Title Treasury Laws Amendment (2020 Measures No. 1) Bill 2020
Database Explanatory Memoranda
Date 10-06-2020 09:57 AM
Source House of Reps
System Id legislation/ems/r6492_ems_2bdf67d4-7464-4843-9015-45236739b11c


Treasury Laws Amendment (2020 Measures No. 1) Bill 2020

2019-2020

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Treasury Laws Amendment (2020 Measures No. 1) Bill 2020

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

(Circulated by authority of the Minister for Housing and Assistant Treasurer

 the Hon Michael Sukkar MP)

 

 


Table of contents

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

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

Chapter 1........... Significant global entities.................................................. 5

Chapter 2........... Permanent tax relief for merging superannuation funds    23

Chapter 3........... Statement of Compatibility with Human Rights.......... 27

 

 


Glossary

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

Abbreviation

Definition

Bill

Treasury Laws Amendment (2020 Measures No. 1) Bill 2020

CGT

capital gains tax

Commissioner

Commissioner of Taxation

ITAA 1997

Income Tax Assessment Act 1997

SLAA 2012

Superannuation Laws Amendment (Capital Gains Tax Relief and Other Efficiency Measures) Act 2012

TAA 1953

Taxation Administration Act 1953

TLAA 2010

Tax Laws Amendment (2009 Measures No. 6) Act 2010

 

 


General outline and financial impact

Significant global entities

Schedule 1 to the Bill broadens the definition of significant global entity in the tax law so that it:

•       applies to groups of entities headed by an entity other than a listed company in the same way as it applies to groups headed by a listed company; and

•       applies despite exceptions to when a group of entities must prepare consolidated accounts, including materiality rules, in the applicable accounting rules.

The amendments also modify the rules that identify which entities must undertake country by country reporting under the tax law to ensure these rules are aligned with Australia’s international commitments.

Date of effect The amendments made by Schedule 1 apply in relation to income years or periods commencing on or after 1 July 2019. However, penalties that arise from the measure do not apply until 1 July 2020 for entities that were not previously significant global entities.

Proposal announced This Schedule fully implements the measure ‘Company Tax — significant global entity definition amendment’ from the 2018-19 Budget.

Financial impact:  This is a revenue protection measure — the revenue impact is estimated to be nil.

Human rights implications:  This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights — Chapter 3.

Compliance cost impact Minimal. This measure ensures that the law operates consistent with the OECD model for country by country reporting. The entities to which the amendments apply may have initial transitional compliance costs to determine if relevant integrity and penalty provisions will apply to them. It is not expected that the amendments will result in entities having significant ongoing additional reporting requirements.

 

Permanent relief for merging superannuation funds

Schedule 2 to the Bill removes impediments to mergers between complying superannuation funds by permitting the roll-over of both revenue gains or losses and capital gains or losses.

Date of effect:  The Schedule commences on the first 1 January, 1 April, 1 July or 1 October to occur after the day the Bill receives the Royal Assent, making tax relief for merging superannuation funds permanent from 1 July 2020.

Proposal announced The Schedule implements the measure ‘Permanent tax relief for merging superannuation funds’ from the 2019-20 Budget.

Financial impact This measure is estimated to have an unquantifiable reduction in revenue over the forward estimates period.

Human rights implications:  This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights —Chapter 3.

Compliance cost impact This proposal is expected to result in a low overall compliance cost impact, comprising a low implementation impact and a low decrease in ongoing compliance costs.

 

 


Chapter 1         
Significant global entities

Outline of chapter

1.1                  Schedule 1 to this Bill expands the definition of significant global entity in the ITAA 1997 so that it:

•       applies to groups of entities headed by an entity other than a listed company in the same way as it applies to groups headed by a listed company; and

•       applies despite exceptions to when a group of entities must prepare consolidated accounts, including materiality rules, in the applicable accounting rules.

1.2                  The amendments also modify the rules that identify which entities must undertake country by country reporting under the tax law to ensure these rules are aligned with Australia’s international commitments.

1.3                  All legislative references in this Chapter refer to the ITAA 1997 unless the contrary is indicated. All references to dollars are to Australian dollars.

Context of amendments

Significant global entity

1.4                  The concept of significant global entity was included in the income tax law by the Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015.

1.5                  Broadly, under the definition in section 960-555, an entity is a ‘significant global entity’ if either:

•       it is a global parent entity with annual global income of $1 billion or more; or

•       it is a member of a group of entities where;

–      the group is consolidated for accounting purposes as a single group; and

–      the global parent entity of that group has annual global income of $1 billion or more.

1.6                  The Commissioner may also make a determination under subsection 960-555(3) that results in an entity being a significant global entity for a period if:

•       the entity is a global parent entity that has not prepared global financial statements for a period; and

•       the Commissioner reasonably believes that, if global financial statements had been prepared, the entity’s annual global income for the period would have been $1 billion or more.

1.7                  A ‘global parent entity’ is broadly an entity that is not controlled by another entity according to accounting principles, or if these principles do not apply, commercially accepted principles relating to accounting (see section 960-560).

