Explanatory Memorandum(Circulated by the authority of the Minister for Small Business and Assistant Treasurer, the Hon Kelly O'Dwyer MP)
Chapter 4 - Third party reporting
Outline of chapter
4.1 Schedule 4 to this Bill amends Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) to improve taxpayer compliance by increasing the information reported to the Commissioner of Taxation (Commissioner) by a range of third parties. The Schedule creates a new reporting regime requiring third parties to report on the following transactions:
- payments of government grants;
- consideration provided for services to government entities;
- transfers of real property;
- transfers of shares;
- transfers of units in unit trusts; and
- business transactions made through payment systems.
4.2 All references to legislative provisions in this chapter are references to Schedule 1 to the TAA 1953 unless otherwise stated.
Context of amendments
4.3 The objective of an efficient tax administration is to collect the maximum amount of revenue with minimum administration and compliance costs. Since 1986-87, Australia's income tax system has largely operated on a self-assessment basis for individuals, meaning that it is the individual taxpayer who is obliged to self-assess their income tax affairs and report relevant information to the Commissioner. For most people, this means preparing and lodging an annual income tax return.
4.4 Starting in 2007, the Australian Taxation Office (ATO) has offered individual taxpayers a pre-filling service to assist them in voluntarily meeting their obligations when preparing their income tax return. In essence, the ATO provides its pre-filling service by using the information it has received for compliance purposes and adding it directly to the relevant tax return label or providing additional information in a summary form.
4.5 The ATO now receives sufficient information so that in the majority of cases it is possible to completely pre-fill a simple tax return in relation to:
- wage and salary data from employers;
- government welfare payments from Centrelink and other providers;
- interest income from financial institutions;
- dividend income from share registries; and
- Medicare levy surcharge and private health insurance policy details from private health insurers.
4.6 The usefulness of pre-filling, and therefore the availability of future pre-prepared tax returns, depends on the ATO receiving relevant and timely information from third parties. This can include employers, financial institutions, private health insurance providers and businesses in the building and construction industry. Currently, the ATO receives a range of information from third parties for the purposes of post-lodgement compliance activities through legislated reporting regimes as well as information collected ad hoc under the Commissioner's general information gathering powers in section 353-10. However, whilst information gathered through existing legislative reporting regimes is generally of a high quality, information collected under the Commissioner's general information gathering powers tends to have shortcomings in relation to timeliness, data formats and the ability to readily match it to the relevant taxpayer.
4.7 The introduction of formal third party reporting regimes has the potential to further reduce the compliance costs for individual taxpayers by increasing the range of information reported to the ATO. It also has the ability to be an effective compliance response to deal with some taxpayers omitting or underreporting income.
4.8 Nonetheless, the introduction of such a regime involves a policy trade-off between the compliance benefits to taxpayers of improved ATO data-matching capabilities and the compliance costs imposed on third party reporters. Imposing these reporting obligations only on those entities that already collect relevant information in the ordinary course of their business, or through other activities, and integrating the obligation into existing business systems will minimise compliance costs. To the extent that these compliance costs are less than the potential compliance benefits to individual taxpayers, and the tax system more generally, there is a persuasive policy case for introducing such a regime.
4.9 Developing a comprehensive and robust third party reporting regime has the potential, over time, to provide opportunities to change how individuals and other self-assessment taxpayers interact with the tax system in the future.
4.10 The Government recognises that this regime complements and expands on existing third party reporting regimes in the tax law, including the Annual Investment Income Report (AIIR) and the obligations relating to the US Foreign Account Tax Compliance Act (FATCA). Accordingly, the Government anticipates the Commissioner will work with reporters to streamline processes, reduce compliance costs and avoid duplication in implementing this reporting regime.
Summary of new law
4.11 Schedule 4 creates a new third party reporting regime. This regime requires certain entities ('third parties') to report information to the ATO on transactions that could reasonably be expected to have tax consequences for other entities.
4.12 The following third parties are required to report under the regime:
- government related entities, other than local governing bodies, must report on government grants;
- government related entities must report on consideration they provide for services;
- states and territories must report on transfers of real property in their jurisdiction;
- the Australian Securities and Investments Commission (ASIC), market participants and trustees of trusts with an absolutely entitled beneficiary must report on transactions relating to shares and units of unit trusts;
- listed companies must report on transactions relating to their shares;
- trustees of unit trusts must report on transactions relating to their units; and
- administrators of payment systems must report on electronic business transactions.
