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  • When the Commissioner's remedial power has been considered but not applied

    The Commissioner of Taxation has limited powers to modify the operation of tax law in circumstances where entities will benefit, or at least be no worse off, as a result of the modification. This power is known as the Commissioner's remedial power (CRP).

    To provide additional transparency on the suitability of the CRP, this page contains an index of certain situations where the CRP was considered and not applied.

    Issue summary

    Issue description

    CRP suitability

    Early stage investors in innovation companies (Angel investor) – three-year expense test

    Investors in early stage innovation companies must satisfy a number of requirements to access a non-refundable tax offset.

    One requirement is satisfying an expense test, which requires the entity to:

    • have incorporated in the last six income years, and
    • have incurred $1 million or less in expenses across all of the last three income years.

    The provision includes the current income year in the expense test period. The test is difficult to apply because entities need to track current year expenses through an incomplete income tax year to show they meet the test.

    It was suggested that the Commissioner exercise his remedial power to change the expense test period to the three prior income years.

    The Commissioner did not need to consider whether to exercise his power because this issue was addressed by a minor technical amendment.

    Issue was addressed by a minor technical amendment – Item 12 of Part 2 to Schedule 2 of the Treasury Laws Amendment (2018 Measures No 2) Act 2020

    Additional requirements for Early stage venture capital limited partnerships (ESVCLPs) to acquire pre-owned investments

    Generally, an ESVCLP can only invest in new shares or units. However, an ESVCLP can invest in ‘pre-owned’ shares or units if it satisfies certain additional requirements.

    An ESVCLP can only meet the additional requirements if the total value of the pre-owned investments in question and the value of all of its other investments does not exceed 20% of the ESVCLP’s committed capital.

    The policy intent was to apply the 20% cap to the total value of the pre-owned investments in question and all of its other pre-owned investments.

    The Commissioner did not need to consider whether to exercise his power because this issue was addressed by a minor technical amendment.

    Issue was addressed by a minor technical amendment – Item 2 of Part 1 to Schedule 2 of the Treasury Laws Amendment (2018 Measures No 2) Act 2020

    Definition of ‘ineligible annuity’ and deferred life annuities

    The definition of ‘ineligible annuity’ provides a carve-out from the definition of qualifying security for the purposes of the taxation of financial arrangements (TOFA) rules. This carve-out currently refers to ‘an annuity issued by a life assurance company to, or for, the benefit of a natural person (other than in the capacity of the trustee of a trust estate)’.

    The carve-out applies to a deferred annuity purchased directly by an individual from a life company, but not to an annuity purchased by a superannuation fund to underwrite its liabilities to its members.

    As a result, annuities issued by life companies to complying superannuation funds to meet their liabilities for the provision of deferred superannuation income streams may be subject to double taxation during the accumulation (pre-retirement) phase.

    The Commissioner did not need to consider whether to exercise his power because this issue was addressed by a minor technical amendment.

    Issue was addressed by a minor technical amendment – Item 30 of Part 6 to Schedule 8 of the Treasury Laws Amendment (2018 Measures No 4) Act 2019

    Fringe benefits tax (FBT) outdated census data

    An FBT exemption for remote area housing is based on road distances from major population centres, measured as at 24 June 1986 and 1981 using census data.

    It was suggested that the road distances from major population centres could be updated using the CRP. However, modifying the law in these circumstances would not be favourable to all taxpayers.

    Unsuitable – not beneficial to all taxpayers.

    The provision of transitional capital gains tax (CGT) relief for unsegregated super funds

    There are transitional rules that are intended to preserve the tax-exempt status of capital gains accrued by super funds, but not realised before 1 July 2017.

    These transitional rules are difficult to apply to unsegregated funds because of the need to undertake analysis of all CGT assets at a share parcel level to determine which are eligible for the relief and which are not and then apportion amounts on a parcel-by-parcel basis.

    The suggested modification using the CRP would have amounted to a new regime for providing cost base resets. This treatment would be inconsistent with the purpose of the provision.

    Unsuitable – inconsistent with the intended purpose or object of the relevant provision.

