House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)

Chapter 2 - Protection for anticipation of certain discontinued announcements

Outline of chapter

2.1 Schedule 2 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to introduce a one-off protection provision, which ensures in broad terms that outcomes are preserved in relation to income tax assessments where:

•

taxpayers have reasonably and in good faith anticipated the impact of identified announcements made by a previous government that the tax law would be amended with retrospective effect; and

•

the current Government has now decided that the announced proposal to change the law will not proceed.

Context of amendments

2.2 The protection provision introduced by this Schedule applies in respect of particular past announcements that proposed a change to the tax law which the Government has decided not to proceed with. The primary purpose of the protection provision is to provide certainty for taxpayers that were impacted by an unenacted announcement, in the event that they self-assessed based on the announcement (often with the comfort of the Commissioner of Taxation (Commissioner) having published an administrative treatment that he would not dedicate resources to enforce compliance with the law that related to the matter subject to the announcement).

2.3 On 6 November 2013, the Treasurer and the then Assistant Treasurer announced (Joint Media Release, 'Restoring integrity in the Australian tax system') a process under which decisions would be made on how the Government would proceed with a backlog of 92 announced but unenacted tax and superannuation measures that were outstanding at the time of the Government coming to office. Under that process, the Government indicated that it had a disposition not to proceed with 64 of those 92 measures, but that final decisions on what would occur with these measures would be the subject of consultation.

2.4 Following this consultation, the then Assistant Treasurer confirmed by way of further Media Release on 14 December 2013 ('Integrity restored to the Australian tax system') that the Government had decided not to proceed with 48 of the 64 measures that were considered in the consultation process.

2.5 As a matter of practice, taxpayers may in many cases anticipate the impacts of an announced proposal to change the law prior to its enactment, where that proposed change is intended to have a beneficial impact for taxpayers prior to the date on which it is enacted.

2.6 ATO Practice Statement PS LA 2007/11 (the Practice Statement), which outlines the Commissioner's administrative treatment of taxpayers affected by announced but unenacted legislative measures which will apply retrospectively when enacted, contemplates that taxpayers might anticipate the impact of such measures. Consistent with this Practice Statement, the Commissioner has in many cases published administrative treatments that advised that the Commissioner would not dedicate resources to enforce compliance with the law where the announcement might reasonably be anticipated to apply in a favourable way to a taxpayer. The practical effect of publishing these treatments is to provide some comfort for taxpayers should they choose to anticipate the proposed change to the law when self-assessing their position.

2.7 The Commissioner is required to administer the existing law, and expects taxpayers and others to behave in accordance with that law. Nevertheless, the Commissioner's justification for adopting the approach set out in the Practice Statement is partly grounded on a reasonable assumption on his part that a government announcement of an intention to change the law will lead to legislation being enacted in due course. In this event, enforcing compliance with the existing law would not be an efficient and effective use of the Commissioner's resources when it is likely that any changes made to the taxpayer's position would require readjustment when that announced change is enacted.

2.8 Accordingly, the protection provision provides certainty for taxpayers and ensures that taxpayers in like assessment positions are treated similarly by:

•

ensuring that the Commissioner cannot amend or adjust a taxpayer's position if he becomes aware in a specific case that a discontinued measure has been anticipated reasonably and in good faith; and

•

providing a continuing justification for the Commissioner to not dedicate resources to examining cases where announcements that have now been discontinued were likely to be anticipated reasonably and in good faith in the past.

2.9 It follows that, in the event the Commissioner decides to not dedicate resources to examining cases that were potentially impacted by discontinued announcements in the past, the practical application of these amendments will be limited only to those cases where the Commissioner becomes aware of a taxpayer's anticipation of an announcement by some other means.

2.10 The Practice Statement also outlines the ATO's policy on penalties and interest where taxpayers anticipate a proposed retrospective change. Where announcements are not enacted, that policy provides penalty and interest relief provided that taxpayers have 'acted reasonably' in anticipating the announcement and have sought amendments or revisions to their position within a reasonable time. The protection provision will ensure that taxpayers need not seek amendments or revisions in these circumstances in relation to the announcements that are identified for the purposes of the provision. In broad terms, the need for anticipation to be reasonable and in good faith for the purpose of the protection provision seeks to give legislative expression to the 'acted reasonably' test in the Practice Statement. In the event that taxpayers have not acted reasonably and in good faith on the basis of the announcement, the Commissioner's usual amendment and recovery powers will apply.

2.11 The relief provided by the protection provision is intended to be a one-off initiative, reflecting the need for the Government, on being elected, to take stock of the considerable number of announced but unenacted tax and superannuation measures that were on hand. The decision to provide protection on this occasion in part reflects the Government's commitment to provide certainty for taxpayers by not proceeding with a significant number of these measures. Accordingly, the provision is intended to be limited to those measures that were considered as part of the process announced on 6 November 2013 (see paragraphs 2.3 and 2.4 above), and then only to those measures that are not proceeding as a result of this process.

Summary of new law

2.12 Schedule 2 introduces a protection provision to deal with cases where taxpayers have anticipated, reasonably and in good faith, the impact of an identified announcement (listed in the provision) made by a previous government of a proposed change to the tax law with retrospective effect, where the Government has now decided that the proposed change will not proceed.

2.13 This protection is primarily provided by placing a statutory bar on the Commissioner amending an income tax assessment about a particular to the extent that the particular reflects a taxpayer's anticipation of the impact of an announcement that meets the conditions set out in the provision.

2.14 In addition, where a taxpayer's anticipation of the impact of an announcement would otherwise allow the Commissioner to recover an overpayment he made to the taxpayer, protection will be provided by treating the taxpayer as being entitled to that amount if the conditions set out in the provision are satisfied.