Comparison of key features of new law and current law
|New law||Current law|
|Specified entities are required to report on a regular basis according to legislative requirements.
This operates in addition to the Commissioner's existing information gathering powers.
|The Commissioner can require entities to provide information under various legislative reporting requirements, including the AIIR, the Payment, ABN and Identification Verification System, and the general information gathering powers under section 353-10.|
Detailed explanation of new law
4.13 Schedule 4 creates a new third party reporting regime in Schedule 1 to the TAA 1953. This regime requires certain entities ('third parties') to report information to the Commissioner about transactions that could reasonably be expected to have tax consequences for other entities.
4.14 The legislative framework has been designed to create a coherent and flexible third party reporting regime for a wide range of transactions, allowing additional transactions to become subject to third party reporting in the future, as the tax system progresses.
4.15 Entities are required to report to the Commissioner under the third party reporting regime if they are a type of entity listed in the legislation. For each type of entity required to report, the transactions about which they must report are also set out. The entities included in the third party reporting regime, and the transactions on which they have to report, are explained in detail at paragraphs 4.42 to 4.81. [Schedule4, item 1, section 396-55]
4.16 Entities must report on the transactions in the 'approved form', which sets out the specific information the Commissioner requires. The concept of approved forms is used in the taxation laws to provide the Commissioner with administrative flexibility to specify the form of information required and the manner of providing it. Section 388-50 of Schedule 1 to the TAA 1953 provides the legislative basis for the use of approved forms.
4.17 The Commissioner may only require information that relates to the identification, collection or recovery of a possible tax-related liability of the parties to the transaction, or information that relates to identifying the parties to the transaction. For example, the third party reporting regime requires states and territories to provide information on real property transfers, which may give rise to an income tax liability for example a net capital gain. [Schedule4, item 1, subsection 396-60(1)]
4.18 A transaction may relate only to a possible tax-related liability because either the Commissioner or the reporting entity (or perhaps both) may not have sufficient information about the tax affairs of the relevant entity being reported on to know whether an actual liability will arise. To continue the example above, the state or territory reporting on a real property transaction may not know whether a seller of the real property could claim the main residence exemption and reduce any income tax liability relating to the real property transfer to nil.
4.19 However, for transactions in relation to which market participants must report information to the Commissioner, the Commissioner may only require information related to identifying the parties to the transaction. This reflects the role of market participants in providing third party information, set out in more detail at paragraphs 4.64 and 4.65. [Schedule4, item 1, subsection 396-60(2)]
4.20 At this stage, most of the information collected under this regime will relate to income tax. However, as noted in paragraph 4.14, the legislative framework supporting this regime may be expanded in the future to collect information relating to all types of taxes that may give rise to a tax-related liability. Accordingly, the amendments adopt the concept of a tax-related liability, as defined in section 255-1, which includes GST, excise duty, various withholding taxes and administrative penalties. The full list of tax-related liabilities is contained in section 250-10.
4.21 In determining whether a possible tax-related liability arises, any exemption under a taxation law that may apply is also disregarded. This recognises that reporting entities may not know whether the entity they are reporting on is exempt from a taxation law. Requiring the reporting entity to find out this information would impose an unnecessary compliance burden. [Schedule4, item 1, paragraph 396-60(1)(a)]
4.22 An administrative penalty may apply under section 284-75 to any false or misleading statements made in reporting.
4.23 Where a reporter becomes aware of a material error in a report they have already given to the Commissioner, then the reporter must give the Commissioner a corrected report in the approved form no later than 28 days after the reporter became aware of the error. This is consistent with the existing obligations in the AIIR regime. [Schedule4, item 1, section 396-75]
Timing of reports
4.24 For pre-filling purposes, it is important that the Commissioner receives the information with sufficient time to process and pre-fill it into taxpayers' returns. However, this objective needs to be balanced against the compliance costs imposed by short timeframes.
4.25 Reporting timeframes have been made sufficiently flexible to accommodate this balance, allowing the Commissioner to make changes where appropriate. These changes can be made in relation to all entities required to report under the regime or, given the diverse nature of entities reporting under the regime, only in relation to specific entities or transactions or types of entities or transactions.