    Interest on overpayments (IOP) of withholding tax (WHT) by non-residents

    Where the Commissioner amends the rate of WHT for non-residents after an internal review, there is no ‘decision to which this Act applies’ and therefore no entitlement to IOP.

    It was suggested that the CRP could be used to modify the law to create an entitlement to IOP.

    However, it is clear from clause 3 of the Explanatory Memorandum to the Taxation (Interest on Overpayments) Bill 1983 that it was not intended that IOP be paid in these circumstances.

    Unsuitable – inconsistent with the intended purpose or object of the relevant provision.

    Exempting certain individuals from the five-year record-keeping requirement

    In 2005, when the period of review was shortened to two years, record-keeping requirements were changed for:

    • payment summaries
    • Medicare levy family payments
    • returns lodged by agents.

    The CRP was sought to exempt some taxpayers from the five-year record-keeping requirement who would otherwise not already be exempt. However, the Commissioner cannot exercise the CRP in these circumstances because it is clear from paragraphs 2.71 to 2.72 of the Explanatory Memorandum to the Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 2) 2005 that it was not intended to exempt individuals outside of the circumstances listed in the statute.

    Unsuitable – inconsistent with the intended purpose or object of the relevant provision.

    Excess non-concessional contributions rules – appropriateness of associated earnings formula

    There is a formula for calculating associated earnings for the purposes of the excess non-concessional contributions rules.

    The Commissioner was asked to use the CRP to permit the use of a different formula because the income calculated under the statutory formula is ‘far higher than the actual income earned on the excess non-concessional contributions’.

    However, the Commissioner cannot exercise the CRP in these circumstances because it is clear from paragraph 1.44 of the Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2014 Measures No 7) Bill 2014 that the associated earnings formula may result in associated earnings being ‘lower or higher than the actual earnings from the investments made with excess non-concessional contributions by the superannuation provider’. This was an intended policy outcome of the measure.

    The law is operating as intended.

    Unsuitable – inconsistent with the intended purpose or object of the relevant provision.

    Discretion to allow taxation of financial arrangements (TOFA) foreign exchange election to apply retrospectively

    The exercise of the CRP was sought to allow taxpayers to make the TOFA foreign exchange election with retrospective effect to fix errors made by incorrectly classifying:

    • foreign exchange gains as unrealised foreign exchange gains
    • unrealised foreign exchange gains as realised foreign exchange gains

    over a number of years where taxpayers are out of time to lodge a request for amendment of their returns.

    Paragraphs 5.70 and 5.71 of the Explanatory Memorandum to the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008 which introduced the TOFA regime notes that elections do not apply to financial arrangements that are held prior to the income year in which the election is made. Therefore, using the CRP to modify the law in these circumstances would be inconsistent with the intended purpose or object of the provisions.

    Unsuitable – inconsistent with the intended purpose or object of the relevant provision.

    CGT – use of discretion to classify properties as pre-CGT assets where the transaction spans the introduction of CGT regime

    The exercise of the CRP was sought to disregard a capital gain from a CGT event for an asset that was acquired under a contract that was originally to be entered into before the CGT law was enacted but the contract was ultimately deferred pending advice from relevant authorities until after the CGT law commenced to apply.

    Paragraph 8 of the 'Main Features' section of the Explanatory Memorandum to the Income Tax Assessment Amendment (Capital Gains) Bill 1986 which introduced the CGT regime notes that where assets were acquired on or after 20 September 1985, they are in scope for CGT – 'for example, where assets are acquired under a contract, the time of acquisition will be the time of the making of the contract'. Therefore, using the CRP to modify the law in these circumstances would be inconsistent with the intended purpose or object of the provisions.

    Unsuitable – inconsistent with the intended purpose or object of the relevant provision.

    Inheritance taxing point – CGT event E7

    Where an asset passes from a deceased individual (first deceased) to a second individual who dies (second deceased) without the affairs of the first deceased having been concluded before the death of the second deceased, the beneficiaries of the second deceased incur a CGT liability.

    While the asset passes from the first deceased’s estate to the second deceased’s beneficiaries under their wills, the rollovers available in these situations are available to those who ‘own’ the asset at the time of death. As no probate or letters of administration are granted for the first deceased before the second deceased dies, the asset is not ‘owned’ by the second deceased at the time of their death and the rollovers do not apply.