1.8                  Section 960-565 provides that an entity’s ‘annual global income’ for a period is either:

•       if it is a member of a group of entities consolidated for accounting purposes—the total annual income of that global parent entity of that group as shown in its latest global financial statements for that period; or

•       otherwise — the total annual income of that entity shown in its latest global financial statements for that period.

1.9                  An entity that is a significant global entity may, if it also satisfies other requirements, be subject to Australia’s country by country reporting rules, the multinational anti‑avoidance law and the diverted profits tax. Significant global entities may also face increased administrative penalties under the taxation law and face additional reporting requirements.

Country by country reporting and significant global entities

1.10              Australia’s country by country reporting rules implement in domestic law the recommendations in Action 13 of the G20 and OECD’s Action Plan on Base Erosion and Profit Shifting – the BEPS Action Plan. Action 13 developed new standards for transfer pricing documentation and country by country reporting.

1.11              Currently, Australia’s definition of a significant global entity means that the country by country reporting rules in Subdivision 815-E may not give the same outcome as would arise under the model legislation in Action 13 of the BEPS Action Plan.

1.12              Specifically, the Australian concept of significant global entity only treats an entity as being part of a group of entities if the head entity of the global group prepares consolidated accounts covering that entity under the applicable accounting principles. In contrast, the OECD model legislation also requires reporting by entities that would have had to prepare consolidated accounts had the parent entity in the relevant structure been a listed company.

1.13              The OECD model legislation also requires reporting to cover entities that are not included in consolidated accounts due to materiality rules. This OECD requirement is not reflected in the existing Australian law.

Summary of new law

1.14              Schedule 1 to this Bill expands the scope of the concept of a significant global entity in the ITAA 1997 so that it also applies to groups of entities headed by an entity other than a listed company in the same way as it applies to groups headed by a listed company. Under the amendments the criteria for determining if an entity is a significant global entity applies despite exceptions to the rules setting out when a group of entities must consolidate for accounting purposes, including materiality rules, in the applicable accounting rules.

1.15              The scope of significant global entity is expanded by introducing the concept of a notional listed company group – a group of entities that would be required to consolidate for accounting purposes as a single group under the applicable accounting rules if:

•       the parent entity of the group was a listed company; and

•       exceptions to requirements about when a group of entities would be required to consolidate, including materiality rules, were disregarded.

1.16              The amendments also extend the definition of:

•       significant global entity so that an entity will be a significant global entity if it is part of a notional listed company group that includes a global parent entity that is a significant global entity; and

•       annual global income so that a global parent entity’s annual global income is the total annual income of all members of any notional listed company group of which it is a member, as shown in global financial statements prepared on a consolidated basis for the group.

1.17              The amendments also provide that if an entity does not have adequate global financial statements for a period, its annual global income for that period is the amount that would have been its annual global income if such global financial statements had been prepared.

1.18              Finally, Schedule 1 also amends the reporting rules in Subdivision 815-E so that these rules now apply to entities that are country by country reporting entities (also referred to as CBC reporting entities) rather than all significant global entities to ensure these rules are aligned with Australia’s international commitments. Schedule 1 also amends the requirement in section 3CA of the TAA 1953 for certain corporate tax entities to provide general purpose financial statements to the Commissioner so that these too now apply to CBC reporting entities rather than all significant global entities.

1.19              An entity is a country by country reporting entity if, broadly, it would be a significant global entity if the notional listed company group rules took into account exceptions to consolidation other than the materiality rule and did not include individuals.

Comparison of key features of new law and current law

New law

Current law

Significant global entities

An entity is a significant global entity for a period if:

•       it is either a member of:

–      a group of entities that are consolidated as a single group for accounting purposes; or

–      a notional listed company group; and

•       another member of the group is a global parent entity that is a significant global entity.

A global parent entity is also a significant global entity if its annual global income is $1 billion or more or if it is subject to a determination by the Commissioner under subsection 960-555(3).

A notional listed company group is a group of entities that would be required to be consolidated as a single group for accounting purposes if a member of that group was a listed company and exceptions to requirements to consolidate were disregarded.

An entity is a significant global entity for a period if:

•       it is a member of a group of entities that are consolidated for accounting purposes; and

•       another member of the group is a global parent entity that is a significant global entity.

A global parent entity is also a significant global entity if its annual global income is $1 billion or more or if it is subject to a determination by the Commissioner under subsection 960-555(3).

 

Annual global income of global parent entities

If a global parent entity is a member of:

•       a group of entities consolidated for accounting purposes as a single group; or

•       a notional listed company group;

then the entity’s annual global income is the total annual income of all members of the group as reported in the most recent global financial statements.

If an entity does not have adequate global financial statements (ie. it either has no such statements or does not have statements that show the annual global income of the group), its annual global income is the amount that would be its annual global income had appropriate global financial statements been prepared.

If a global parent entity is a member of a group of entities consolidated for accounting purposes as a single group, the entity’s annual global income is the total annual income of all members of the group as reported in their most recent global financial statements.

