those visas, even if they are performing the same work for the same employer.

Whilst not explored in detail in this Digest, prior to the introduction of the ‘backpacker tax’ for WHM visa holders, taxation-related proposals reflected a view that it was appropriate to tax foreign workers on short-term visas on the same basis, regardless of the sector they worked in or the type of visa that they held.89

As such, a key issue raised by the Bill is whether it is appropriate to tax foreign workers on short-term visas working from specific countries:

• in the same manner as other non-residents foreign workers or

• on a more concessional basis compared to other non-residents workers.

Readers are referred to the Bills Digest that was written for two lapsed Bills for further details on this issue.90

Key issue 2: Australia’s strategic objective with the Pacific and Timor-Leste nations

The Australian Government has indicated its intention to run the PALM scheme with the aim of producing a ‘win-win’ outcome for both Australia and the partnering nations.

If the seasonal workers in the PALM scheme are taxed at a higher starting rate of 32.5% as a foreign resident, there is a danger that the PALM scheme would fail its dual purposes of

(i) addressing Australia’s workforce shortages,91 and

(ii) maintaining good relationships with the Pacific and Timor-Leste nations.92

Committee consideration of the related key issue

Joint Standing Committee on Foreign Affairs, Defence and Trade

In its March 2022 report, the Joint Standing Committee on Foreign Affairs, Defence and Trade recognised the growing importance of labour mobility schemes in the enduring Australia-Pacific relationships. The Committee recommends that such schemes be built on to support career development, build relationships, and provide pathways to permanent residence. 93

Recommendation 2 of the report states the following.

The Committee notes the growing importance of the Pacific Australia Labour Mobility scheme for skills transfer and training and as a source of remittance income, and the support for such programs amongst the Pacific. The Committee recommends the Australian Government:

90. Murphy, Bills Digest, 10-12 and 42. 91. PALM, Expanding, 1. See also: PALM, Frequently Asked Questions, under question ‘what industries can I recruit workers in?’. 92. PALM, Expanding, 2. 93. Joint Standing Committee on Foreign Affairs, Defence and Trade (JSCFADT), Strengthening Australia’s Relationships In The

Pacific, (Canberra: Senate, March 2022), iii.

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• pursue steps to scale-up the program, better support career development, and provide pathways for permanent residency, akin to those being developed for the Agriculture Visa Scheme; and • explicitly recognise the relationship building and cultural exchange elements of the Pacific Australia Labour Mobility Scheme in its design and promotion.94

Policy position of non-government parties, independents and major interest groups

The PALM scheme and its expansion have attracted some media attention. For example, ABC News recently reported that farmers have traditionally relied on backpacker labour for planting and harvest work but, since the pandemic, working holiday-makers are yet to return in the same numbers.95

Bree Grima, the chief executive of Bundaberg Fruit and Vegetable Growers, said that made it even more critical the Pacific workers are supported:

If it wasn't for [the Pacific workers], we simply would not have been harvesting our crops or planting our crops either… We've had some brilliant numbers come into Queensland and into regional areas, a lot more than we've had before. So we need to make sure that the workers that are here, that are keen to stay here, that they've got the support mechanisms to ensure that they've got that work available for them.

There's a lot of work and time and effort that goes into becoming an approved employer, and there should be... It is a difficult process to go through but I do support that it does do a lot of background checks and ticks a lot of boxes. These workers, they are highly skilled, they're putting a lot into the community, and we need to make sure that we're looking after them in every aspect.96

ABC News also reported that the unions and employers in the aged care sector considered the extension of the PALM scheme to include aged care as a positive move but warned that there would be minimal impact:

• CapeCare chief executive Joanne Penman was reported to have said that the full-time [Fijian] workers had made a huge difference, working with the non-for-profit aged care provider for four months.

• Australian Nursing and Midwifery Federation (ANMF) federal secretary Annie Butler was reported to have said overseas-trained workers had long formed a significant part of Australia's care and nursing workforce and the expansion of the scheme could have a positive, yet limited impact.

• Aged and Community Care Providers Association interim chief executive Paul Sadler was reported to have said Pacific Island workers would fill a limited portion of the empty roles.