2.15 These conditions are to be met for protection to be available:

•

A particular of a taxpayer's assessment is ascertained on the basis of a statement made by or on behalf of the taxpayer that reasonably and in good faith anticipated an announcement of a proposal to change the law which is specifically listed for the purposes of the provision;

•

One of the following timing conditions are met:

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the statement was made by or on behalf of the taxpayer in a return while the announcement was 'on foot', provided the return was not required to be lodged before the announcement was 'on foot'; ^[8]

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the statement was made by or on behalf of the taxpayer other than in a return while the announcement was 'on foot';

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the events happened or the circumstances existed on or before 14 December 2013 that enabled the taxpayer to anticipate the announced proposal to change the law, and the statement that relates to that anticipation is in an original return lodged by or on behalf of the taxpayer after 14 December 2013, provided that the return was not required to be lodged before that date; or

-

the taxpayer was definitively committed on or before 14 December 2013 to events happening or circumstances existing that would enable the taxpayer to anticipate the announced proposal to change the law, and the statement that relates to that anticipation is in an original return lodged by or on behalf of the taxpayer after 14 December 2013, provided that the return was not required to be lodged before that date; and

•

The taxpayer would have a less favourable outcome if the Commissioner were to amend or adjust the position of the taxpayer to reflect the fact that the announced proposal to change the law has not been enacted.

2.16 It is only necessary to provide protection in relation to income tax assessments, as the only announcements that may meet the conditions, as listed in the provision, involved proposals to amend the income tax law.

2.17 Taxpayers can choose not to have eligible positions protected. In these circumstances, the Commissioner may amend the taxpayer's position on request to reflect the ongoing operation of the law.

2.18 The operation of the protection provision can also be overridden in circumstances where:

•

the Commissioner is amending an assessment in relation to a protected particular to give effect to an objection decision, or a decision of the Administrative Appeals Tribunal (AAT) or Court on review or appeal; or

•

the taxpayer makes a statement for a later income year that is inconsistent with an earlier anticipation of an announcement, where continuing to anticipate the announcement would give rise to a less favourable outcome in that later income year.

Comparison of key features of new law and current law

Detailed explanation of new law

2.19 This explanation of the protection provision has been organised in the following way:

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Means of providing protection (paragraphs 2.20 to 2.42);

•

Conditions under which positions will be protected (paragraphs 2.43 to 2.92);

•

Exceptions (paragraphs 2.93 to 2.102);

•

Definitions (paragraphs 2.103 to 2.105); and

•

Application and transitional provisions (paragraph 2.106).

Means of providing protection

Self-assessment context

2.20 The drafting approach adopted in the protection provision reflects that anticipation by a taxpayer of an announced proposal to change the law occurs in a self-assessment setting. Under a self assessment system, statements of taxpayers are most often accepted on face value and reflected in assessments that are made by the Commissioner. In some cases (for example, in relation to income tax for companies and superannuation funds), returns lodged by taxpayers for an income year are deemed to be an assessment for that year. ^[9] More generally, once a return for an income year is lodged, the Commissioner may accept statements of a taxpayer (including those on behalf of a taxpayer) in the return or otherwise in making an assessment for the taxpayer in that income year. ^[10]

2.21 The Commissioner's administrative treatment of announced but unenacted legislative measures which will apply retrospectively when enacted (explained at paragraphs 2.6 and 2.7 above) is based on this self-assessment context.

2.22 The drafting approach adopted in the protection provision also reflects the Government's decision not to proceed with the majority of announced but unenacted measures that were outstanding when the Government came to office and provides certainty for taxpayers where they have acted reasonably and in good faith while the announcement was current. The position of taxpayers that have acted in this way will be reflected in an assessment. In contrast, the purpose of the provision is not to effectively enact the measures that the Government has decided not to proceed with for a limited period of time.

2.23 Given this, the law does not allow taxpayers that previously did not anticipate the impact of listed announcements in their returns to now seek an amendment or adjustment of their position.

Primary means of protection: Preventing amendment of assessments in relation to anticipated particulars

2.24 The primary means by which protection is provided to a taxpayer meeting the conditions for protection (see paragraphs 2.43 to 2.92 below for an explanation of these conditions) is to prevent the Commissioner from amending assessments in relation to protected positions in a way that would produce a less favourable result for the taxpayer. [Schedule 2, item 2, subsection 170B(1)]

2.25 Importantly, the protection provided is limited to the particulars of an assessment that reflect the taxpayer's anticipation of the impact of an announcement that is listed for the purposes of the provision. In an income tax context, a 'particular' of an assessment is a specific or definite constituent element in an assessment of taxable income (or that there is no taxable income) or tax payable on taxable income (or that there is no tax payable). All other particulars of the assessment are subject to the usual rules governing amendment of assessments. [Schedule 2, item 2, subsection 170B(1)]

Less favourable result

2.26 The operation of the concept of a 'less favourable result' is intended to mirror the 'more favourable result' concept that is used in the existing tax rulings provisions (see subsection 357-70(1) of Schedule 1 to the Taxation Administration Act 1953). [Schedule 1, item 2, subsection 170B(1)]

2.27 In an income tax context, a 'less favourable result' would be most clearly reflected in an amendment to an assessment that establishes a liability to tax by increasing income tax payable.

2.28 However, a 'less favourable result' is also intended to contemplate an amendment to an assessment that increases taxable income without increasing income tax payable. Such a scenario might arise because of the application of the tax-free threshold to the taxpayer or of the application of tax offsets that the taxpayer is entitled to against tax payable. While an immediate exposure to an income tax liability may not arise in relation to such an amendment, the increase in taxable income nevertheless gives rise to a greater exposure to an income tax liability in the future in the event that there is a further amendment of the assessment. Given this possibility, an amendment that only increases taxable income without increasing tax payable is considered to produce a 'less favourable result' for the taxpayer.

Example 2.1

Bronwyn was impacted by a natural disaster in December 2012 and anticipated the 'CGT relief for natural disasters' announcement (listed at item 3 of the table in subsection 170B(8)). This anticipation, which meets all of the necessary conditions for protection, has the effect of reducing her net capital gain for the 2012-13 income year under section 102-5 of the Income Tax Assessment Act 1997 by $30,000.