Country by country reporting

An entity must undertake country by country reporting under Subdivision 815-E and may be required to provide general purpose financial statements to the Commissioner if, among other things, it is a country by country reporting entity.

An entity is a country by country reporting entity if, broadly, it would be a significant global entity if the notional listed company group rules did not disregard exceptions to consolidation other than the materiality rule and did not include individuals.

An entity must undertake country by country reporting under Subdivision 815-E and may be required to provide general purpose financial statements to the Commissioner if, among other things, it is a significant global entity.

Detailed explanation of new law

1.20              Schedule 1:

•       extends the circumstances in which an entity is a significant global entity; and

•       amends the country by country reporting requirements in Subdivision 815-E of the ITAA 1997 and the requirement to provide general purpose financial statements in section 3CA of the TAA 1953 to apply to a subset of significant global entities referred to as country by country reporting entities.

1.21              The amendments to the definition of significant global entity ensure that the definition applies consistently to all types of entities, rather than potentially excluding members of large multinational groups headed by individuals, partnerships, private companies, trusts, investment entities and other entities.

1.22              The amendments to the country by country reporting rules in Subdivision 815-E ensure Australian law is aligned with international practice and the OECD model legislation.

1.23              Overall, the effect of the amendments is to ensure members of all groups of an appropriate size, including those headed by:

•       individuals, partnerships, trusts, private companies and investment companies, are SGEs and potentially subject to the multinational anti‑avoidance law, diverted profits tax and significant global entity penalty provisions; and

•       partnerships, trusts, private companies and subsidiaries of investment companies, subject to applicable accounting standards or principles excluding rules relating to materiality, are:

–      country-by-country reporting entities; and

–      may, if other requirements are met, be subject to obligations to provide country‑by‑country reporting and general purpose financial statements.

Extending the definition of significant global entity

Significant global entities and annual global income

1.24              The amendments to the definition of significant global entity extend the circumstances in which an entity is a significant global entity to include cases where an entity is a member of a notional listed company group that includes a global parent entity that either:

•       has annual global income equal to or in excess of $1 billion; or

•       is the subject of a determination by the Commissioner under subsection 960-555(3).

[Schedule 1, item 7, subsection 960-555(2A)]

1.25              If a global parent entity is a member of a notional listed company group its annual global income is the total annual income of all of the members of the group, determined on a consolidated basis, as shown in the latest global financial statements of the entity for the relevant period – if such statements exist. If no such statements exist that set out the income of the group on this basis, then the annual global income of the entity is determined using the rules explained in paragraphs 1.28 to 1.33. [Schedule 1, item 10, paragraph 960-565(1)(aa)]

1.26              Effectively entities that are part of a notional listed company group are treated in the same way as entities that are members of a group of entities that are required to be consolidated for accounting purposes as a single entity when determining the annual global income of the group.

1.27              If an entity is a member of both types of groups, it is the annual income of the notional listed company group (which will be the larger group) that is used in determining the income of the entity. [Schedule 1, item 11, paragraph 960‑565(a)]

Global financial statements and annual global income

1.28              Schedule 1 also makes amendments to the interaction between global financial statements and global annual income.

1.29              Prior to these amendments, if an entity did not have global financial statements, it could not have annual global income and would not have been a significant global entity unless it was the subject of a determination by the Commissioner under subsection 960-555(3).

1.30              As a result of the amendments made by Schedule 1 the annual global income of an entity that:

•       does not have global financial statements; or

•       does not have adequate global financial statements (ie. statements that accurately represent the annual global income of the entity and the group of entities consolidated for accounting purposes or notional listed company group of which the entity is a member);

is the amount that would be the annual global income were such global financial statements prepared for the period. [Schedule 1, items 8 to 13, subsection 960-565(1), paragraph 960-565(1)(aa), subsections 960-565(2) and (3) and section 960-570]

1.31              This is an objective test based on what would be expected to be the amount of such income if adequate statements were prepared.

1.32              This amendment ensures that the absence of adequate global financial statements does not prevent the total annual income of all of the members of the group from being taken into account in determining if members are significant global entities. This is particularly important for notional listed company groups, as there is no requirement for the preparation of consolidated accounts for the entirety of such groups. It also avoids any need for such groups to prepare consolidated accounts or seek a determination by the Commissioner to provide clarity about its status as a significant global entity.

1.33              These amendments do not affect the power of the Commissioner to make a determination under subsection 960-555(3) in relation to an entity if global financial statements have not been prepared for the entity for the period.