• South Sea Islander worker welfare advocate Geoffrey Smith was reported to have said a lot more work to address Australia’s history of mistreatment of people from South Pacific Islands was needed before expanding the program.97

The concerns reflected in the last point above are consistent with the historical prevalence of underpayment or non-payment of wages and other unlawful employment arrangements in the agricultural sector and are examined in detail in the Bills Digest to the lapsed Income Tax

94. JSCFADT, Strengthening Australia’s Relationships In The Pacific, 55-58. 95. Johanna Marie and Kallee Buchanan, ‘Pacific farm workers who breached visas by working for wrong employers fight to get them back’, ABC Rural, 2 August 2022.

96. Marie and Buchanan, ‘Pacific farm workers who breached visas by working for wrong employers fight to get them back’, ABC Rural. 97. Nicole Hegarty, ‘Aged care sector welcomes Pacific workers but needs 35,000 more each year to address shortages’, ABC News, 18 August 2022.

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Amendment (Labour Mobility Program) Bill 2022 and the Income Tax Amendment (Labour Mobility Program) Bill 2022.98

Financial implications

Schedule 4 (Main Bill) and Schedule 1 (Supporting Bill) partially implements the Pacific Labour Mobility - reforms measure from the previous Government’s 2021-22 Mid-Year Economic and Fiscal Outlook.99

The Government estimates that the measure will increase receipts by $165.0 million over the then forward estimates period.100

All figures in this table represent amounts in $ million.

2021-22 2022-23 2023-24 2024-25

40.0 45.0 40.0 40.0

Source: Explanatory Memorandum, 4.

These estimates reflects the tax that was expected to be paid at the proposed rates by workers participating in the new Pacific Australia Labour Mobility scheme and the expansion of the Pacific Labour Scheme. This estimate includes an increase in goods and services tax receipts of $50.0 million over the then forward estimates period that will subsequently be paid to the states and territories.

Compliance cost impact

The Government has stated that this measure ‘is expected to result in a negligible impact on compliance costs, as the proposed taxation arrangements are consistent with existing taxation arrangements for other labour mobility programs’.101

Schedule 5 (Main Bill): Faith-based products

The Bill proposes amendments to the Superannuation Industry (Supervision) Act 1993 (SIS Act) to establish a supplementary performance test for faith-based superannuation products.

Performance test for MySuper products

MySuper products were introduced in 2013. They were designed to be a simplified superannuation accumulation product, into which contributions are paid if the employee either nominates the product or does not express a choice about which fund their superannuation contributions are paid into.102 That is, they are intended to be simple, cost-effective and balanced investment options eligible to receive default contributions.103

In 2018, the Productivity Commission conducted a review of Australia’s superannuation system (the PC Review) which made a number of findings relevant to the introduction of the performance test:

98. Murphy, Bills Digest, 40-42. 99. Josh Frydenberg and Simon Birmingham, Mid-Year Economic and Fiscal Outlook 2021-22, Budget 2021-22, 236. 100. Explanatory Memorandum, 4. 101. Explanatory Memorandum, 4. 102. Kai Swoboda, ‘Superannuation Legislation Amendment (MySuper Core Provisions) Bill 2011’, Bills Digest, 119, 2011-12,

(Canberra: Parliamentary Library, 7 March 2012), 3-4. 103. The Treasury, Your Future, Your Super Review: Consultation Paper, (Canberra: Treasury, 7 September 2022), 5.

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• many Australians have low financial literacy and are disengaged from their superannuation104

• holding superannuation in one of the worst performing funds could mean a person retired with a significantly lower superannuation balance

• high fees also eroded final superannuation balances.105

The Treasury Laws Amendment (Your Future, Your Super) Act 2021 introduced a performance test for MySuper products to hold superannuation funds to account for underperformance through greater transparency and increased consequences. The Australian Prudential Regulation Authority (APRA) conducts the test each year.

There are two components to calculating the performance measure:

• the net investment return of a product over the past 8 years (actual return) is compared to a benchmark return and

• the product’s representative administration fees and expenses (actual RAFE) for the most recent financial year is compared to the median RAFE (benchmark RAFE).106

The benchmark return is a passive investment portfolio of indices tailored to the product’s reported strategic asset allocation. As noted in the PC Review, using a benchmark portfolio to assess investment performance aims to account for the many influences on investment markets which are beyond funds’ control, while providing insights into the value added by funds.107 The issue of selecting an appropriate portfolio of indices is examined below in the ‘key provisions and issues section’.