Frequency of reporting
4.26 The regime provides a default reporting period of a financial year, so each entity is required to report to the Commissioner on an annual basis in regards to any transactions that have occurred in the previous financial year. The Commissioner may change this period by legislative instrument. [Schedule4, item 1, paragraph 396-55(a)]
4.27 For most transactions, the Commissioner cannot change the period for transactions that happen before 1 July 2020 (see paragraphs 4.84 to 4.86). This provides certainty to reporters as the regime is being established, while ensuring that, in the future, the Commissioner has the flexibility to receive information in a timely manner as technology and systems evolve. Any legislative instruments changing the reporting period would be disallowable. [Schedule 4, item 27]
4.28 However, the Commissioner may vary the default reporting period by legislative instrument for reports by the states and territories on real property transfers, and for reports by ASIC. This recognises that the ATO has been closely working with these bodies in anticipation of facilitating more frequent reporting prior to 2020. [Schedule 4, item 27]
Dates for reporting
4.29 The regime provides for the report to be given to the Commissioner on or before the 31st day after the end of the reporting period. [Schedule4, item 1, subparagraph 396-55(b)(i)]
4.30 Since information is to be reported via an approved form, the Commissioner may defer the date for lodgement under section 388-55 without the need for a legislative instrument. This gives the Commissioner flexibility between receiving information in time for pre-filling, and the ability of reporters to collect and provide the information in that time. For example, the Commissioner may choose to extend the reporting date in situations where third party reporters would have significant compliance costs in providing information within 31 days after the end of the reporting period.
4.31 The Commissioner may also change the reporting date by legislative instrument. Again, these legislative instruments may be disallowed. [Schedule4, item 1, subparagraph 396-55(b)(ii)]
4.32 As with the ability to change reporting periods above at paragraphs 4.27 and 4.28, the Commissioner cannot change the date via legislative instrument for transactions that happen before 1 July 2020, other than real property transactions and reports by ASIC. [Schedule 4, item 27]
4.33 If the Commissioner does not modify the reporting dates, each entity is required to report by 31 July each year on transactions that happened during the previous financial year.
4.34 An administrative penalty under subsection 286-75(1) applies to a failure to give the report by the 31st day after the end of the reporting period or, if the Commissioner has changed the reporting date, by that date.
4.35 The Commissioner may exempt entities from their reporting obligations under the third party reporting regime. For example, the Commissioner may exempt a class or classes of entity from reporting information when the information is not necessary to assist the Commissioner. Alternatively, a particular entity may be exempted based on specific circumstances that may impact on that entity's ability to report in a particular year.
4.36 The Commissioner may also choose to exempt entities from reporting on specific classes of transactions.
4.37 The Commissioner may take a variety of circumstances into account when determining whether to exempt an entity or class of entity, including the compliance costs imposed on the entity, the availability of information and the Commissioner's ability to use the information.
Exemptions for particular entities
4.38 The Commissioner may exempt a particular entity from some or all of its reporting obligations through written notice. If an entity is dissatisfied with a decision made by the Commissioner either to give it a notice or not give it a notice, the entity may object against the decision under Part IVC of the TAA 1953. [Schedule 4, item 1, subsections 396-70(1) and (2)]
4.39 A notice exempting an entity from its reporting obligations is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003 because it is not legislative in character. [Schedule 4, item 1, subsection 396-70(3)]
4.40 The Commissioner may exempt a specified class of entities from some or all of their reporting obligations through legislative instrument. [Schedule 4, item 1, subsection 396-70(4)]
Exemption for wholesale clients
4.41 A reporting entity does not need to include information about certain transactions to the extent that the information relates to a party to the transaction who is not an individual and who is being provided a financial product or a financial service under the transaction as a wholesale client. These transactions are those in relation to which market participants, companies, trustees of unit trusts and trustees of other trusts must report (see paragraphs 4.64 to .74). [Schedule 4, item 1, section 396-65]
Transactions that entities must report
4.42 Many government entities provide grants for a range of purposes. These grants often constitute assessable income in the hands of recipients. The third party reporting regime requires government related entities at the Commonwealth, state and territory level to report information in relation to grants. [Schedule 4, item 1, table item 1 in section 396-55]
4.43 The entities subject to this reporting obligation are those captured by the definition of government related entity in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999. 'Government related entity' includes a broad range of government entities at the Commonwealth, state and territory level, entities established by the Commonwealth, a state or a territory, and local governing bodies.
4.44 Local governing bodies are exempt from the obligation to report grants because grants made by those entities are rarely assessable for income tax purposes.