Notional listed company groups

1.34              A notional listed company group is a group of entities that would be required to be consolidated as a single group for accounting purposes under the applicable accounting principles or commercially accepted principles relating to accounting, if an entity (the global parent entity) was a listed company (broadly, had its shares been listed for quotation on any public exchange – see section 26BC of the Income Tax Assessment Act 1936). [Schedule 1, item 14, subsection 960‑575(1)]

1.35              Each entity in the group is a member of that notional listed company group. [Schedule 1, item 14, subsection 960‑575(2)]

1.36              Whether entities would be required to be consolidated for accounting purposes as a single group were the global parent entity a listed company is to be determined based on relevant accounting principles or commercially accepted principles relating to accounting (if accounting principles do not apply in relation to those entities). [Schedule 1, item 14, subsection 960-575(3)]

1.37              However, any exceptions in the relevant principles that may permit an entity not to consolidate with other entities are disregarded. This means, for example, that an investment entity that controls other entities but is not required to consolidate with those entities under relevant accounting principles would still be part of a notional listed company group with those entities. [Schedule 1, item 14, paragraph 960‑575(4)(a)]

1.38              Similarly, any rules that permit an entity not to consolidate with another entity or entities because the effect of consolidating would be immaterial because of the size of the entities or for other reasons are also disregarded and hence the entity must consolidate with the entity or entities. [Schedule 1, item 14, paragraph 960‑575(4)(b)]

1.39              These rules ensure that the definition of significant global entity applies consistently to all types of entities. It removes potential gaps in the application of the rules for certain types of entities and the particular requirements applying for accounting purposes.

Example 1.1: notional listed company group

Entity A, is an investment entity and global parent entity that controls Entity B which in turn controls Entity C and Entity D. Only Entities B and C are consolidated for accounting purposes as a single group.

As Entity A is an investment entity, it is not required to consolidate with Entities B, C and D for accounting purposes. Entity B is also not required to consolidate with Entity D as Entity D is so small that its activities are not material to Entity B’s overall accounts.

However, under the relevant accounting standards Entity A would be required to consolidate with all of the other entities if the exception for investment entities and the materiality rule both did not apply. As a result, Entities A, B, C and D are a notional listed company group.

Example 1.2: notional listed company group – individuals and trusts

Jesse, an individual, wholly owns and controls Pyramid Co, a company that itself wholly owns and controls a number of subsidiaries with which it is consolidated for accounting purposes as a single group. Jesse is also the trustee and primary beneficiary of AUMi Trust, and hence Jesse has effective control of the trust.

Were Jesse a listed company, under the relevant accounting standards, Jesse, Pyramid Co and its subsidiaries and AUMi Trust would be required to consolidate for accounting purposes as a single entity. In the case of AUMi Trust, this involves applying the rules in the relevant accounting standard to determine if Jesse, were she a listed company, would be required to consolidate with AUMi Trust. This may involve an assessment of the circumstances of the trust, including the provisions in the trust deed, in light of the rules in the relevant accounting standards. Depending on the applicable accounting standards, relevant circumstances may include:

•       the provisions of the trust deed;

•       the purposes and structure of AUMi Trust;

•       Jesse’s involvement in the creation and structuring of AUMi Trust; and

•       Jesse’s role in and influence over decisions made by AUMi Trust.

As a result, these entities form a notional listed company group, of which Jesse is the global parent entity.

Example 1.3: notional listed company group – partnerships

Zac, an individual, is the general partner of a limited partnership, Buzz Partners. The partnership owns and controls Service Co, a company.

Were Zac a listed company, he may (depending on the circumstances of the case and the relevant accounting standards) have been required to consolidate for accounting purposes with Buzz Partners and Service Co as a single entity.

If Zac would be required to consolidate with Buzz Partners and Service Co were he a listed company, the three entities would form a notional listed company group, of which Zac would be the global parent entity.

If Zac would not have been required to consolidate with Buzz Partners and Service Co were he a listed company, but, under the relevant accounting standards, Buzz Partners, would have been required to consolidate with Service Co were it a listed company, Buzz Partners and Service Co would form a notional listed company group. The group would not include Zac and Buzz Partners would be the global parent entity, as no entity within the notional listed company group controls Buzz Partners.

Country by country reporting

Country by country reporting entities

1.40              Schedule 1 also amends the country by country reporting regime in Subdivision 815-E. Prior to the amendments, one of the conditions an entity was required to meet before it was required to report under that regime was that the entity was a significant global entity.

1.41              As a result of the changes to the definition of significant global entity, its scope differs from the scope of the entities required to undertake country by country reporting under Action 13 of the BEPS Action Plan.

1.42              To better align with international standards, the amendments change the scope of Subdivision 815-E so that it requires reporting by country by country reporting entities rather than all significant global entities. [Schedule 1, items 2 and 3, section 815‑350 and paragraph 815‑355(1)(a)]

1.43              An entity is a country by country reporting entity (also referred to as a CBC reporting entity) for a period if either of the following apply:

•       it is a country by country reporting parent for the period; or

•       it is a member of a country by country reporting group and another member of that group is a country by country reporting parent.

[Schedule 1, item 5, section 815-370]

1.44              A entity is a country by country reporting parent for a period if:

•       it is not an individual;

•       it is either not a member of a country by country reporting group or is not controlled by any other entity in the same country by country reporting group; and

•       either:

–      if it is a member of a country by country reporting group—the annual global income of the group is $1 billion or more; or

–      otherwise—the annual global income of the entity alone is $1 billion or more.