Recent test results

The performance text was applied to MySuper products from 1 July 2021, with 13 products failing the performance test in 2021.108 Of those, 2 belonged to funds with clear religious affiliations (Australian Catholic Superannuation and Retirement Fund and Christian Super).109 The performance test looks at results over 8 years meaning some newer funds committed to investing along ‘ethical’ or ‘socially responsible’ principles were not tested. A values-based investment fund, Australian Ethical’s MySuper passed the performance test by 132 basis points.110

The 2 Christian funds which offered products which did not pass the performance test in 2021 have since merged with other funds.111 There have also been further mergers of other Christian funds.112 According to the Financial Standard, this only leaves 2 religious funds - Anglican Super (managed by Mercer) and Crescent Wealth.113

104. Productivity Commission (PC), Superannuation: Assessing Efficiency and Competitiveness, report, 91, (Canberra: PC, 2018), 56. 105. PC Review, 53. 106. Treasury, Your Future, Your Super Review: Consultation Paper, 6-7. The test methodology is detailed in the Superannuation Industry (Supervision) Regulations 1994.

107. Treasury, Your Future, Your Super Review: Consultation paper, 6-7. 108. Treasury, Your Future, Your Super Review: Consultation Paper, 5. 109. APRA, ‘Your Future, Your Super Performance Test - 2021’, APRA website, 31 August 2021.

110. Super Consumers Australia, Submission to the Treasury consultation Superannuation Performance Test of Faith-Based Products, August 2022. 111. Australian Catholic Superannuation and Retirement Fund is reported to be merging with UniSuper and Christian Super is reported to be merging with Australian Ethical: see Jamie Williamson, ‘Time to Legislate Objective of Super’, Financial

Standard, 22 August 2022. 112. Williamson, ‘Time to Legislate Objective of Super’. 113. Williamson, ‘Time to Legislate Objective of Super’.

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Key issues and provisions

The ALP made an election promise to ‘allow APRA to take into account the religious affiliation of a super fund when applying the recently-introduced performance benchmark.’114 Schedule 5 of the Bill implements this commitment.

What is a faith-based product?

Proposed section 60K defines a faith-based product as one specified in the determination made by APRA. In turn, proposed section 60L prescribes the information an entity would need to provide to APRA in order for its product to be classified as a faith-based product. As part of this process the trustees of the entity must apply to APRA to make a determination that a product is a faith-based product. In making such an application, the trustees of the entity must:

• declare that the investment strategy for the product accords with faith-based principles

• declare that they have:

- disclosed the investment strategy to beneficiaries of the product and - disclosed (and in the future disclose) the investment strategy in marketing materials and • provide to APRA one or more indices which APRA could use to assess the product’s performance

• provide any additional information as specified in the regulations.

The Explanatory Memorandum notes that regulations may provide that an application must contain:

• the trustee’s investment strategy, which includes the product’s faith-based principles

• the product’s Product Disclosure Statement

• a copy of any advertising materials disclosing the product’s faith-based investment strategy and

• the time at which the product adopted its faith-based investment strategy.115

Treasury has released an Exposure Draft of the Regulations which set out the information that will be required to be disclosed.

As part of a consultation process undertaken by Treasury on the Exposure Draft of the Bill,116 some stakeholders expressed concerns about the proposed definition of a faith-based product, based on the definition being ‘circular’, lacking detail and not being clear.117

In relation to how the proposed definition of a faith-based product could be improved, some stakeholders suggested:

• applying ‘quantifiable criteria’ such as considering on a look-through basis whether the products invest in companies that earn above a certain percentage of their revenue from activities not inconsistent with their faith-based filters118

114. Stephen Jones (Shadow Assistant Treasurer and Minister for Financial Services and Superannuation), ‘Labor will end super fund religious discrimination’, media release, 13 December 2021. 115. Explanatory Memorandum, para. 5.23, 37. 116. For further information see, ‘Superannuation Performance Test Treatment of Faith-based Products’, Treasury. 117. Chartered Accountants ANZ and CPA Australia, Submission to the Treasury, Superannuation Performance Test of Faith-Based

Products, 16 August 2022, 5; Responsible Investment Association Australasia, Submission to the Treasury, Superannuation Performance Test of Faith-Based Products, 16 August 2022, [3]; Haven Wealth Partners, Submission to the Treasury, Superannuation Performance Test of Faith-Based Products, 15 August 2022, [3]. 118. Actuaries Institute, Submission to the Treasury, Superannuation Performance Test of Faith-Based Products, 16 August 2022,2.