4.45 Reporting entities need only provide information on grants made to entities that have an Australian Business Number under the A New Tax System (Australian Business Number) Act 1999. Grants paid to entities that do not have an Australian Business Number do not need to be reported, as they are usually of low value and are rarely assessable.
4.46 As noted in paragraph 4.18, reporters are not required to determine whether a grant would constitute assessable income or give rise to a tax-related liability in the hands of the recipient. Grants made by government related entities that are not exempted relate to a possible tax-related liability of the grant recipient, and so must be reported even though the grant may not ultimately be taxable in the hands of the recipient, or the recipient is exempt from taxation.
4.47 'Grant' is not defined in legislation and should take its ordinary meaning. Some factors that may indicate whether a payment constitutes a grant include:
- grants may be explicitly tied to a government policy or goal;
- grants may be disbursed on a one-off or longer term basis, but are not provided as ongoing, permanent funding;
- recipients are usually required to submit applications to receive grants;
- grants typically, but do not always, have conditions attached, such as reporting obligations or the requirement to include government logos on marketing materials; and
- unlike loans, grants usually do not have to be repaid.
4.48 Of note, the Commonwealth Grants Rules and Guidelines, an instrument issued by the Minister for Finance under section 105C of the Public Governance, Performance and Accountability Act 2013, provide a specific definition of grant as used by the Commonwealth Government.
4.49 The Government anticipates that the ATO will work together with relevant entities to meet their reporting obligations in the most efficient way possible. For example, reporting requirements under the Commonwealth Grants Rules and Guidelines may streamline the reporting process by enabling the Department of Finance to report grants to the Commissioner on behalf of other Commonwealth government related entities, potentially reducing duplicative reporting and administrative costs.
Consideration for services to government
4.50 Government entities provide consideration to suppliers, such as contractors or consultants, for the provision of a range of services. This consideration may give rise to taxable consequences for the supplier.
4.51 Commonwealth, state and territory entities that are government related entities, including local governing bodies, are required to report consideration provided for the supply of services. [Schedule 4, item 1, table item 2 in section 396-55]
4.52 Consideration includes any payment, or any act or forbearance, in connection with a supply of anything and any payment, or any act or forbearance, in response to or for the inducement of a supply of anything (as defined in section 9-15 of the A New Tax System (Goods and Services Tax) Act 1999). Usually consideration will be a monetary payment, but it may also include other forms of non-cash benefits and constructive payments.
4.53 Only consideration provided wholly or partly for a supply of services must be reported. Consideration provided solely for something other than services, or for a supply of services where the services are merely incidental to the provision of goods, do not need to be reported.
4.54 Consideration provided 'partly' for the supply of services includes consideration provided for both goods and services. A reporting entity is required to report the total benefit provided and should not separate out the proportion of the benefit that went towards the goods.
A local council orders 1700 black pens from an office supply company and pays an additional fee for delivery.
Delivery of the pens constitutes a service. However, since this service has been provided incidentally to the provision of the goods, it does not need to be reported.
Real property transfers
4.55 Transfers of real property may give rise to several different kinds of tax consequence. A common consequence of a transfer of real property is an income tax liability, based on a net capital gain. Transfers may also have consequences for GST.
4.56 Each state and territory is required to report information on all transfers of freehold or leasehold interests in real property situated in that state or territory to the Commissioner in the approved form. The approved form can include tax file numbers of parties to the transaction that have voluntarily provided their tax file number to the state or territory. States and territories may request the tax file number of a party to the transaction for the purpose of reporting on the transaction, and disclose any tax file numbers provided to the Commissioner. The request for and disclosure of tax file numbers by a state or territory is permitted by an exception to the offences of requesting and disclosing tax file numbers because the states and territories are requesting or disclosing the information to comply with a taxation law (see sections 8WA and 8WB of the TAA 1953). A state or territory is not required to report a party's tax file number to the Commissioner if the party has chosen not to provide this information. The Privacy (Tax File Number) Rule 2015, a legislative instrument issued under section 17 of the Privacy Act 1988 provides protection for the privacy of individuals. Individuals who consider that their tax file number information has been mishandled may make a complaint to the Information Commissioner. [Schedule 4, item 1, table item 3 in section 396-55 and subsections 396-60(1) and (3)]
4.57 Freehold and leasehold interests refer to the type of interest that the Crown has granted the relevant entity in the real property. A freehold interest is perpetual, while a leasehold interest is granted for a limited period of time. An entity holding a freehold interest in land would be colloquially considered to be the 'owner' of the land. An example of a leasehold interest is the 99 year leases granted by the Crown in the Australian Capital Territory.