Taking this $30,000 reduction in her net capital gain into account, Bronwyn reports in her income tax return that her assessable income for the 2012-13 income year is $150,000, and the total of her deductions for that income year is $175,000. Accordingly, Bronwyn has a tax loss for the year of $25,000 and the Commissioner makes an assessment of nil taxable income and nil tax payable for the income year.

In the absence of the protection provision, the Commissioner may make an amended assessment for Bronwyn that increases her taxable income to $5,000. (This would reflect an increase in her net capital gain of $30,000, which would in turn increase her assessable income for the income year to $180,000. Her taxable income would be $5,000 after subtracting her deductions of $175,000.). Nevertheless, the operation of the tax-free threshold would ensure that no income tax liability would immediately arise from such an amendment.

However, if this amendment was made, Bronwyn would be exposed to a greater liability in the event that a further amendment to her assessment was made that increased her income tax liability. Accordingly, any amendment to increase her taxable income to $5,000 produces a less favourable result for her. As her anticipation of the listed announcement meets the conditions for protection, the Commissioner is prevented from making this amendment.

2.29 It is also possible that anticipation of an announced proposal to change the law which is initially reflected in a statement in an income year could give rise to a 'less favourable result' for a taxpayer in a later income year if that anticipation were to be reversed.

2.30 In particular, this can occur where a tax loss arises in the initial income year, and any reversal of that anticipation would not immediately result in an amended assessment in that income year. Under the law, there can only be an amended assessment for an income year if the amounts of taxable income or tax payable on that taxable income for that year change. Accordingly, there would be no amendment of an assessment where an anticipated position might be reversed on the basis that the announcement was discontinued, but the impact of that anticipation is less than the amount of a tax loss. As Example 2.2 below illustrates, the protection provision may nevertheless take effect at a later time where:

•

There are adjustments to other particulars of the loss year assessment within the time limits set out in subsection 170(1) of the ITAA 1936 that, together with any reversal of the anticipated position, would result in an amended assessment; or

•

The tax loss is sought to be applied as a deduction in a later income year.

Example 2.2

Assume the same facts as Example 2.1, where Bronwyn has a tax loss of $25,000, except now:

•

her assessable income for the income year is $170,000 because the impact of anticipation on her net capital gain for the 2012-13 income year is a reduction of $10,000 rather than $30,000; and

•

her deductions for that income year are $195,000 rather than $175,000.

In this case, the operation of the protection provision would not have an immediate impact for Bronwyn's assessment. Increasing her net capital gain by $10,000 alone would not result in an amendment of her assessment as her taxable income and tax payable would both remain nil. Her tax loss that is available to be carried forward would be reduced from $25,000 to $15,000.

However, if the Commissioner also came to the view (prior to the time limits for amendment expiring) that Bronwyn was not entitled to a deduction of $50,000 that had been allowed in her 2012-13 income year assessment, the protection provision would have an impact. The protection provision would prevent the Commissioner from making an amendment about the $10,000 net capital gain particular, even though the Commissioner could still make an amendment about the $50,000 deduction particular.

Accordingly, in the absence of the protection provision, Bronwyn's taxable income may be increased by amendment to $35,000. This would reflect assessable income for the income year of $180,000 (increased by $10,000 to take account of the change to her net capital gain) less deductions of $145,000 (decreased by $50,000 to take account of the over-claimed deduction).

With the protection provision, Bronwyn's taxable income may only be increased by amendment to $25,000. This would reflect assessable income for the income year of $170,000 (reflecting the net capital gain Bronwyn reported in her income tax return) less deductions of $145,000.

Alternatively, if Bronwyn was in a position to claim a deduction for her 2012-13 tax loss in the 2013-14 income year prior to the Commissioner becoming aware of the over-claimed deduction of $50,000, the protection provision would prevent an amendment of her 2013-14 income year assessment to reduce her prior year tax loss deduction from $25,000 to $15,000.

2.31 The concept of a 'less favourable result' also ensures that the Commissioner retains the ability to amend an assessment to reverse the anticipation of the impact of an announcement by a taxpayer where amending the assessment would produce a more favourable result for the taxpayer.

Anticipated amendments

2.32 The design of the protection provision has explicitly taken scenarios such as the one illustrated in Example 2.2 into account by distinguishing between the statements of the taxpayer that reflect anticipation on the one hand, and particulars of an assessment that are made on the basis of those statements on the other.

2.33 The concept of 'anticipated amendments' is the means of identifying which statements made by a taxpayer in a self-assessment context can form the basis of particulars of an assessment that will be protected. A taxpayer must have 'anticipated amendments' before protection will be provided. [Schedule 2, item 2, paragraph 170B(1)(a) and subsection 170B(3)]

2.34 The conditions that must be met for protection to be provided are contained within the definition of 'anticipated amendments' (see paragraphs 2.43 to 2.92 below for an explanation of these conditions). That definition establishes a connection between one or more hypothetical amendments to the law and statements made by the taxpayer that are consistent with those hypothetical amendments. [Schedule 2, item 2, subsection 170B(3)]

Protection of particulars ascertained on the basis of anticipated amendments

2.35 If the conditions are met for these hypothetical amendments to be 'anticipated amendments', a particular of an assessment that is ascertained on the basis of those amendments will be protected. [Schedule 2, item 2, paragraphs 170B(1)(b) and 170B(1)(c)]

2.36 The anticipated amendments may only be one element in ascertaining the relevant particular of an assessment.

2.37 The scenarios in Examples 2.1 and 2.2 illustrate this point. In these examples, the direct and immediate impact of the reduction of Bronwyn's net capital gain is to move her into a tax loss position (in Example 2.1) or increase the amount of her tax loss (in Example 2.2) for the 2012-13 year.

2.38 If Bronwyn seeks to deduct her 2012-13 tax loss in a later income year, the amount of her tax loss ($25,000) will have been worked out on the basis of her anticipated amendments. The particular in the later income year - being the deduction for a prior year tax loss - will still have been ascertained on the basis of her anticipated amendments having been made. Accordingly, the condition in paragraph 170B(1)(b) can apply to this particular.