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• that the Bill or regulations give ‘explicit guidance on expectations of a faith-based product. Where this is limited to religious principles… this should be made explicit’119 and

• drawing on legal definitions of ‘religion’ and/or the Australian Bureau of Statistics’ Australian Standard Classification of Religious Groups.120

Key issue: creating a supplementary performance test

Under the existing Part 6A SIS Act framework, if a MySuper product fails the performance test, a number of consequences will apply:

• APRA must publish the fail result on a website maintained by APRA (see subsection 60C(5) of the SIS Act)

• trustees must notify beneficiaries of the fail result using a notification letter prescribed by regulations (see section 60E of the SIS Act) and

• for two consecutive fail results, trustees are prohibited from accepting new beneficiaries into the relevant product (see section 60F of the SIS Act).

Schedule 5 of the Bill amends the SIS Act to provide for a supplementary annual performance test for faith-based products. If a faith-based product fails the original performance test, none of the above consequences will apply.121 Instead, APRA must assess the product against the supplementary performance test. The trustee of the faith-based product only experiences the consequences of a failed performance test if it fails the supplementary performance test.122

For the current performance test, APRA is required to calculate a benchmark return for a product using assumed indices set out at regulation 9AB.17 of the Superannuation Industry (Supervision) Regulations 1994. The appropriateness (or inappropriateness) of those indices is examined below.

However, for the supplementary test, APRA may use alternative indices for faith-based products.123 Proposed subsection 60P(5) provides that regulations may specify requirements relating to the supplementary performance test. In turn, proposed subsection 60Q(4) provides that such regulations may include requirements relating to APRA determining appropriate indices for a faith-based product.

The Explanatory Memorandum notes that in deciding on alternative index or indices, APRA will consider whether an alternative index or indices reflects the faith-based investment strategy, and it is anticipated that APRA will consider the indices included in the application for faith-based status.124

Exposure Draft Regulations relating to the supplementary performance test for faith-based products were released on 12 September 2022. In summary, the Exposure Draft regulations would:

• allow APRA to make a determination specifying alternative assumed indices for the covered asset classes in the table in regulation 9AB.17 of the existing regulations

• requires APRA to consider the suitability of any of the indices provided in the application for faith-based status when determining alternative assumed indices for the product. In deciding

119. Actuaries Institute, Submission, 2. 120. Responsible Investment Association Australasia, Submission. 121. Proposed subsections 60P (1) and (2). 122. Schedule 5, Main Bill, item 2. 123. Proposed subsection 60P(3). 124. Explanatory Memorandum, para 5.38, 40.

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on an alternative index or indices, APRA will consider whether the provided alternative index or indices reflects the product’s faith-based investment strategy.125

However, the draft explanatory statement notes ‘it is not expected that APRA will investigate all available indices or propose alternative indices in making a determination.’126 In addition, as currently drafted, the proposed regulations do not appear to enable APRA to create customised indices by removing any investments that were excluded from a faith-based product from otherwise appropriate indices.

As such, it does not appear that the proposed supplementary performance test addresses the issue of the lack of appropriate indices used as the basis for both the current performance test and the proposed supplementary test, as discussed below.

Key issue: lack of appropriate indices

Stakeholders raised a number of concerns about the existing operation of the current law with regards to appropriate indices by which to measure MySuper product performance, as well as in relation to the proposed indices for faith-based products.

Current use of indices in the performance test

As noted above, each MySuper fund is required to benchmark each product it offers to a portfolio of listed market indexes that reflects the asset allocation of the product.127

Whilst not explored in detail in this Digest, APRA provides information and guidance on how it selects appropriate indices by which to measure the performance of MySuper funds.128

For example, where a MySuper product invests in:

• Australian equities, the S&P/ASX 300 is used as the index

• Australian Listed Property, the S&P/ASX 300 A-REIT Index is used as the index and

• International Fixed Interest, the Bloomberg Barclays Global Aggregate Index (hedged to AUD).129

In turn, where a MyProduct invests in more than one category, relevant indices are combined with appropriate weighting to provide an overall appropriate index.130