    It was proposed to apply the CRP to allow a rollover in these circumstances. However, subparagraph 1 of paragraph B of Chapter 2.18 of the Explanatory Memorandum to the Tax Laws Improvement Bill (No 1) 1998 states that the rollover does not apply to assets that were acquired by the legal personal representative during administration of the first deceased estate. Therefore, the CRP cannot be exercised to modify the law in these circumstances.

    Unsuitable – inconsistent with the intended purpose or object of the relevant provision.

    Not-for-profits (NFPs) exemption from income tax subject to satisfying special conditions

    Income tax exempt NFPs must satisfy ‘special conditions’ by applying income and assets solely for the purposes for which they are established and complying with all the substantive requirements in their governing rules.

    Some in the NFP sector consider that the conditions operate overly restrictively with minor technical breaches resulting in the loss of the income tax exemption. Some in the sector consider that the ATO’s attempts to relieve this result by the terms of a public ruling (Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt) are not supported by the law, and therefore does not provide sufficient certainty for all sector participants.

    Use of the CRP was sought to modify the law to include a discretion to allow NFPs to be held to satisfy special conditions and maintain exempt status.

    Paragraphs 9.56 and 9.60 of the Explanatory Memorandum to the Tax Laws Amendment (2013 Measures No 2) Bill 2013 states that NFPs must comply with these special conditions and ‘are expected to operate in a manner consistent with those rules and purposes’ to retain their exempt status. Paragraph 9.61 notes the requirement to comply with the substantive requirements allowing for ‘minor procedural irregularities’ to occur whilst retaining exempt status. It is clear compliance with the substantive requirements is expressly required and that a limited discretion already exists. Therefore, modifying the law to apply a broader discretion is inconsistent with the intended purpose or object of the provisions.

    Unsuitable – inconsistent with the intended purpose or object of the relevant provision.

    Authorised Deposit Institutions (ADIs) – effective non-contingent obligation on Tier 2 regulatory capital

    For the purpose of the debt/equity rules in Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997), an interest would be classed as ‘debt’ if the issuer has an ‘effectively non-contingent obligation’ to repay the investment. Regulations may provide what constitutes ‘debt’ or ‘equity’ for Division 974 purposes.

    Section 974-135F of the Income Tax Assessment Regulations 1997 provides that non-viability clauses on certain subordinate notes issued by prudentially regulated entities do not in themselves prevent the note’s obligation to pay principal or interest from being a non-contingent obligation. This may allow the notes to be classed as a ‘debt interest’ under the debt/equity rules of Division 974 of the ITAA 1997.

    To apply section 974-135F, ‘the note must be written off or converted into ordinary shares of the issuer….if a non-viability trigger event occurs’.

    Mutual and NFP ADIs however would issue these notes with the non-viability clauses resulting in a conversion into mutual equity interests (MEIs) instead of shares due to their corporate structuring and capitalisation. This conversion into MEIs is permitted under the prudential standards.

    It was unclear as to whether MEIs fit the definition of ‘ordinary share’ for the purposes of section 974-135F. This could result in a difference in tax outcome for those notes that would convert into 'ordinary shares’ and those which would convert into MEIs, despite both notes conforming with the prudential regulations.

    Use of the CRP was sought to extend subsection 974-135F(4) to include MEIs.

    Issue was addressed by a minor technical amendment – Treasury Laws Amendment (Mutual Equity Interests) Regulations 2019.

    CGT replacement asset rollover relief where there has been an asbestos insulation buyback

    The ACT Government offered a voluntary scheme to buy back asbestos insulated properties at market value.

    Subdivision 124-B of the ITAA 1997 provides that a taxpayer can choose to obtain CGT replacement asset rollover relief where an asset is compulsorily acquired, lost or destroyed. Where this rollover relief is chosen, the taxpayer must incur expenditure in acquiring another CGT asset.

    Use of the CRP was sought to include an asset which is damaged because of asbestos insulation under the voluntary scheme within the CGT definition of a compulsorily acquired, lost or destroyed asset.