2.39 However, under paragraph 170B(1)(c), the protection offered by the provision only extends to an amendment that would instead ascertain the particular on the basis of the anticipated amendments having not been made. This means that the amount of Bronwyn's tax loss deduction is protected to the extent that it is increased by her anticipated amendments. However, if there is another basis on which Bronwyn's tax loss deduction would be denied, subsection 170B(1) will not prevent the Commissioner from amending the assessment to deny the deduction.

Further means of protection: Preventing recovery of administrative overpayments

2.40 There may also be circumstances where a taxpayer may be immediately exposed to a 'less favourable result' without there being an amended assessment. An example is where, on the basis of an original assessment reflecting an anticipation of the impact of an announced proposal by the taxpayer (such as the announcement listed in item 13 of the table in subsection 170B(8)), excess refundable tax offsets (such as tax offsets for franked distributions) are refunded. In such cases, an administrative overpayment may arise for the taxpayer without any amendment being made to the underlying assessment.

2.41 Provided the conditions for 'anticipated amendments' are met in these circumstances, the law ensures that the taxpayer is not exposed to a liability for an administrative overpayment under section 8AAZN of the Taxation Administration Act 1953. Instead, the taxpayer will be taken to be entitled to the amount that reflects the anticipation of the impact of the announcement. [Schedule 2, item 2, subsection 170B(2)]

Priority of the protection provision

2.42 To ensure the protection provision has its intended impact, the effect of the provision will override any other provision in the taxation law. This priority rule is subject to the specific exceptions listed in the provision, which are discussed further at paragraphs 2.93 to 2.102 below. [Schedule 2, item 2, subsection 170B(5)]

Conditions under which positions will be protected: Definition of 'anticipated amendments'

2.43 In conjunction with the 'less favourable result' concept explained at paragraphs 2.26 to 2.31 above, the definition of 'anticipated amendments' in subsection 170B(3) sets out the other conditions that must be satisfied before protection will be available. Specifically, to be eligible for protection, statements made to the Commissioner by or on behalf of the taxpayer must:

•

Be consistent with one or more hypothetical amendments to the law that, if made, would reasonably reflect an announcement listed for the purposes of the provision. [Schedule 2, item 2, paragraph 170B(3)(a) and subparagraph 170B(3)(b)(i)];

•

Be made in good faith [Schedule 2, item 2, subparagraph 170B(3)(b)(ii))];

•

Meet at least one of these timing requirements relating to when the announcement that was anticipated was 'on foot': [Schedule 2, item 2, subparagraph 170B(3)(b)(iii)]

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the statement is made in a return for an income year that was lodged on or before 14 December 2013 and while the announcement was 'on foot', provided that return was not required to be lodged before the original announcement was made [Schedule 2, item 2, item 1 of the table in subsection 170B(3)];

-

the statement is made other than in a return while the announcement was 'on foot' [Schedule 2, item 2, item 2 of the table in subsection 170B(3)];

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the statement is made in an original return for an income year that is lodged after 14 December 2013 and was not required to be lodged before that date, and relates to the application of the taxation law to events that happened or circumstances that existed prior to the announcement being discontinued on 14 December 2013 [Schedule 2, item 2, paragraph (a) in column 2 of item 3 of the table in subsection 170B(3)]; or

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the statement is made in an original return for an income year that is lodged after 14 December 2013 and was not required to be lodged before that date, and relates to the application of the taxation law to the happening or existence of events or circumstances to which the taxpayer had definitively committed prior to the announcement being discontinued on 14 December 2013 [Schedule 2, item 2, paragraph (b) in column 2 of item 3 of the table in subsection 170B(3)].

Statement consistent with hypothetical amendments that reasonably reflect an announcement

2.44 For protection to be available, it is necessary for the taxpayer's statements that anticipate the announcement to be consistent with amendments to the law that would reasonably reflect a listed announcement. [Schedule 2, item 2, paragraph 170B(3)(a) and subparagraph 170B(3)(b)(i)]

Statement made by or on behalf of the taxpayer

2.45 As discussed earlier (at paragraphs 2.20 to 2.23), protection is available under the provision in a self-assessment context. Accordingly, taxpayer positions that are eligible for protection will be reflected in statements made by or on behalf of the taxpayer. [Schedule 2, item 2, paragraph 170B(3)(b)]

2.46 The provision is intended to apply to circumstances where, consistent with an announcement, amounts or items are omitted from a taxpayer's return or other statement. A common example where this might occur is where the law would require an amount to be included in a taxpayer's assessable income, but that amount would not have been included in assessable income had the announced proposal to change the law been enacted (Examples 2.1 and 2.2 above are cases in point). Any statement made by the taxpayer must be read as a whole. An omission of the amount from a taxpayer's return or other statement would be consistent with hypothetical amendments that reflect the announcement.

2.47 It is not necessary that the statement relate to a quantifiable amount. 'Statement' is not limited to any particular type of information that is contained within it.

2.48 It is also not necessary for the anticipation of the announcement to be readily apparent in the statement. Given the Commissioner's administrative treatment of announced but unenacted legislative measures which will apply retrospectively when enacted, as set out in ATO Practice Statement PS LA 2007/11, it is expected that the anticipation would not be readily apparent. Section 169A of the ITAA 1936 allows the Commissioner to take statements made by or on behalf of a taxpayer on face value for the purpose of making an assessment in relation to the taxpayer.