Several stakeholders have previously expressed concerns about not only the indices used to measure MySuper product performance, but how they are selected and how many are used, including:

• ‘Given the seriousness of the consequences of the ‘underperformance’ test, the proposed test will drive trustees to make investment decisions effectively to ‘hug the index’. This is in conflict with the objective of delivering good member outcomes over the medium to long term’131

125. Explanatory Statement, Superannuation Industry (Supervision) Amendment (Annual performance assessments—Faith-based products) Regulations 2022, 4. 126. Explanatory Statement, 4. 127. PC Review, 492. 128. See, for example: APRA, ‘Methodology Paper: MySuper Heatmap’, (Sydney: APRA, December 2021). 129. APRA, Methodology Paper, 23-26. See also: Superannuation Industry (Supervision) Regulations 1994, regulation 9AB.17(7) 130. APRA, Methodology Paper, 26. 131. AFSA, Submission to Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (Your Future, Your

Super) Bill 2021, [Submission no. 27], 18 March 2021, 5.

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• ‘the performance benchmark test will cost consumers because it will constrain super funds from constructing portfolios which are in the members’ best interests’132

• ‘The question has been raised as to whether the benchmarking approach potentially is in conflict with members’ best interests and member outcomes, as it measures the returns of assets in a particular class against the index for that class, a measure of investment efficiency, but does not take into consideration the strategic asset allocation or risk of the investment portfolio underlying the product.’133

• ‘An increased number of indices will better capture the intended implementation of the trustees and therefore the fund’s ability to deliver against relevant benchmarks. Fewer indices will result in an assessment that captures more than a fund’s ability to deliver on their planned implementation. Such an outcome could result in some good performing funds failing the test whereas some poorly performing funds could pass the test.’134

Further, some stakeholders have previously expressed support for a second test be developed for funds or products which fail the initial performance test.135

These concerns are relevant to the measure proposed by the Bill as a key area of concern for stakeholders is the use of indexes, how they are selected and the non-availability of alternative mechanisms to measure performance not only of faith-based MySuper products, but others as well.

Concerns about appropriate indices for faith-based products

The Jefferson and Shea Group (JSG) noted that superannuation funds and products which offer investment strategies reflecting the religious faith and values of their member base have a distinct nature and different principles from other products.

JSG noted such funds and products ‘have a clear mandate from members to express these values in the way the fund invests’ and this usually results in ‘specifically customised’ funds and products that generally follow one or more of the following investment forms:

• portfolio construction - diverging from a market-cap benchmark weighting of portfolio assets to favour (upweight) assets neutral or more aligned with faith principles and exclude (‘screen out’) or down-weight other assets less aligned with faith principles

• active ownership - holding assets in order to exercise voting rights and seek to engage with a company to improve performance on issues relevant to faith values and

• impact investing - investing (sometimes in partnership) in organisations which have specific social benefit or otherwise non-financial goals, along with financial goals. Financial goals in this context may be given a longer timeframe to be achieved and/or be held to a lower priority. Considerable due diligence is performed by funds in order to support specific impact investment initiatives.136

JSG provided examples of how the above can influence the performance of faith-based MySuper products:

• a large cap US equity portfolio applying a Catholic Values screen had materially different weightings to the top 3 sectors relative to the S&P 500 Index - Information Technology (44 bps overweight), Health Care (92 bps underweight) and Financials (62 bps overweight)

132. ASFA, Submission to the Senate, 5. 133. AFSA, Submission to Treasury, Your Future, Your Super Regulations and Associated Measures, 25 May 2021, 2. 134. Mercer, Submission to Senate Economics Legislation Committee, Inquiry into the Treasury Laws Amendment (Your Future, Your Super) Bill 2021, 18 March 2021, 8. 135. Mercer, Submission to the Senate, 8-9. 136. Jefferson and Shea Group (JSG), Submission to Treasury, Superannuation Performance Test of Faith-Based Products, 1-2.

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• a large cap Europe, Australasia and Far East (EAFE) equity portfolio applying a Catholic Values screen had materially different weightings to the top 3 sectors relative to the MSCI EAFE Index - Financials (51 bps overweight), Industrials (65 bps underweight) and Health Care (190 bps underweight)

• the MSCI World ESG Leaders Index had several materially different sector weights to the MSCI World Index, including a 113 bps overweight to Communications Services and a 130 bps underweight to Utilities.