[Schedule 1, item 5, section 815-375]

1.45              Effectively, a country by country reporting parent (also referred to as a CBC reporting parent) is an entity that would be a global parent entity and a significant global entity assuming all entities outside of the country by country reporting group of which it is a part were disregarded. In this context, it does not matter if that entity is controlled by another entity outside the group. The country by country reporting parent concept allows an alternative controlling entity to be identified in circumstances where an entity is controlled by another entity that does not form part of the country by country reporting group. This is illustrated in example 1.4 below.

1.46              A country by country reporting group (also referred to as a CBC reporting group) includes a group of entities that are consolidated for accounting purposes as a single group. It also includes a group of entities that would be a notional listed company group if the definition of notional listed company group:

•       took into account exceptions to consolidation (other than an exception for immateriality) in the relevant accounting principles or commercially accepted accounting principles (if accounting principles do not apply to the entity); and

•       excluded individuals.

[Schedule 1, item 5, subsections 815-380(1) and (6)]

1.47              However, a group of entities is not a country by country reporting group if all of its members are members of another larger country by country reporting group. [Schedule 1, item 5, subsections 815-380(3), (4) and (5)]

1.48              This rule ensures that entities that are members of more than one potential country by country reporting group are only subject to reporting and other obligations in relation to the largest such group (ie. the group with the most members). It prevents duplication that would otherwise occur from separate reporting requirements applying for sub-groups within a larger country by country reporting group.

1.49              Most significant global entity groups that are a notional listed company group will also be country by country reporting entities. However, some exceptions apply. Although an individual can be a significant global entity, an individual cannot be a member of a country by country reporting group. Similarly, investment entities can form part of a group of significant global entities but, subject to the relevant accounting principles, may not be included in a country by country reporting group. [Schedule 1, item 5, subsection 815-380]

1.50              For example, a non-investment entity owned by an investment entity is a significant global entity because it is a member of a notional listed company group headed by the investment entity. It would not be part of a country by country reporting group headed by the investment entity as an exception to consolidation applies in the relevant accounting principles. However, the entity that is owned by the investment entity may form part of a country by country reporting group with other entities with which it would be required to consolidate for accounting purposes if the company was a listed company. In these circumstances the entity that is owned by the investment entity may be a country by country reporting parent (see paragraph 1.44 and example 1.4).

1.51              Each entity in a country by country reporting group is a member of that country by country reporting group. The term member clarifies the status of entities within country by country reporting groups. [Schedule 1, item 5, subsection 815-380(2)]

1.52              While the concept of country by country reporting entity is narrower than the concept of significant global entity, the other changes made by these amendments mean that country by country reporting obligations will apply more widely than before these amendments, consistent with Action 13 of the BEPS Action Plan. Specifically, the changes outlined in paragraphs 1.24 to 1.39 mean that groups of entities headed by an entity other than a listed company are more likely to be subject to country by country reporting obligations.

Example 1.4: identifying country by country reporting groups in groups headed by an investment entity

Assuming the same facts as in Example 1.1 above, Entity A does not form part of a country by country reporting group with Entity B, Entity C and Entity D. This is because the exception to the requirement to consolidate for investment entities is taken into account when working out the entities that form part of a country by country reporting group.

Entity A is not a member of any country by country reporting group, but it can still be a country by country reporting parent. It will be a country by country reporting parent and a country by country reporting entity if its own total annual global income is $1 billion or more.

Entity B controls Entity C and Entity D and, under applicable accounting standards would be required to be consolidated for accounting purposes as a single group were Entity B a listed company, disregarding the materiality rule. As a result Entities B, C and D are a country by country reporting group.

Entity B is not controlled by any other entity in the group so it too may be a country by country reporting parent. It will be a country by country reporting parent and a country by country reporting entity if, broadly, the annual global income of the group (the total annual income of Entities B, C and D worked out on a consolidated basis) is $1 billion or more. If Entity B is a country by country reporting parent, Entities C and D will also be country by country reporting entities.

Note that Entity B and Entity C do not form a separate country by country reporting group, even though they are a group of entities that are consolidated as a single entity for accounting purposes. This is because a group of entities is not a country by country reporting group if all of the members of the group are members of another country by country reporting group - both Entity B and Entity C are members of the larger consolidated group with Entity D.

Example 1.5: identifying country by country reporting groups in groups headed by individuals

Assuming the same facts as in Example 1.2 above, this group (the notional listed company group) is not a country by country reporting group. Jesse is an individual and therefore cannot be part of a country by country reporting group.

As an individual, Jesse also cannot be a country by country reporting parent and so Jesse cannot ever be a country by country reporting entity.

Pyramid Co is consolidated for accounting purposes as a single group with its subsidiaries. As the result, these entities form a country by country reporting group. As Pyramid Co is not controlled by any other entity in the country by country reporting group it may be a country by country reporting parent. It will be a country by country reporting parent if the annual global income of the country by country reporting group is $1 billion or more. If Pyramid Co is a country by country reporting parent, it and all of its subsidiaries will also be country by country reporting entities.