Statement consistent with amendments that would reasonably reflect an announcement

2.49 To provide a benchmark against which protection can be provided, the law hypothesises amendments that may have been made to the law that would 'reasonably reflect' a listed announcement. Statements made by or on behalf a taxpayer that are consistent with such amendments become the taxpayer's 'anticipated amendments'. [Schedule 2, item 2, paragraph 170B(3)(a) and subparagraph 170B(3)(b)(i)]

2.50 The 'reasonable reflection' test recognises that the exact amendments that would give effect to the announcement may well not be known with precision. This means that the test can contemplate differences in how different taxpayers might anticipate an announced proposal to change the law, provided that the anticipation in any given case is reasonable. Nevertheless, there would need to be sufficient detail associated with an announced proposal to change the law to provide a basis on which to reasonably anticipate its likely impact. [Schedule 2, item 2, paragraph 170B(3)(a)]

2.51 The following factors are to be taken into account in applying the 'reasonable reflection' test in paragraph 170B(3)(a):

•

the terms of the announcement, which will generally be set out in Budget Papers and associated media releases, as identified in the table of listed announcements in subsection 170B(8) [Schedule 2, item 2, paragraph 170B(4)(a)];

•

any related document published after the announcement on behalf of the Commonwealth Government, the Department of the Treasury or the Commissioner, including discussion papers and exposure drafts [Schedule 2, item 2, paragraph 170B(4)(b)];

•

any specific schemes or practices to which the announcement was proposed to apply, which will contemplate more specifically whether the taxpayer has entered into such schemes or engaged in such practices, making it more likely that the taxpayer's hypothetical amendments would reasonably reflect the announcement [Schedule 2, item 2, paragraph 170B(4)(c)]; and

•

comparable provisions in the existing taxation law that, in relation to another matter, produce the same or a substantially similar result as that proposed by the announcement. [Schedule 2, item 2, paragraph 170B(4)(d)]

2.52 An example of where the last of these factors will be relevant is where an announcement contemplated that there would be a CGT roll-over in a particular set of circumstances. There are a number of precedents in the current law that provide for a CGT roll-over that might reasonably form a basis for anticipating what amendments could have been made to the law to give effect to such an announcement.

2.53 Any other relevant matters may also be taken into account in applying the 'reasonable reflection' test. [Schedule 2, item 2, paragraph 170B(4)(e)]

2.54 From this basis, the condition in subparagraph 170B(3)(b)(i) considers whether the taxpayer's statement is consistent with one or more hypothetical amendments that would reasonably reflect the announcement. Any statement made by or on behalf of a taxpayer that anticipates an announced proposal to change the law must necessarily be consistent with some amendments being made to the law. However, if the amendments that are consistent with the taxpayer's statement do not reasonably reflect the relevant announcement, it follows that the statement cannot meet the condition in subparagraph 170B(3)(b)(i). [Schedule 2, item 2, subparagraph 170B(3)(b)(i)]

2.55 Two particularly important aspects of an announcement to take into account in the application of the condition in subparagraph 170B(3)(b)(i) are:

•

the proposed start date for the announced proposal to change the law; and

•

whether the announced proposal to change the law would reasonably apply to the taxpayer's circumstances.

2.56 For the purposes of this provision, statements that anticipate the impact of an announcement for an income year prior to the proposed start date will not be consistent with amendments that reasonably reflect that announcement.

2.57 Similarly, a reasonable reflection of an announced proposal to change the law must necessarily contemplate its scope, both in terms of the class of entities and the class of arrangements to which it may reasonably apply. If the taxpayer or taxpayer's circumstances fall outside of these classes, statements that anticipate otherwise will not be consistent with amendments that reasonably reflect the announcement.

2.58 Nevertheless, it is not necessary for the taxpayer to be aware of an announced proposal to change the law for the conditions in paragraph 170B(3)(a) and subparagraph 170B(3)(b)(i) to be satisfied. Collectively, these conditions merely require the taxpayer's statement to be consistent with amendments that, if made, would reasonably reflect an announcement listed for the purposes of the provision.

Announcements listed for the purposes of the provision

2.59 Of the 48 measures that the Government has decided not to proceed with as part of the process described in paragraphs 2.3 and 2.4, the provision lists those announcements where the protection provision is relevant. The protection provision will not apply to any discontinued announcement that is not listed for the purposes of the provision. [Schedule 2, item 2, paragraph 170B(3)(a) and subsection 170B(8)]

2.60 In broad terms, the criteria applied in listing the announcements in subsection 170B(8) are as follows:

•

The announcement was unenacted at the time the current Government was elected and was considered as part of the process described in paragraphs 2.3 and 2.4;

•

The Government expressly decided to not proceed with the announcement as part of that process;

•

At some point in the period while the announcement was 'on foot', the announced proposal to change the law or a particular aspect of it had a proposed start date that would have been retrospective had the announcement been enacted at that point; and

•

The announced proposal to change the law or a particular aspect of it had an intended operation that would have been beneficial for taxpayers (that is, it had the potential to reduce a liability or increase an entitlement of a taxpayer under the law if it had been enacted).

2.61 Some of the listed announcements had potential impacts that would have been favourable to taxpayers, as well as other potential impacts that would not have been favourable to taxpayers. An example is the related party bad debts announcement listed at item 1 of the table in subsection 170B(8). Provided all of the other conditions required for protection to be available are satisfied, the protection provision may apply to the extent that these announcements would have had favourable impacts that were anticipated by taxpayers. The 'less favourable result' concept, discussed at paragraphs 2.26 to 2.31 ensures this outcome is achieved. ^[11]

2.62 Some of the 37 measures ^[12] in the original backlog that the Government has decided should proceed are intended to have a beneficial impact for taxpayers prior to their enactment. The protection provision does not apply to measures that are currently proposed to proceed. Accordingly, any taxpayer that anticipates such a measure will need to consider their position in accordance with the Commissioner's administrative treatment in Practice Statement PS LA 2007/11 in the event that the measure is enacted. However, if any of these measures are discontinued for any reason, they may potentially be added to the list of announcements for the purposes of the protection provision.

Statements made in good faith

2.63 Statements made by taxpayers that are the source of protected positions must also be made in 'good faith'. This condition more specifically contemplates whether the taxpayer's anticipation of the impact of the listed announcement is bona fide given their particular circumstances. [Schedule 2, item 2, subparagraph 170B(3)(b)(ii)]

2.64 The 'good faith' test broadly contemplates honesty in belief or purpose; observance of reasonable standards of dealing in relation to an announcement; and an absence of intent to seek an unconscionable advantage. Including this condition is intended to be a counter-balance against overly aggressive conduct by or on behalf of a taxpayer.