    Chapter 2.16 of the Explanatory Memorandum to the Tax Law Improvement Bill (No 1) 1998 expressly states that rollover relief is only available when one of the required circumstances occurs. Damage to an asset is not a specified circumstance and it is not the intended policy outcome to include such a circumstance. Therefore, expanding the circumstances for which replacement asset rollover relief is available is inconsistent with the intended purpose or object of the provision.

    Unsuitable – inconsistent with the intended purpose or object of the relevant provision.

    Simplified reporting for a chain of entities to access relief for tax paid at the trustee level

    A taxpayer anticipated new managed investment trust (MIT) rules which would have allowed the Australian trusts in the particular taxpayer’s structure to be considered MITs and access the 15% MIT withholding rate. However, the taxpayer’s trusts did not satisfy the tests for being classified as MITs.

    The application of Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936) results in the amounts being taxed at 45% as trustee tax under subsection 98(4) of the ITAA 1936. The ultimate beneficiaries under this trust structure are companies, and Division 6 recognises that the tax paid by the trustee can benefit those companies in respect of their own tax liabilities. However, to obtain a credit for the tax paid by the trustee, it would be necessary for the taxpayer to lodge tax returns for the trust and a number of companies upstream.

    Use of the CRP was sought to allow simplified reporting for the chain of entities so that just one tax return needed to be filed and for tax to be paid at the 30% rate rather than at the trustee level.

    Paragraphs 10.31 to 10.32 and 10.42 to 10.45 of the Explanatory Memorandum to the Tax Laws Amendment (2007 Measures No 3) Bill 2007 states that the applicable tax rate in these circumstances is 45% and shows that the intended method to obtain the credit was for each ultimate beneficiary to lodge a tax return so that their tax liability was individually assessed, and the appropriate credit to be refunded. Therefore, using the CRP to modify the law to allow for simplified reporting and a lower tax rate would be inconsistent with the intended purpose or object of the provisions.

    inconsistent with the intended purpose or object of the relevant provision and the power cannot be used to modify the law for one particular entity.

    Taxation of monies received as a result of a compensation payout

    A taxpayer suffered a compensable injury. As a result, income was received from Centrelink and WorkCover, which was included in the taxpayer’s income tax return. The taxpayer then received a lump sum compensation settlement in a later financial year. In certain circumstances, under Part 3.14 of the Social Security Act 1991 and Chapter 3 of the Queensland Workers’ Compensation and Rehabilitation Act 2003, when a person receives a compensation settlement it is required that any Centrelink and WorkCover income received be repaid. The taxpayer repaid the Centrelink and WorkCover monies and sought to amend their income tax return.

    Subsection 59-30(3) of the ITAA 1997provides that section 59-30 does not apply (which makes a payment non-assessable non-exempt income) to an amount that a taxpayer must repay because the taxpayer received a lump sum as compensation or damages for a wrong or injury they suffered in their occupation. As a result, the amounts the taxpayer received from Centrelink and WorkCover were assessable income and the income tax return amendment was denied.

    Use of the CRP was sought by the taxpayer to allow the requested amendment.

    Paragraph 3.11 of the Explanatory Memorandum to the Tax Laws Amendment Bill (No 2) 2003 confirms that an intended exclusion to the provision is where a taxpayer receives income as a benefit or regularly paid compensation, and then has to repay that income because a lump sum compensation payment or a lump sum payment for damages for a wrong or injury suffered in the taxpayer’s occupation is later received. Therefore, use of the CRP in this case is inconsistent with the intended purpose or object of the provision.

    inconsistent with the intended purpose or object of the relevant provision and the power cannot be used to modify the law for one particular entity.

    Returns on foreign investment from dual resident companies to Australian residents being treated as assessable income

    In 2014, the tax law provisions dealing with returns on foreign investment were modernised and updated. Section 23AJ of the Income Tax Assessment Act 1936 (ITAA 1936) was replaced by Subdivision 768-A of the ITAA 1997 as part of this process. Subdivision 768-A treats certain income received by an Australian corporate tax entity from a foreign resident company as non-assessable non-exempt income.