AUMi Trust is not a member of any country by country reporting group. It will be a country by country reporting parent and a country by country reporting entity if its own total annual global income is $1 billion or more.

Even though Pyramid Co and AUMi Trusts are members of the same notional listed company group and are controlled by Jesse, their status for country by country reporting purposes is determined independently, as their controller, Jesse, is an individual who cannot form part of a country by country reporting group.

Country by country reporting obligations

1.53              The amendments also make changes to information that is required in the statements that must be provided by country by country reporting entities to be consistent with the changes to the scope of the affected entities.

1.54              Specifically, the statements provided by country by country reporting entities now need to include information on the other members of a country by country reporting group of which it was a member. [Schedule 1, item 4, subparagraph 815-355(3)(a)(ii)]

1.55              As a result, consistent with the treatment of members of groups of entities that are consolidated for accounting purposes, such entities must provide statements dealing with the global operations and activities and the allocation between countries of the tax paid by the group members of any country by country reporting group of which they are a member.

1.56              This ensures that the statements that must be provided are consistent with international practice and the OECD model legislation.

Example 1.6: Entities in a group subject to country by country reporting obligations

Assuming the same facts as in examples 1.1 and 1.4, it is determined that Entity B is a country by country reporting parent and therefore, a country by country reporting entity for the 2025-26 income year. This also means that Entity C and Entity D, as members of the same country by country reporting group, are country by country reporting entities for that year.

As country by country reporting entities for 2025-26, Entities B, C and D may be required to provide statements for the 2026-27 income year that, among other things, relate to the global operations and activities and pricing policies relevant to transfer pricing of each of the entities (a Master File) as well as statements about the allocation between countries of the income, activities and tax paid by each of the entities (a country by country report).

Entities B and D satisfy the requirements set out in subsection 815‑355(1) and so must provide statements. Entity C does not satisfy these requirements (as it is a non-resident company without an Australian permanent establishment) and so is not required to provide statements under section 815-355. In practice, the obligations of Entities B and D will be satisfied if one of the entities provides country by country reporting statements (including a country by country report and Master file) consistent with the relevant OECD reporting standards that covers all three entities.

Both the country by country report and Master File must cover all three entities in the country by country reporting group, including Entities C and D. This obligation applies despite Entity D not being consolidated with the other two entities as a single group for accounting purposes due to materiality rules and despite Entity C not itself being subject to reporting obligations under section 815‑355.

Country by country reporting statements that only cover Entity B and Entity C or Entity B and Entity D would not satisfy the country by country reporting requirements as they would not cover all of the members of the relevant country by country reporting group. Similarly, the statements do not need to and should not include Entity A as it does not form part of the country by country reporting group (even though Entity A does form part of a notional listed company group with the other entities).

General purpose financial statements

1.57              Schedule 1 also amends the requirement for certain corporate tax entities to provide the Commissioner with a general purpose financial statement for a financial year.

1.58              Previously, this obligation applied to entities that were, among other things, significant global entities. Following the amendments, the obligation instead applies to entities that are, among other things, country by country reporting entities. [Schedule 1, item 19, paragraph 3CA(1)(a) of the TAA 1953]

1.59              This ensures that the obligation to provide general purpose financial statements remains aligned with the relevant accounting standards and avoids unnecessary compliance burdens for investment entities.

1.60              While the requirement to provide general purpose financial statements remains limited to corporate tax entities, as noted in paragraph 1.52 above these amendments will result in a wider range of entities being country by country reporting entities. This means that more entities are likely to be subject to the requirement to provide general purpose financial statements to the Commissioner. The types of entities that are most likely to be affected are entities that are members of notional listed company groups that are not actually consolidated as a single entity with some or all of the members of that notional listed company group.

1.61              While these amendments require relevant accounting standards to be applied subject to assumptions and modifications when determining whether an entity is a country by country reporting entity, these assumptions and modifications do not have wider relevance and do not affect what must be included in general purpose financial statements provided to the Commissioner.

1.62              This means that, for example, an entity that is part of a notional listed company group may not be consolidated for accounting purposes as a single group with any other entities in that group for the purposes of subsection 3CA(5) of the TAA 1953 and would reflect this in the statements provided to the Commissioner. Similarly, when preparing general purpose financial statements as required under the relevant accounting standards or commercially accepted principles relating to accounting for the purposes of subsection 3CA(5) of the TAA 1953, an entity may have regard to the materiality rule in determining what is required by the relevant standards or principles.