Collectively, these intentional faith- and values-driven portfolio biases create annual return differences to their respective agnostic benchmarks of 84-104 bps over the short term and 11-45 bps over longer term horizons, in one asset class alone.137

As a result, JSG and other stakeholders indicated that it may be difficult or almost impossible to find suitable indices to benchmark funds against, or that the current system used to compare the performance faith-based products that apply faith-based screening to investment decisions to other superannuation products that don’t isn’t ‘comparing apples with apples’.138

For example, in their submission Haven Wealth described systemic problems with the evaluation of values-based investments:

One of Haven Wealth Partners’ biggest frustrations is that our high conviction ethical approach is classified ‘responsible’ just the same as the investment product built on the bare minimum screening to achieve the same ‘responsible’ classification. To date, ratings and certifications in this area tend to be binary rather than depict the level of commitment toward screening. That said, we are aware of developments in this space.139

As noted above, the Exposure Draft of the Superannuation Performance Test Treatment of Faith-based Products - Regulations 2022 does seem to address this problem by giving APRA the power to determine an alternative index for comparison (proposed regulation 9AB.18A(2)(d)).

However, whilst this would allow APRA to develop alternative indexes, the draft regulations to not appear to able to address the excluding of certain industries entirely from indices used in the performance test, to better reflect faith-based investment decisions. Some stakeholder argued that this would an objective performance comparison to be made, whilst better reflecting the faith-based investment strategy of the relevant product.140 For example, RIAA argued:

for asset class where the product’s investment strategy varies significantly because a faith-based approach excludes a number of investments, ‘ex-screening’ indices could be determined. For example, for Australian equities this could be the S&P/ASX 300 reweighted to remove any investments that were excluded for that product.141

Financial implications

The Explanatory Memorandum to the Bill states that there are no financial implications arising from the provisions in Schedule 5 of the Main Bill.142

However, if people retire with lower superannuation balances, it can reasonably be expected that they will rely more heavily on the Age Pension. The PC Review suggested that the difference

137. JSG, Submission, 2. 138. See submissions to the Treasury consultation process on the Superannuation Performance Test of Faith-Based Products from: Jefferson and Shea Group, Responsible Investment Association Australasia, Mercer, Actuaries Institute, AFSA, CPA Australia and Chartered Accountants Australia and New Zealand, Haven Wealth Partners.

139. Haven Wealth Partners, Submission, para. 8. 140. See submissions to the Treasury consultation process on the Superannuation Performance Test of Faith-Based Products from CPA and CAANZ; JSG; Mercer and RIAA. 141. RIAA, Submission, [2]. 142. Explanatory Memorandum, 5.

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between a low performing fund and a high performing fund could be as much as $502,000 over a lifetime.143 This is equivalent to at least 8-10 years’ income in retirement.144

Position of major interest groups

There were 15 submissions to Treasury’s Exposure Draft of the Bill. Stakeholders uniformly supported choice in superannuation products, however, none of the submissions supported the proposed changes unreservedly, with some arguing strongly against the creation of a ‘two-tier’ system.

Stakeholders that would be directly impacted by the reforms (that is, entities involved in faith-based investment services) appear to favour reforms to the existing performance test or changes to the proposed supplementary performance test that would allow industries excluded from faith-based or values-based products to be removed from indices used in either test, to better reflect faith-based or value-based investment decisions.

Most stakeholders appear to favour including the proposed changes in the wider Review of Your Future, Your Super Measures, particularly as similar changes are likely to be extended to other funds with a values-based investment philosophy and with submissions from bodies supportive of

proposed changes indicating that further changes may be necessary.145

Separately, Margaret Cole of APRA said that the annual performance test was ‘driving change and improvements for members.’ She also stated that while APRA was supportive of review, it was for others to decide if further parameters should be added to the performance test.146

‘Equity’ of the current performance test and proposed supplementary test

Stakeholders raised different views about the equity of introducing a supplementary performance test for a single category of MySuper products (faith-based products).