    There was a change made to the wording of one of the key conditions for entitlement to the exemption. The condition that the paying company be ‘not a Part X Australian resident’ was changed to a requirement that the paying company be a ‘foreign resident’. This change inadvertently resulted in some dual resident companies’ dividends paid to Australian residents being treated as assessable income for the Australian resident. This was not the policy intent. The distribution received by the Australian resident should not be assessable income.

    Use of the CRP was sought to modify the law to enable the condition for entitlement to the exemption recognise that the paying company be ‘not a Part X Australian resident’.

    The CRP was considered unsuitable in this circumstance as the budget impact of the proposed modification was not negligible.

    Unsuitable – the impact of the modification on the Commonwealth Budget would not be negligible.

    Issue was addressed by a minor technical amendment – Item 113 of Part 2 of Schedule 3 to the Treasury Laws Amendment (2019 Measures No 3) Act 2020.

    CGT liability for the sale of a rental property

    A taxpayer sought to have their CGT liability waived on the sale of a rental property they owned as joint tenants on the basis they had received none of the rental income.

    As a joint tenant of the property the taxpayer held a CGT asset according to the tax law. The disposal of the property triggered the CGT event which gave rise to a capital gain and in turn a CGT liability for the taxpayer. This is the intended operation of the CGT regime in these circumstances as reflected in Chapters 2.6 and 2.12 of the Explanatory Memorandum to the Tax Law Improvement Bill (No 1) 1998.

    The CRP was not used in this circumstance as the law is operating as intended and the CRP cannot be used for an individual taxpayer.

    Unsuitable – inconsistent with the intended purpose or object of the relevant provision and the power cannot be used to modify the law for one particular entity.

    CGT – extension of the main residence exemption for a destroyed dwelling

    Section 118-160 of the ITAA 1997 allows for the main residence exemption to continue to be claimed when a main residence is accidentally destroyed, and a CGT event happens in relation to the land on which it was built without another dwelling being built on the land.

    A request was made to extend this section, for an individual taxpayer, to cover when a property is intentionally destroyed (for instance, as part of a renovation process) and the construction of a new residence is interrupted or otherwise prevented.

    Chapter 2.12 of the Explanatory Memorandum to the Tax Law Improvement Bill (No 1) 1998 confirms that the rule in section 118-160 was only intended to apply when ‘a dwelling is accidentally destroyed (e.g. by a bushfire)’. The intentional destruction of a main residence would not be within the intended policy outcome for this rule.

    The CRP was not used in this circumstance as the law was operating as intended and the CRP cannot be used for an individual taxpayer.

    Unsuitable – inconsistent with the intended purpose or object of the relevant provision and the power cannot be used to modify the law for one particular entity.

    Continuity of ownership test (COT) where there is an interposition of new head company

    Division 166 of the ITAA 1997 modifies the COT for widely held and eligible Division 166 companies to make it easier for these companies to apply the COT rules.

    Where a new holding company is interposed between the relevant COT tested company and a less than 10% direct stakeholder, the COT tested company is disqualified from relying on the concessional tracing rule in section 166-225 of the ITAA 1997. Section 166-230 of the ITAA 1997 would then apply (attributing the indirect stakes to an entirely different top interposed entity). This generally has the effect of causing the company to fail the COT. The company would then have to satisfy the same business test in order to deduct its tax losses or apply its net capital losses.

    The proposed CRP modification to section 166-225 of the ITAA 1997 was to ensure that the interposition of a holding company between the tested company and a less than 10% direct stakeholder will not cause a failure of the COT.

    The CRP was considered unsuitable in this circumstance as the budget impact of the proposed modification was not negligible.

    Unsuitable – the impact of the modification on the Commonwealth Budget would not be negligible.

    Issue was addressed by a minor technical amendment – Item 80-83 of Part 2 of Schedule 3 to the Treasury Laws Amendment (2019 Measures No 3) Act 2020.

    Excess non-concessional superannuation contributions – consideration of a proposed alternative associated earnings formula

    Section 97-30 of Schedule 1 to the Taxation Administration Act 1953 contains the formula to calculate associated earnings on excess non-concessional superannuation contributions. A request was made to use the CRP to allow an alternative to this formula as the income calculated was higher than the actual income earned on the excess non-concessional contributions.