2.65 To adapt judicial statements about 'good faith' to the current context, the good faith condition offers a warning that game playing at the margins of anticipation may attract a finding that there will be no protection afforded to the taxpayer. ^[13]

2.66 Given the context in which the 'good faith' condition is being applied here, the anticipation of an announcement of itself cannot lead to a conclusion that the statement in the income tax return was made other than in good faith.

2.67 However, if the taxpayer's anticipation of the impact of the announced proposal to change the law is such that it reflects a statement of facts that are known to be untrue, then that statement would not be made in good faith. Similarly, if the taxpayer or its agent knows that the announcement would not apply to the taxpayer's circumstances, or is reckless as to whether this would be the case, then any statement that anticipates that there would be an impact for the taxpayer would not be in good faith. ^[14]

2.68 Consistent with the way that the concept of 'good faith' has been interpreted in other similar statutory contexts, this condition also allows for a consideration of whether the taxpayer's statement reflects an arbitrary anticipation of the impact of the announcement, or the absence of reasonable caution and diligence in this regard. Accordingly, the extent to which the taxpayer or its agent was aware of an announcement and its likely impact will be relevant to whether the 'good faith' condition is met.

2.69 An example of where the 'good faith' condition might not be met is where a statement is made by or on behalf of a taxpayer very shortly after a proposal to change the law is announced, and there is little detail on how that proposal might be enacted at that time, either in the terms of the announcement itself or having regard to any other relevant matters. All relevant surrounding circumstances would need to be taken into account in determining whether the good faith test has been met in such a case.

2.70 Unlike some other cases that are dealt with explicitly in the provision (see paragraphs 2.93 to 2.102 below), there is no specific exception that applies in relation to the ability of the Commissioner to amend an assessment if he is of the opinion there has been fraud or evasion (see item 5 of the table in subsection 170(1) of the ITAA 1936). If a taxpayer's anticipation of an announcement has been tainted by fraud or evasion, the statement of the taxpayer would not be in good faith. ^[15]

2.71 In addition, given the standards that a 'good faith' test more broadly contemplates, the condition may not be met if the general anti-avoidance provision in Part IVA would have applied to cancel the anticipated benefit had the announced proposal to change the law been enacted.

Timing conditions: Statements made or relating to events while the announcement was 'on foot'

2.72 The application rules for the protection provision are effectively contained in timing requirements for the statements made by or on behalf of the taxpayer, which relate to the period during which the announcements listed in subsection (8) were current or 'on foot'. For a taxpayer to be eligible for protection, it is necessary for the statement made by it or in its behalf to meet at least one of four timing requirements. [Schedule 2, item 2, subparagraph 170B(3)(b)(iii)]

2.73 These four timing requirements can be grouped into two categories, namely:

•

Lodgment-based eligibility: Either:

-

The taxpayer's statement is contained in a return for an income year lodged during the period while the announcement was 'on foot', provided that return was not required to be lodged before the original announcement was made. [Schedule 2, item 2, item 1 of the table in subsection 170B(3)]; or

-

The taxpayer's statement is made otherwise than in a return and is made while the announcement was 'on foot'. [Schedule 2, item 2, item 2 of the table in subsection 170B(3)].

•

Event-based eligibility: The statement is made in an original return for an income year that is lodged after 14 December 2013 (the end of the 'on foot' period), where the return is not required to be lodged on or before that date, and the statement relates to the application of the taxation law (as hypothetically amended) to:

-

events or circumstances that happened or existed on or before 14 December 2013 [Schedule 2, item 2, paragraph (a) in column 2 of item 3 of the table in subsection 170B(3)]; or

-

the happening or existence of events or circumstances to which the taxpayer had definitively committed on or before 14 December 2013 [Schedule 2, item 2, paragraph (b) in column 2 of item 3 of the table in subsection 170B(3)].

Lodgment-based eligibility: General

2.74 Any anticipation of a listed announcement will ultimately be reflected in information provided in a statement made by or on behalf of the taxpayer and given to the Commissioner. Once an announcement is 'live', the potential for taxpayers to anticipate it through such statements, on the assumption that a proposed change to the law will be enacted by Parliament with retrospective effect, is enlivened. For the listed announcements, such an assumption continued until 14 December 2013, when the Government announced it had decided not to proceed with those announcements.

2.75 Any statement that anticipates an announced proposal to change the law must be in relation an income year to which the proposal to change the law would have applied. However, it is not necessary for that income year to have started or ended after the original announcement was made. In addition, provided the statement is given while the announcement is on foot, it is also not necessary for the relevant events or circumstances (that is, the events or circumstances that allow anticipation to take place) to have happened or existed while the announcement is on foot. In some cases, an announced proposal to change the law will contemplate the application of the proposed change well before the announcement is made, so these events and circumstances may have happened or existed before the original announcement was made.

Lodgment-based eligibility: Statements in returns

2.76 The most common way for a taxpayer to anticipate an announced proposal to change the law is through the lodgment of its tax return for an income year impacted by the announcement. As a general rule, a statement that anticipates an announcement in a tax return will meet the timing requirement if the return is lodged while the announcement was 'on foot'. [Schedule 2, item 2, item 1 in the table in subsection 170B(3)]

2.77 However, to avoid the potential for compliant taxpayers that lodge returns in a timely fashion being be disadvantaged, the timing requirement will not be met for a statement in a tax return lodged while an announcement was 'on foot' if that return was due to be lodged before the original announcement was made. [Schedule 2, item 2, item 1 in the table in subsection 170B(3)]

Lodgment-based eligibility: Other statements

2.78 Other statements made by or on behalf of a taxpayer in relation to an income year will meet the timing requirement if they are made in the period while the announcement was 'on foot'. [Schedule 2, item 2, item 2 in the table in subsection 170B(3)]

2.79 In some circumstances, taxpayers may only be in a position to reasonably anticipate an announced proposal to change the law for the first time in relation to a particular income year after an assessment has been made that does not reflect the proposed change to the law. For example, this may occur where the assessment is made before the original announcement is made. It may also occur where there is insufficient detail at the time an announcement is originally made to allow for the taxpayer to anticipate in good faith.