The Industry Superannuation Australia submission argues:

The Government’s proposal to provide differential treatment to faith-based products - by giving these products two attempts to pass the performance test - potentially undermines the intention of the test. In particular, it creates an uneven playing field between faith-based products and other superannuation products, including products that are also applying values-based investment principles (such as those that are marketed as being ethical or socially responsible) … To the extent unintended and perverse outcomes arise as a result of applying the current performance test benchmarks to faith-based products, the same issue is likely to exist for other products, including those that apply values-based investment principles.

Accordingly, ISA recommends that the treatment of faith-based products be considered as part of the Government’s broader review of the Your Future, Your Super reforms later this year. Committing to specific changes for faith-based products ahead of that review is premature and appears to add an additional layer of complexity to the review that could otherwise be avoided. 147 [emphasis added]

In contrast, the Association of Superannuation Funds of Australia argues:

143. PC Review, 107 144. How much do you need to save for your retirement?, Super Consumers Australia, accessed 26 September 2022. 145. Submissions to the Treasury consultation process on the Superannuation Performance Test Treatment of Faith-based Products.

146. Joyce Moullakis, ‘Four super funds fail test again’, Australian, 1 September 2021, 13. 147. Industry Superannuation Australia, Submission to the Treasury, Superannuation Performance Test of Faith-Based Products, 16 August 2022, [1-2].

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If a product has made a ‘values-based’ or ‘principles-based’ decision not to invest in one or more assets then it is not appropriate to assess that product against a benchmark that includes the performance of those assets. Instead, the benchmark should be adjusted by removing those assets and the product assessed against the adjusted benchmark… By way of example, if a product has decided not to invest in tobacco products, or armaments, or gambling, because of the deleterious effect on public and individual health, the relevant benchmark(s) should be adjusted by removing the performance of those products from that benchmark.

Further, establishing a paradigm in which a product ‘fails’ the original, unadjusted, performance test, and is then assessed against a ‘supplementary’, adjusted, performance test, creates the impression that the product has ‘failed’ but has been granted special treatment, in the form of a concession, to be assessed against another test. We submit that this should not be the case - instead a product should be assessed against a single, appropriate, benchmark in the first place to determine whether it has succeeded in delivering appropriate outcomes to members.

Accordingly, we suggest that, in lieu of a ‘supplementary’ performance test, ‘values-based’ or ‘principles based’ products should be assessed against a performance test that has been adjusted to take into account the filters/screens that the trustee has put in place and whether that product has passed or failed in delivering appropriate outcomes to its members is determined on the basis of that assessment.148 [emphasis added].

JSG argued that ‘there is no compelling policy reason for penalising a faith-based investment strategy for underperforming an agnostic performance benchmark’.149

Haven Wealth Partners noted that the proposed reforms are in part aimed at making sure faith-based investment products receive a ‘fair and reasonable’ performance assessment given the additional complexity of their product design and the customers which they serve.150

Likewise, in their submission Crescent Wealth said:

Whilst the proposed changes to the Act are welcome; we urge and recommend that given the nature, processes and extra costs of faith based funds, that further and expanded amendments to the Act be considered … We believe such further changes … will assist in creating a more level playing field for faith based funds.151

Other issues raised by stakeholders

As noted above, other issues raised by stakeholders included:

• whether these changes should be considered as part of the wider Review of Your Super, Your Future Measures currently being undertaken by Treasury

• that similar conditions would be extended to other values-based products and

• the effect that a separate test would have on the amount of superannuation people retired with.

Table6 below summarises stakeholder responses around those issues.

Table 6: Summary of stakeholder responses against three of the major themes

Organisation name Should be part of

the wider review Extension to other values-based funds Financial

impact

148. Association of Superannuation Funds of Australia, Submission to the Treasury, Superannuation Performance Test of Faith-Based Products, 16 August 2022, 3. 149. Jefferson and Shea Group, Submission, 3. 150. Haven Wealth Partners, Submission, para. 4. 151. Crescent Wealth, Submission, para. 1.

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Actuaries Institute Y Y

Association of Superannuation Funds of Australia

Y

Australian Institute of Superannuation Trustees

(AIST)

Y Y

Chartered Accountants ANZ and CPA Australia Y Y

Council on the Ageing (COTA) Y Y

Crescent Wealth

Financial Services Council Y Y

Haven Wealth Partners Y

Industry Super Australia Y Y Y

Jefferson and Shea Group Y

Mercer Y Y

National Renewable Energy Network Y

Responsible Investment Association Australia Y

Super Consumers Australia Y Y

Source: Treasury, Superannuation Performance Test Treatment of Faith-based Products, Submissions.