Kathy decides to sell her rental property, which she holds under a freehold interest. She signs a contract to sell the property to James on 2 March 2017. James and Kathy settle on 20 April 2017. The sale is registered with her state's Land Titles Office, effecting a transfer of the freehold interest.
The relevant state is required to report information on this sale to the Commissioner after the financial year ending on 30 June 2017. This information must be in the approved form and provided within 31 days after the end of the financial year.
The Commissioner is able to use the information received from the state to pre-fill Kathy's tax return for the 2016-17 income year. Kathy can then review the information and make any necessary adjustments as she completes her tax return. The Commissioner may also use the information to conduct compliance and data-matching activities.
Transfers of shares in a company and units in a unit trust
4.58 Entities transferring shares in a company or units in a unit trust may incur an income tax liability based on a net capital gain. Tax liabilities may also be affected by other transactions, such as a demerger or in specie transfer. Reporting information on these types of transactions will assist in pre-filling tax returns and undertaking compliance activities.
4.59 The Commissioner may collect information on transactions that result in a change to the type, name or number of shares in a company or units in a unit trust held by an entity. This is intended to encompass a broad range of transactions that may either give rise to a tax-related liability or allow the Commissioner to trace the ownership of shares in a company or units in a unit trust until such time as a tax-related liability may arise.
4.60 Certain financial markets are required to report on transactions that have taken place on their market to ASIC under the market integrity rules.
4.61 Market integrity rules are rules made by ASIC under section 798G of the Corporations Act 2001 that, among other things, require certain financial markets to report information to ASIC on transactions that take place on their market. The rules also require market participants to provide information that assists identification of the person who provided instructions to place an order or enter into a transaction. [Schedule4, item 2, subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)]
4.62 ASIC must provide information collected under those rules to the Commissioner. Therefore, financial markets and market participants that report information to ASIC will not have to also report that information to the Commissioner. [Schedule 4, item 1, table item 4 in section 396-55]
4.63 Legislating this requirement for ASIC to provide information clarifies that the disclosure of this information to the Commissioner is permitted under subsection 127(2) of the Australian Securities and Investments Commission Act 2001, which authorises the disclosure of information as required or permitted by a law of the Commonwealth.
4.64 The information ASIC receives under the market integrity rules does not contain sufficient detail to identify the parties to each transaction. Information on the identity of each party is held by the entities making these trades, that is, the brokers allowed to directly participate in the market. These brokers are defined as participants under section 761A of the Corporations Act 2001 and, in relation to a financial market, are persons who are allowed to directly participate in a market under that market's operating rules.
4.65 To enable the Commissioner to identify the parties in each transaction, when a transaction involving a participant results in a change to the type, name or number of shares in a company or units in a unit trust held by another entity, the participant is required to report information to the Commissioner. Market participants only need to report on transactions that an Australian financial market must deliver to ASIC under the market integrity rules. [Schedule 4, item 1, table item 5 in section 396-55]
Companies listed on Australian financial markets
4.66 ASIC typically does not receive data on most transactions which take place otherwise than in the ordinary course of trading on an Australian financial market. This includes most off-market transfers and other transactions, such as demergers and in specie distributions. Since these transactions may also affect the income tax liabilities of entities holding the shares in a company or units in a unit trust in relation to which these transactions occur, companies listed on an Australian financial market are required to report on them.
4.67 These companies must report on transactions that result in a change to the type, name or number of shares in the company held by an entity. [Schedule 4, item 1, table item 6 in section 396-55]
4.68 To avoid imposing unnecessary compliance costs and duplication in reporting, companies only need to report on transactions that an Australian financial market is not required to report to ASIC under the market integrity rules (see paragraphs 4.60 to 4.63).
On 3 March 2018, Zahra instructs her broker, Koala Stockbroking Ltd, to buy 500 shares in Gumleaf Industries Ltd. Gumleaf Industries Ltd is listed on the Arboreal Securities Exchange. Assume the Arboreal Securities Exchange is required to deliver information on this transaction to ASIC under the market integrity rules. Once Koala Stockbroking Ltd completes the transaction on Zahra's behalf, the Arboreal Securities Exchange would then report the transaction to ASIC under the market integrity rules.