1.63              Because the requirement will cover a wider range of entities, there is an increased chance that it may apply to government entities that are subject to alternative disclosure or accountability regimes through government budget processes. The amendments provide the Commissioner with a power to exempt government related entities from this requirement. This ensures that the Commissioner has flexibility to ensure that the wider application of this rule does not inappropriately affect these entities. [Schedule 1, item 20, subsections 3CA(1A) and (1B) of the TAA 1953]

Consequential amendments

1.64              Schedule 1 makes consequential amendments to renumber provisions, add headings and inserts definitions in the dictionary in subsection 995-1(1). It also makes consequential amendments to existing provisions and terms related to significant global entities to ensure that these provisions apply as intended given the changes made by these amendments. [Schedule 1, items 1, 6, 8, 9, 13 and 15 to 18, the heading to Subdivision 815-E, subsection 960-50(7A), sections 960‑565 and 960‑570 and the definitions of ‘CBC reporting entity’, CBC reporting parent’, CBC reporting group’, ‘country by country reporting entity’, ‘country by country reporting group’, ‘country by country reporting parent’, ‘member’ and ‘notional listed company group’ in subsection 995‑1(1) of the ITAA 1997 and the heading to section 3CA of the TAA 1953]

Application and transitional provisions

1.65              The amendments made by Schedule 1 to this Bill commence from the first day of the first quarterly period that occurs after the day the Bill receives Royal Assent. [Clause 2]

1.66              The amendments apply to income years or periods starting on or after 1 July 2019. [Schedule 1, item 21]

1.67              When determining if an entity has country by country reporting obligations for a period, it is necessary to determine if the entity was a country by country reporting entity for the previous period. For the avoidance of doubt, the amendments specify that if the amendments apply to a period, they also apply for the purpose of determining if an entity was a country by country entity for a previous period when this is relevant to the country by country reporting obligations of the entity in a period after 1 July 2018, even if the previous period began before 1 July 2019.

1.68              The measure generally applies retrospectively from 1 July 2019. When this measure was announced in the Budget on 8 May 2018, it applied from 1 July 2018. While the application of the measure has subsequently been deferred by one year recognising the delays in the implementation of the measure, the retrospective application of the measure is consistent with the Government’s intention to broaden the scope of the significant global entity definition to ensure that Australia’s multinational tax integrity rules apply as intended. Retrospectivity is necessary to minimise, to the extent that is reasonable in the circumstances, the period between the announcement of the measure and the application of the improved integrity rules. [Schedule 1, subitems 21(2) and (3)]

1.69              However, to ensure that penalty obligations imposed under the law do not apply retrospectively, the amendments include a transitional provision to ensure the penalties that arise from the measure do not apply until 1 July 2020 for entities that were not previously significant global entities. [Schedule 1, subitems 21(2) and (3)]

1.70              If an entity is a significant global entity due to the amendments made by this Schedule for the period on or after 1 July 2019 and before 1 July 2020 the entity is not treated as a significant global entity for the transitional period for the purpose of penalty provisions in Divisions 284 and 286 in Schedule 1 to the TAA 1953. [Schedule 1, subitem 21(4)]

 


Chapter 2         
Permanent tax relief for merging superannuation funds

Outline of chapter

2.1                  Schedule 2 to this Bill amends the ITAA 1997, the SLAA 2012 and the TLAA 2010 to make permanent tax relief for merging superannuation funds.

Context of amendments

2.2                  The CGT regime is the primary code for calculating gains or losses of complying superannuation funds. There are certain gains and losses that are treated on revenue account, such as those from a debenture stock or bond (see section 295-85 ITAA 1997).

2.3                  The transfer of assets from one superannuation fund to another, under a merger between the two funds, will typically trigger a CGT event. Therefore, the asset transfer will lead to the realisation of capital gains and/or capital losses for the transferring fund. Following this asset transfer and the transfer of members’ accounts to the receiving fund, the transferring fund will typically be wound up.

2.4                  Capital losses are extinguished on the ending of an entity. As capital losses can be used to offset present and future capital gains, they carry some value — at most the value of the tax liability that would otherwise be payable on the reduced capital gains. This value is extinguished on the winding up of the transferring superannuation fund.

2.5                  Similarly, revenue losses, such as foreign exchange losses, are also extinguished on the ending of an entity. Revenue losses also have a value as they can be offset against current year income, or carried forward where the entity continues to exist. However, where there is a merger and the transferring entity ceases to exist, the value of the revenue losses is also extinguished.

2.6                  Valuations of members’ superannuation interests may include the tax benefits of unrealised net capital losses or revenue losses. In the absence of optional loss relief and asset roll-over a merger may lead to a reduction in the value of members’ superannuation interests. This can act as an obstacle to the superannuation fund merging with another fund because the trustee has to take this reduction into account when considering such a merger. The trustee may decide to abandon any merger plans where there is a significant negative impact on members’ benefits.  The optional loss relief and asset roll-over removes the impediment to eligible funds merging that would otherwise arise from the extinguishment of the losses.

2.7                  This loss relief includes transfers to and from pooled superannuation trusts and life insurance companies as well as superannuation funds and approved deposit funds. Providing loss relief to superannuation fund mergers involving these kinds of entities recognises the commercial reality that a significant amount of superannuation is invested indirectly through pooled superannuation trusts and life insurance companies.