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Appendix A: Relevant statistical data for Schedule 1 (Main Bill) Foreign acquisitions and takeovers penalties152

The Foreign Investment Review Board (FIRB)has been publishing annual reports on insights into foreign purchases and sales of residential real estate since 2017-18 when the Register of foreign ownership of residential land (the Register) was introduced. FIRB also publishes data on the number of approvals and applications processes each financial year in their annual reports.

The most recent version of the Register covers transactions by financial year from 2017-18 to 2020-21. These figures only cover residential property transactions over each period, there is no data on foreign ownership levels in this report. It should also be noted that foreign persons in this report do not include permanent residents, who do not require FIRB approvals for residential property purchases. Figures for purchases and sales are provided down to the state level.

Figure 2: Four-year comparison of purchase transactions by state or territory

Source: FIRB, Register of foreign ownership of residential land: Insights into foreign purchases and sales of residential real estate 2020-21, 7.

Over the 4-year period covered by the Register, Victoria has reported largest number of foreign purchases of residential property, followed by NSW. The number of purchases has fallen steeply over the COVID-19 period, with all the states/territories except for the ACT, NT and SA showing an overall reduction in purchase counts in 2020-21 when compared to 2019-20.

152. The information in Appendix A has been prepared by the Statistics and Mapping team in the Research Branch of the Parliamentary Library.

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Figure 3: Four-year comparison of sale transactions

There was an increase in sales counts when compared to 2019-20 in all states and the ACT.

Source: FIRB, Register of foreign ownership of residential land: Insights into foreign purchases and sales of residential real estate 2020-21, 9.

For sales, there have been much smaller numbers of transactions prior to 2020-21. In contrast to purchases, COVID-19 led to a spike in foreign owner sales of Australian residential property, and there was an increase in sales counts when compared to 2019-20 in all states and the ACT.

The Property Council of Australia publishes quarterly figures on the proportion of property sales to offshore investors by property sector, including residential property. These figures are based on surveys of real estate professionals (around 750 respondents) as part of the ANZ/Property Council Survey, so the figures are not based on direct observation. The definition of offshore investors is broader than the definition of foreign investor used by the FIRB. The latest data shows a strong downward trend in the estimated proportion of residential property sales to offshore investors.

Figure 4: Proportion of survey respondents’ property sales to offshore investors, by sector (Data correct for June Quarter 2022)

Source: Property Council of Australia, Property sales to offshore investors by asset type, ANZ/Property Council Survey.

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Appendix B: Schedule 4 (Main Bill) - comparison between the current schedules and their corresponding schedules in lapsed Bills

Schedule to the current Bills

Corresponding Schedules in lapsed Bills

Comparing the Bills (Current vs Lapsed Bills)

Schedule 4 (Main Bill): Tax treatment for new or revised visa programs

Schedule 6 to the Treasury Laws Amendment (Enhancing Tax Integrity and Supporting Business Investment) Bill 2022

For the income tax rates relating to the Pacific Australia Labour Mobility (PALM) scheme, the proposed changes are mostly the same except for

• Retrospective start date: 1 July 2022 for the current Bill; 1 March 2022 for the lapsed Bill

• Two more new paragraphs 840-905(b) and 840-906(c) to be inserted to Income Tax Assessment Act 1997. They are only mentioned in the current Bill, not the lapsed Bill. The effect of these two paragraphs allows any future Government to expand the application of the concessional tax treatment to new types of visas via regulations, rather than amending the Act each time.

• Australian Agriculture Worker Program and its tax treatments are not in the current Bill, but were covered in the lapsed Bill.

• Explanatory Memoranda for the current and lapsed Bills are written differently but the ultimate purpose of achieving a 15% income tax rate for foreigners under the scheme remain the same.153

Schedule 1 (Supporting Bill)

Schedule 1 to the Income Tax Amendment (Labour Mobility Program) Bill 2022

Almost identical, except that the current Bill specified a retrospective commencement date of 1 July 2022, and the lapsed Bill did not.

153. Explanatory Memorandum, lapsed Treasury Laws Amendment (Enhancing Tax Integrity and Supporting Business Investment) Bill 2022, 5, 64-73.

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