Under the amendments made by this Bill, ASIC would report the transaction to the Commissioner. The Commissioner would also receive identity information from Koala Stockbroking Ltd, enabling the transaction information to be attributed to Zahra. Gumleaf Industries Ltd would not need to report the transaction to the Commissioner because it has already been reported under the market integrity rules.
Zahra decides to sell the shares on 30 September 2020. Koala Stockbroking Ltd completes the transaction and the same reporting requirements arise. Arboreal Securities Exchange reports the transaction to ASIC under the market integrity rules, who in turn reports it to the Commissioner. Koala Stockbroking Ltd would also report information to the Commissioner so the transaction can be matched to Zahra. Gumleaf Industries Ltd would not need to report the transaction.
The information received by the Commissioner indicates that Zahra has made a capital gain. The Commissioner can pre-fill this information in Zahra's tax return for the 2020-21 income year. Zahra can then review the information and make any necessary adjustments as she completes her tax return. The Commissioner may also use the information for compliance and data-matching activities.
4.69 ASIC does not receive data on transactions relating to units of unit trusts that take place outside of Australian financial markets. Therefore, trustees of unit trusts must report on transactions that result in a change to the type, name or number of units in the unit trust. [Schedule 4, item 1, table item 7 in section 396-55]
4.70 Similarly to the reporting required of companies, trustees of unit trusts only need to report on transactions that an Australian financial market is not required to report to ASIC under the market integrity rules (see paragraphs 4.60 to 4.63).
4.71 Trusts are used to separate the legal and beneficial ownership of assets. Legal ownership of a trust asset remains with the trustee; however, one or more beneficiaries may have beneficial ownership of that asset. Some trustees may include licensed custodians, financial advisors and family members.
4.72 In some circumstances, the income tax laws provide for the tax consequences relating to a trust asset to pass to a beneficiary rather than a trustee where the beneficiary has beneficial ownership of that asset. This occurs under the capital gains tax (CGT) regime, which frequently gives rise to tax consequences arising from transactions involving shares in a company and units in a unit trust.
4.73 Where an asset of the trust is a CGT asset (as defined in section 108-5 of the ITAA 1997), CGT consequences relating to that asset are attributed to a beneficiary of the trust where that beneficiary is absolutely entitled to the asset. However, in general, the reporting by other entities under these amendments relates to the legal owner of the securities, not the beneficial owner.
4.74 Trustees of trusts (other than unit trusts) that do not lodge a trust income tax return are required to report on any transaction that results in a change to the type, name or number of any shares in a company or units in a unit trust that are held as assets of the trust and to which one or more entities are absolutely entitled as beneficiaries of the trust. This allows the Commissioner to attribute CGT consequences to a beneficiary who is absolutely entitled to an asset of the trust. [Schedule 4, item 1, table item 8 in section 396-55]
Mateo uses Gumtree Security Services, a custodian acting under an Australian Financial Services Licence, to purchases shares in Burl Design Ltd. Gumtree is recorded as the legal owner of the shares on the Arboreal Securities Exchange, and holds the shares in trust for Mateo. Gumtree did not lodge an income tax return for the trust.
Mateo is absolutely entitled to the shares at all times since the purchase.
As a trustee of a trust with an absolutely entitled beneficiary, Gumtree Security Services is required to report on the purchase transaction to the Commissioner because it results in a change to the number of shares in Burl Design Ltd held in the trust.
Without this information, the Commissioner would only be aware of the transaction information reported by the Arboreal Securities Exchange to ASIC, which lists Gumtree Security Services as the owner of the shares.
Assuming the same facts as Example 4.4 above, on 4 February 2018 Burl Design Ltd merges with Wombat Holes Ltd to become Womburl Ltd. As a part of the merger, the shares in Burl Design Ltd held by Gumtree Security Services are replaced with shares in Womburl Ltd. This merger caused a change in the number of shares in Burl Design Ltd and Womburl Ltd held by Gumtree Security Services for Mateo.
These changes would not be reported to ASIC by the Arboreal Securities Exchange under the market integrity rules because the transactions were not made on an Australian financial market. Therefore, both Burl Design Ltd and Womburl Ltd would be required to report to the Commissioner on the share transactions resulting from the merger.
As trustee of a trust with an absolutely entitled beneficiary, Gumtree Security Services would also have to report to the Commissioner on the share transactions resulting from the merger.