    Paragraphs 1.44 and 1.47 of the Explanatory Memorandum (EM) to the Tax and Superannuation Laws Amendment (2014 Measures No 7) Bill 2014 makes it clear that the legislated associated earnings formula may result in associated earnings being ‘lower or higher than the actual earnings from the investments made with excess non-concessional contributions by the superannuation provider’. This was an intended policy outcome of the measure.

    It is clear from the EM that the law is operating as intended. Therefore, using the CRP to modify the law in these circumstances is inconsistent with the intended purpose or object of the provisions.

    Unsuitable – inconsistent with the intended purpose or object of the relevant provision.

    Pay as you go (PAYG) instalments – high instalment rates

    Taxpayers with business or investment income pay instalments towards their income tax liability during the income year. Generally, there are two methods for working out the PAYG instalment amount payable, namely the ‘rate’ method and ‘amount’ method. If the ‘rate’ method is chosen by the taxpayer, the amount that they are required to pay is determined according to a rate notified to them by the Commissioner. In some instances, the calculation of this rate (which is prescribed in the law) can work out to be significantly higher than the taxpayer’s top marginal income tax rate. Therefore, for these selected taxpayers, this instalment rate method does not accurately reflect their true tax liability.

    The anomaly with the calculation occurs where a taxpayer receives a high proportion of one type of income (i.e. statutory income such as employee share scheme income) as compared to another type of income (i.e. ordinary income such as interest or dividends). To overcome this problem, taxpayers are informed by the ATO to vary the rate downwards. However, some taxpayers do not manually vary the rate downwards and use the rate that was notified. The result is the taxpayer ends up overpaying their tax instalments. Any overpayments are reconciled at the time of assessment.

    Use of the CRP was sought to modify the instalment rate so it would not exceed the top marginal tax rate (plus Medicare levy) and ensure the rate more accurately reflected the taxpayer’s actual tax liability.

    The intended purpose or object of the law is to ensure efficient collection of income tax through the payment of instalments over a year that is as close as possible to the taxpayer’s tax liability for that year. The overpayment or incorrect reporting of tax instalments which are reconciled only when the taxpayer lodges their tax return is clearly not in line with the policy intent. However, the CRP was considered unsuitable in this circumstance as the budget impact of the proposed modification was not negligible.

    Unsuitable – the impact of the modification on the Commonwealth Budget would not be negligible.

    Early Stage Venture Capital Limited Partnership (ESVCLP) Tax Offset

    Subdivision 61-P of the ITAA 1997 provides limited partners in an ESVCLP with a non-refundable carry-forward tax offset to encourage investment in new ESVCLPs. The amount of the tax offset is calculated from the formula under subsection 61-765(1) of the ITAA 1997 and is equal to 10% of the lessor of the partner’s contributions to the ESVCLP for the income year; and the partner’s investment related amount (the proportionate share of the investments made by the ESVCLP). The investment related amount is worked out using the formula in subsection 61-765(3) of the ITAA 1997 where the partner’s share is multiplied by the sum of eligible venture capital investments.

    The application of the definition of partner’s share in the investment related amount means that if a partner joins a ESVCLP in a subsequent year, they receive a reduced tax offset because the partner’s share of the investment related amount is based on the entire capital of the ESVCLP rather than the funds committed in the relevant tax year.

    A request was made to use the CRP to amend the partner’s share part of the investment related amount formula to make this part based on the funds contributed during the financial year instead of the partner’s interest at the end of the income year in relation to the ESVCLP’s entire capital.

    Paragraph 2.27 of the Explanatory Memorandum (EM) to the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 makes clear that the definition of partner’s share was intended to be an end of income year test. This was how the offset was intended to be calculated to encourage long-term commitment from partners to ESVCLPs.

    It is clear from the EM that the law is operating as intended. Therefore, using the CRP to modify the law in these circumstances is inconsistent with the intended purpose or object of the provisions.

    Unsuitable – inconsistent with the intended purpose or object of the relevant provision.

    Last modified: 15 Jul 2020QC 58416