2.8                  The loss relief and asset roll-over in Division 310 of the ITAA 1997 was introduced as a temporary concession to assist the superannuation industry to cope with the severe economic and financial market conditions in late 2008. The temporary loss relief and asset roll‑over was granted for transfer events happening on or after 24 December 2008 and before 1 July 2011.

2.9                  The tax relief was first extended to 30 September 2011 to further encourage consolidation in the superannuation industry. The relief was further extended to apply to mergers from 1 October 2011 to 1 July 2017 to facilitate the implementation of the MySuper reforms. The extension of the relief was designed to ensure there were no barriers for the superannuation industry to respond to the MySuper changes. Following the 2017-18 Budget, the Government then further extended the temporary taxation relief to 1 July 2020.

2.10              The Productivity Commission Inquiry Report—Superannuation: Assessing Efficiency and Competitiveness—was publicly released on 10 January 2019. Recommendation 21 of the Report provides:

The Australian Government should legislate to make permanent the temporary loss relief and asset rollover provisions that provide relief from capital gains tax liabilities to superannuation funds in the event of fund mergers and transfer events.

2.11              Following the Productivity Commission Inquiry Report, the Government announced in the 2019-20 Budget that it would make permanent the current temporary arrangements that are due to expire on 1 July 2020.

Summary of new law

2.12              The tax system currently contains temporary arrangements for loss relief and asset rollover that provide relief from CGT liabilities to superannuation funds in the event of fund mergers and transfer events. These temporary arrangements are due to expire on 1 July 2020. Schedule 2 makes the arrangements permanent.

Comparison of key features of new law and current law

New law

Current law

A merging superannuation fund may choose loss relief and have access to asset roll-over where the transferring entity transfers assets to the receiving entity on or after 1 October 2011.

A merging superannuation fund may choose loss relief and have access to asset roll-over where the transferring entity transfers assets to the receiving entity on or after 1 October 2011 and before 2 July 2020.

 

The tax relief available under Division 310 for merging superannuation funds is permanent and is not automatically repealed on 1 July 2022.

 

The temporary tax relief available under Division 310 for merging superannuation funds will be automatically repealed on 1 July 2022.

Detailed explanation of new law

2.13              To make permanent the operation of Division 310 of the ITAA 1997 concerning tax relief for merging superannuation funds, the application provisions for the loss relief and asset roll‑over in the SLAA 2012 and the TLAA 2010 are amended to make the provisions apply on or after 1 October 2011. [Schedule 2, items 2, 4 and 5, item 19 to Schedule 1 to the SLAA 2012, and subitem 11(1) of Schedule 2 to the TLAA 2010]

2.14              The note in section 310-1 of the ITAA 1997 explains the periods in which mergers must occur for the loss relief provisions in Division 310 to apply. The note is amended to make clear that the provisions are permanent, and apply to mergers happening on or after 1 October 2011. [Schedule 2, item 1, section 310‑1 ITAA 1997]

Consequential amendments

2.15              Parts 4 and 5 of the TLAA 2010 were intended to repeal the temporary loss relief provisions on 1 July 2022 and to provide for application arrangements following the repeal. Because the arrangements are being made permanent, these repeal and application provisions are no longer required and they are therefore repealed. [Schedule 2, items 3 and 6, table item 4 of subsection 2(1) and Parts 4 and 5 of Schedule 2 to the TLAA 2010]

Application and transitional provisions

2.16              The amendments apply in relation to transfer events that happen on or after 1 October 2011. All of the members of the original fund (the transferring entity) need to become members of a continuing fund (the receiving entity) on or after 1 October 2011 and the transferring entity needs to cease to hold all relevant assets on or after 1 October 2011. [Schedule 2, item 7]

2.17              While the application of the amendments is retrospective, the amendments operate only to make permanent the concessional taxation treatment that has been afforded to merging entities in the period 1 October 2011 to 1 July 2020. In this way, the retrospectivity is not disadvantageous to affected entities.

 


Chapter 3         
Statement of Compatibility with Human Rights

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

Significant global entities

3.1                  Schedule 1 to this Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

3.2                  Schedule 1 to this Bill expands the definition of significant global entity in the ITAA 1997 so that it:

•       applies to groups of entities headed by an entity other than a listed company in the same way as it applies to groups headed by a listed company; and

•       applies despite exceptions to when a group of entities must prepare consolidated accounts, including materiality rules, in the applicable accounting rules.

3.3                  The amendments also modify the rules that identify which entities must undertake country by country reporting under the tax law to ensure these rules are aligned with Australia’s international commitments.

Human rights implications

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

Conclusion

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

Permanent relief for merging superannuation funds

3.6                  Schedule 2 to this Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

3.7                  Schedule 2 to this Bill amends the ITAA 1997, the SLAA 2012 and the TLAA 2010 to make permanent the current temporary arrangements for taxation relief for merging superannuation funds, which includes the provision of loss relief and an asset roll-over.

Human rights implications

3.8                  This schedule does not engage any of the applicable rights or freedoms.

Conclusion

3.9                  This schedule is compatible with human rights as it does not raise any human rights issues.