Business transactions made through payment systems
4.75 Amounts that a customer or client pays a business for a good or service typically give rise to tax consequences for that business. To allow the Commissioner to collect third party information on these types of transactions, administrators of payment systems are required to report information to the Commissioner about transactions facilitated on behalf of an entity, through a payment system they administer. Administrators only need to report where they reasonably believe that the transactions are for the purpose of a business carried on by the entity. This is limited to information on transactions involving receipts of payments, refunds and cash out facilitated through the payment system. [Schedule 4, item 1, table item 9 in section 396-55]
4.76 In recognition of the continuing evolution of the banking sector, this reporting requirement applies to all administrators of payment systems, providing a level playing field between traditional and emerging methods of doing business in Australia.
4.77 Not all payments facilitated by a payment system give rise to potential tax consequences. For example, transactions made by individuals in their personal capacity would not normally give rise to an income tax liability for that individual.
4.78 Therefore, an administrator of a payment system is only required to report on transactions facilitated on behalf of an entity where it reasonably believes the transactions are for the purposes of a business carried on by the entity. For example, an administrator of a payment system may, in the usual course of facilitating a transaction, hold or collect information which indicates the entity holding an account is a business, and therefore reasonably believe that transactions connected to such an account are for the purposes of a business carried on by the entity. Such information indicating an entity is a business could include the fact that the entity has provided its Australian Business Number, or holds an account which is treated by the administrator's own business practices as a business type account, or that the entity's account has a high annual turnover.
4.79 This test is designed to capture payments that are likely to have tax consequences. However, administrators of payment systems are not required to determine whether an entity's transactions have tax consequences. Nor are administrators of payment systems required to change their usual business practices to collect additional information to that collected in the usual course of facilitating a transaction, which would enable it to positively determine that transactions are for the purposes of a business carried on by the entity.
4.80 Where appropriate, the Commissioner may further refine which transactions are to be reported through either the power to exempt entities or transactions (see paragraphs 4.35 to 4.40) or the use of approved forms.
Jane decides to start her own baking business. As part of setting up the business, she establishes a merchant account with a bank. This allows her to receive credit and debit card payments from customers in store and online. Jane also sets up a business account with an online payment service provider to allow an alternative payment option for her customers. As both accounts are of a kind usually marketed at and utilised by businesses, the bank and the online payment service provider would reasonably believe these transactions are for the purposes of a business carried on by Jane.
The bank and the online payment service provider will both report information on transactions facilitated by each payment system for Jane's business to the Commissioner. This will include totals on sales transactions involving receipts of payments, refunds and cash backs.
Jane also holds a personal account with the bank. She has not provided her Australian Business Number in connection with this account. The account has low annual turnover and is of a kind marketed at and utilised by individuals. The bank reasonably believes that the transactions associated with this account are not for the purposes of Jane's business and therefore does not report these transactions to the Commissioner. The bank has met its reporting obligations.
Michael's personal trainer, Chip, receives his monthly payment through an ongoing direct debit arrangement. Chip has an account with a third party payment system. He uses that payment system to process the direct debit payments for all his customers. This account has an annual turnover of $80,000, made up of regular and consistent payments from a range of sources. This leads the administrator of that payment system to reasonably believe these transactions are for the purposes of a business carried on by Chip and therefore report information on those transactions to the Commissioner.
4.81 Administrators of payment systems are only required to report on electronic transactions, such as those made by credit and debit cards, and other online payment methods. This does not include payments made by cash or cheque.