2.80 A statement made to the Commissioner that seeks to amend assessments so as to anticipate announcements in these types of circumstances will meet the timing requirement in item 2 of the table in subsection 170B(3), provided the statement is made in the period while the announcement is 'on foot'. In contrast, statements that seek an amendment of an assessment after 14 December 2013 will not meet any timing requirement.

Event-based eligibility: General

2.81 Alternatively, taxpayers may have entered into transactions, or other events or circumstances may have happened or existed on or before 14 December 2013, which allow for anticipation of the announced proposal. The timing requirement will be met in these circumstances, even if an original income tax return that seeks to anticipate an announcement for the first time is lodged after the announcement was discontinued on 14 December 2013.

2.82 Once these events or circumstances happen or exist on or before 14 December 2013, the taxpayer will have a basis on which to anticipate the announced proposal to change the law in its income tax returns. Allowing events-based eligibility ensures that protection can continue to be provided in a self-assessment context. This will be so even where the lodgment of the taxpayer's return in respect of those events and circumstances occurs after 14 December 2013.

2.83 In broad terms, the intent of event-based eligibility is to provide protection to anticipation that meets all of the other necessary conditions, where the only thing that remains for the taxpayer to anticipate reasonably and in good faith on 14 December 2013 is to reflect that anticipation in a statement in a tax return.

Event-based eligibility: Events or circumstances that happened or existed on or before 14 December 2013

2.84 The core case where the timing requirement will be met based on event-based eligibility is where all necessary events or circumstances allowing for anticipation have happened or existed on or before 14 December 2013. A statement made by or on behalf of the taxpayer in an original return lodged after 14 December 2013 that relates to the application of the taxation law (as hypothetically amended) to those events or circumstances will meet the timing requirement, provided the return was not required to be lodged on or before 14 December 2013. [Schedule 2, item 2, paragraph (a) in column 2 of item 3 in the table in subsection 170B(3)]

2.85 Some of the announcements listed in subsection 170B(8) would necessarily have a deferred impact on the tax affairs of impacted taxpayers. An example is the announcement in item 8 of the table in subsection 170B(8), which dealt with improvements to the company loss recoupment rules. Example 2.3 illustrates how the timing requirement may be met for this announcement via event-based eligibility.

Example 2.3

SCMH Ltd is a large public company that has carry forward tax losses at the start of the 2010-11 income year of $200,000. In February 2011, a holding company is interposed between SCMH Ltd and its shareholders. As a consequence of this, SCMH Ltd would no longer be able to satisfy the 'continuity of ownership' test as a basis for claiming its existing carry forward tax losses as a tax deduction in future income years.

The announcement in item 8 of the table in subsection 170B(8) is made in the 2011-12 Budget on 10 May 2011. With effect from the 2010-11 income year, this announcement proposed that the 'continuity of ownership' test will not be failed in these circumstances.

SCMH Ltd also has tax losses in the 2011-12, 2012-13 and 2013-14 years. In the 2014-15 income year, SCMH Ltd has taxable income of $150,000 prior to the application of prior year tax losses.

SCMH Ltd claims $150,000 of its carry forward tax losses as a deduction in its original 2014-15 tax return, and indicates in the return that these losses are claimed as 'continuity of ownership' losses. These statements meet the timing requirement in paragraph (a) in column 2 of item 3 of the table in subsection 170B(3). If the other conditions in subsection 170B(3) are met, SCMH Ltd has anticipated amendments in relation to the announcement in item 8 of the table in subsection 170B(8).

Event-based eligibility: Happening or existence of events or circumstances to which the taxpayer had definitively committed on or before 14 December 2013

2.86 There may also be cases where, as at 14 December 2013, not all necessary events or circumstances allowing for anticipation have happened or existed, but nevertheless the taxpayer is 'definitively committed' to those events or circumstances happening or existing at that date. The timing requirement will be met in these circumstances if a statement is made in an original return lodged after 14 December 2013 that relates to the application of the taxation law (as hypothetically amended) to those events or circumstances, provided the return was not required to be lodged on or before 14 December 2013. [Schedule 2, item 2, paragraph (b) in column 2 of item 3 in the table in subsection 170B(3)]

2.87 The 'definitive commitment' test is intended to allow for greater flexibility in the application of event-based eligibility where taxpayers are locked-in to arrangements as at 14 December 2013.

2.88 The courts have applied the concept of 'definitively committed' in determining whether losses or outgoings are incurred for the purposes of the general deduction provision in section 8-1 of the Income Tax Assessment Act 1997. In this context, there need not be an actual disbursement for a loss or outgoing to be incurred, provided that a taxpayer is 'definitively committed' to a presently existing liability. Similarly here, the intent is that certain events or circumstances need not have actually happened or existed by 14 December 2013, but nevertheless it is necessary that the taxpayer is 'definitively committed' to them happening or existing.

2.89 The ordinary meaning of a 'commitment' is 'an engagement or obligation that restricts freedom of action'. For a 'commitment' to be 'definitive', as ordinarily understood, it would generally need to be unconditional or final.

2.90 The authorities dealing with the meaning of 'incurred' identify the need for taxpayers to be 'completely subjected' to the loss or outgoing, and that the loss or outgoing needs to be something more than 'impending, threatened or expected'.

2.91 In a similar vein, the events or circumstances here would need to be more than merely contemplated for a definitive commitment to exist. In contrast, a definitive commitment to events or circumstances suggests that it is a matter of legal or commercial certainty that they will happen or exist, and they would not be subject to any contingency which would be regarded as such in the ordinary course of affairs.

Example 2.4

Jill lends securities to Flegs Pty Ltd under a securities lending arrangement on 1 December 2012. The securities are due to be returned to Jill by 30 November 2013. Flegs Pty Ltd becomes insolvent on 1 August 2013 and fails to return the securities to Jill by 30 November 2013 due to the company's insolvency.

