Show download pdf controls
  • 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 will be addressed by a minor technical amendment.

    Issue will be addressed by a minor technical amendment – Item 12 of Part 2 to Schedule 2 of the Treasury Laws Amendment (2018 Measures No 2) Bill 2018External Link

    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 do 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 will be addressed by a minor technical amendment.

    Issue will be addressed by a minor technical amendment – Item 2 of Part 1 of Schedule 2 to the Treasury Laws Amendment (2018 Measures No 2) Bill 2018External Link

    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 of Schedule 8 to 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 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 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.

    Capital gains tax (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.

    Last modified: 01 Apr 2019QC 58416