4.82 This Schedule makes consequential amendments to define the Australian Securities and Investments Commission as ASIC, and standardise that definition throughout Schedule 1 to the TAA 1953 and the Tax Agent Services Act 2009. [Schedule 4, items 2 to 15 and 22 to 26, paragraphs 20-30(2)(b) and 40-20(3)(b), subparagraphs 60-125(8)(c)(iv) and 60-125(8)(d)(iii) and subsection 70-40(3A) of the Tax Agent Services Act 2009, subparagraph 12-400(3)(b)(ii), paragraphs 355-70(4)(l) and 355-70(7)(d), subsections 12-403(3), 355-65(3) and 355-65(4) and section 269-50 of Schedule 1 to the TAA 1953, and section 995-1 of the ITAA 1997]
4.83 The title of Part 5-25 is also updated to reflect that third party reporting places obligations on entities relating to other taxpayers. In addition, Division 396 is renamed as 'Third party reporting' with the provisions relating to FATCA, currently comprising Division 396, moved into a new subdivision in Division 396 (Subdivision 396-A). [Schedule 4, items 16 to 21, subsection 396-20(1), section 396-1, Subdivision 396-A, Division 396 and Part 5-25]
4.84 Third party reporting obligations in relation to transfers of real property (reported by states and territories) and ASIC market integrity data (reported by ASIC) apply to transactions happening on or after 1 July 2016. All other third party reporting obligations apply to transactions happening on or after 1 July 2017. [Schedule 4, item 27]
4.85 The Commissioner may change the reporting period and reporting dates by legislative instrument. This applies to transfers of real property (reported by states and territories) and ASIC market integrity data (reported by ASIC) from 1 July 2017. For all other transactions, it applies from 1 July 2020. More detail is at paragraphs 4.24 to 4.34. [Schedule 4, item 27]
4.86 The other amendments made by the Schedule apply from Royal Assent.
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Third party reporting
4.87 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.
4.88 Schedule 4 to this Bill amends Schedule 1 to the Taxation Administration Act 1953 to improve taxpayer compliance by increasing the information reported to the Commissioner of Taxation (Commissioner) by a range of third parties. The Schedule creates a new reporting regime requiring third parties to report on the following transactions:
- payments of government grants;
- consideration provided for services to government entities;
- transfers of real property;
- transfers of shares;
- transfers of units in unit trusts; and
- business transactions made through payment systems.
Human rights implications
4.89 The amendments made by this Schedule engage the prohibition on arbitrary or unlawful interference with privacy contained in Article 17 of the International Covenant on Civil and Political Rights (ICCPR), as third parties will need to provide a range of personal information to the Commissioner that they collect in the ordinary course of business.
4.90 These reporting obligations are compatible with the prohibition, as they are neither arbitrary nor unlawful. In addition, they are aimed at a legitimate objective of minimising the overall compliance burden on taxpayers and are an effective and proportionate means of achieving that objective by requiring only the minimum amount of information necessary to identify relevant taxpayers and transactions.
4.91 The United Nations Human Rights Committee has stated, in their General Comment No. 16, that:
- 'unlawful means that no interference can take place except in cases envisaged by the law. Interference authorized by States can only take place on the basis of law, which must itself comply with the provisions, aims and objectives of the Covenant [the ICCPR]'; and
- 'the concept of arbitrariness is intended to guarantee that even interference provided for by law should be in accordance with the provisions, aims and objectives of the Covenant and should be, in any event, reasonable in the particular circumstances'. 
4.92 The objective of third party reporting is to reduce the overall compliance burden on taxpayers by gathering information regarding their potential tax-related liabilities from entities that can provide it to the Commissioner at an overall lower cost than taxpayers themselves. The ATO can then use this information to pre-fill the tax returns of those taxpayers and other compliance purposes.
4.93 Legislative reporting regimes, such as third party reporting, provide more certainty and consistency of treatment for entities than the alternative, where the Commissioner collects information under his or her general information gathering powers on an ad-hoc basis. The information to be reported by entities would typically be limited to that information they already hold having collected it in the ordinary course of their business. Taxpayer information held by the ATO is subject to strict confidentiality rules that prohibit tax officials from making records or disclosing this information unless a specific legislative exemption applies.
4.94 These amendments specify that the Commissioner may only require third parties to report information that relates to the identification, collection or recovery of a possible tax-related liability as well as the identity of the taxpayer to which the tax-related liability may arise. The amendments also allow the ATO to exempt entities from reporting where, for example, the Commissioner does not expect to be able to productively use the information or where reporting the information places a disproportionately high compliance costs on the third party relative to the benefit of providing the information to the ATO. This is consistent with the broader objective of the third party reporting regime to reduce overall compliance costs.
4.95 The Commissioner also has the flexibility to vary the timeframes for reporting, to achieve a balance between the needs of the Commissioner to receive the information with sufficient time to process and pre-fill it into taxpayers' returns and any increase in compliance costs that short timeframes may impose on entities reporting under the regime.
4.96 This Bill is consistent with Article 17 of the ICCPR on the basis that its engagement of the right to privacy will neither be unlawful (including by virtue of the amendments to Australia's taxation legislation set out in the Bill) nor arbitrary. To this extent, the Bill complies with the provisions, aims and objectives of the ICCPR.