At this time, the announcement listed at item 6 of the table in subsection 170B(8) is on foot. Under this proposed change to the law, Jill would have been entitled to roll-over relief in relation to the disposal of her securities to Flegs Pty Ltd, provided that Jill acquired identical securities by 30 December 2013.

Jill seeks advice from her financial planner and tax agent. They recommend that she acquires identical securities to access the benefit of the announced proposal to change the law. Jill places an order with her stockbroker for identical securities using collateral received under the securities lending arrangement on the afternoon of 13 December 2013. The transfer of the securities to Jill is not completed until 17 December 2013, after the announcement was discontinued.

In these circumstances, Jill is definitively committed to the transfer of securities happening. She anticipates the announcement in a statement in an original tax return lodged after 14 December 2013 by claiming the roll-over relief.

This statement meets the timing requirement in paragraph (b) in column 2 of item 3 of the table in subsection 170B(3). If the other conditions in subsection 170B(3) are met, Jill has anticipated amendments in relation to the announcement in item 8 of the table in subsection 170B(8).

Announcements 'on foot'

2.92 The period while a relevant announcement is 'on foot' is relevant to the timing requirements for statements. This period will vary from announcement to announcement. The table of listed announcements identifies the start date of this period for each of these announcements. The end date of this period is 14 December 2013, when the Government announced it had decided not to proceed with the listed announcements. [Schedule 2, item 2, subsection 170B(8)]

Exceptions

2.93 There are three sets of circumstances where the protection that would otherwise be provided by subsections 170B(1) or (2) will not apply. [Schedule 2, item 2, subsection 170B(5)]

Exception 1: Taxpayer chooses not to have an eligible particular protected

2.94 A taxpayer may choose not to have eligible particulars of an assessment protected. Where this choice is made there is no limitation (subject to any other limitations applying to the amendment of assessments, particularly those in subsection 170(1) of the ITAA 1936) on the Commissioner amending an assessment of the taxpayer in relation to those particulars. It is intended that this choice would be accommodated simply by way of the usual process that taxpayers have available to contact the Commissioner to seek an amendment to their assessment. [Schedule 2, item 2, paragraph 170B(6)(a)]

Exception 2: Amendments to give effect to decision on review or appeal

2.95 The operation of the protection provision can be the subject of review or appeal under Part IVC of the Taxation Administration Act 1953. In any circumstances where the application of the protection provision comes to the attention of the Commissioner, and the Commissioner is of the view that the taxpayer's assessment is not protected, he may amend the taxpayer's assessment in relation to the anticipated particular, provided that he is not out of time or otherwise prevented from doing so. The taxpayer can object to this assessment, as amended, under Part IVC. ^[16]

2.96 The purpose of item 6 of the table in subsection 170(1) of the ITAA 1936 is to ensure that the Commissioner has the power at any time to amend an assessment to reflect decisions made under Part IVC, which covers objection decisions and decisions made by the AAT and the Courts. Accordingly, this power is to prevail over the protection provision. [Schedule 2, item 2, paragraph 170B(6)(b)]

Exception 3: Later inconsistent statements

2.97 Some of the announcements that are listed for the purposes of the provision contemplated changes to the law that would have a beneficial impact for taxpayers when initially anticipated, but at a later time may have a related or associated impact that is not beneficial.

2.98 For example, a number of the announcements listed in subsection 170B(8) proposed to introduce CGT roll-overs. A CGT roll-over generally involves any capital gains being disregarded when a certain CGT event occurs, but also involves the original cost base of the asset to which that event occurs being maintained and used in relation to a later CGT event that happens to that asset or a replacement asset.

2.99 The deferral of a capital gain on the roll-over transaction would be an anticipated benefit under the protection measure. However, maintaining the original cost base will most likely mean that there is a larger capital gain or smaller capital loss if a later CGT event happens.

2.100 Such situations give rise to the possibility that a taxpayer may rely on the protection provision to ensure that the anticipated benefit is obtained in the first instance, while in a later income year relying on the operation of the law in their return to obtain a further benefit that is inconsistent with their initial anticipation of the announcement.

2.101 To ensure that taxpayers do not obtain a later inconsistent benefit, the protection provided by the provision will cease to be available should a statement be made for a later income year that is inconsistent with the anticipated amendments, where an assessment for the later income year would have a less favourable result for the taxpayer if made on the basis of the anticipated amendments. [Schedule 2, item 2, subsection 170B(7)]

2.102 To facilitate this outcome, the Commissioner will have the power to amend assessments, including the assessments where the taxpayer originally anticipated the announcement, at any time where the conditions for this exception are met. [Schedule 2, item 1, item 27A in the table in subsection 170(10)]

Definitions

2.103 The term 'taxation law' is referred to in various parts of the protection provision. This term has a meaning as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997. That definition includes any Act of which the Commissioner has the general administration. [Schedule 2, item 2, paragraph 170B(9)]

2.104 While the listed announcements in subsection 170B(8) only directly contemplated proposed changes to the income tax law, it is possible that the amendments that would reasonably reflect those announcements may extend to taxation laws other than the income tax law, in particular the Taxation Administration Act 1953.

2.105 In addition, there is the need for the protection provision to explicitly deal with the potential for 'administrative overpayments' (see paragraph 2.40 above), which is a concept that is found in the Taxation Administration Act 1953.

Application and transitional provisions

2.106 The protection provision commences on the day the Act receives the Royal Assent. The application provisions are effectively incorporated in the timing conditions that are discussed at paragraphs 2.72 to 2.92 above.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 Tax and Superannuation Laws Amendment (2014 Measures No. 2) Bill 2014 - Protection for anticipation of certain discontinued announcements

2.107 This Schedule 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

2.108 This Schedule amends the ITAA 1936 to introduce a one-off protection provision, which ensures in broad terms that outcomes are preserved in relation to income tax assessments where:

•

taxpayers have reasonably and in good faith anticipated the impact of identified announcements made by a previous government that the tax law would be amended with retrospective effect; and

•

the current Government has now decided that the announced proposal to change the law will not proceed.

Human rights implications

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

Conclusion

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