House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer and Minister for Financial Services, the Hon Stephen Jones MP)

Glossary

This Explanatory Memorandum uses the following abbreviations and acronyms.

General outline and financial impact

Schedule 1 - Build to rent developments

Outline

Schedule 1 to the Bill aims to increase the supply of rental housing, including affordable tenancies, by improving incentives for institutional investors to support the construction of new BTR developments. Schedule 1 to the Bill increases the capital works deduction rate from 2.5 per cent to 4 per cent per year for eligible new BTR developments. Schedule 1 to the Bill also reduces the final withholding tax rate on eligible fund payments from MIT investments for eligible new BTR developments from 30 per cent to 15 per cent.

The Imposition Bill ensures the integrity of these tax concessions by providing for the levy of a misuse tax in the event that an entity improperly claims one or both of the tax concessions.

Date of effect

The Imposition Bill commences on the first 1 January, 1 April, 1 July or 1 October to occur after the day that Bill receives Royal Assent.

Schedule 1 to the Bill commences at the same time as the Imposition Bill. However, the provisions of the Bill do not commence at all if the Imposition Bill does not commence.

The amendments in Schedule 1 to the Bill (other than the amendments to section 12-450 in Schedule 1 to the TAA 1953) apply to capital works that commenced after 7:30 pm, by legal time in the Australian Capital Territory, on 9 May 2023. The amendment of section 12-450 in Schedule 1 to the TAA 1953 made by Schedule 1 to the Bill apply to an amount that is referrable to a payment of rental income made on or after 1 July 2024; or an amount that is, or is attributable, to a capital gain, or part of a capital gain, from a CGT event that happens on or after 1 July 2024.

Proposal announced

The Imposition Bill and Schedule 1 to the Bill fully implement the 'Housing (Build-To-Rent Developments) – accelerating tax deductions and reducing managed investment trust withholding tax rate' measure in the 2023-2024 Budget.

Financial impact

Schedule 1 to the Bill is estimated to decrease receipts by $30.0 million.

All figures in this table represent amounts in $m, rounded to the nearest tenth of a million each year.

Impact Analysis

The Impact Analysis addressing the reducing managed investment trust withholding tax rate aspect of Schedule 1 has been included in Attachment 1.

Human rights implications

Schedule 1 to the Bill raises human rights issues and the Imposition Bill does not raise any human right issues. See the Statement of Compatibility with Human Rights — Chapter 8.

Compliance cost impact

This measure is expected to result in a small overall compliance cost impact, comprising a small implementation impact and a small increase in on-going costs.

Schedule 2 – Buy Now, Pay Later

Outline

Schedule 2 to the Bill extends the application of the Credit Code to BNPL contracts and establishes LCCCs as a new category of regulated credit. LCCCs are continuing or non-continuing credit contracts for providing credit to consumers on a low cost basis. Most BNPL contracts will be regulated as LCCCs. Schedule 2 to the Bill amends the Credit Act to establish an optional modified RLO framework available to LCCCs. Schedule 2 to the Bill also creates new regulation-making powers in respect of LCCCs. The overarching aim of this measure is to provide appropriate and proportionate protections to consumers who enter LCCCs, while maintaining the benefits of consumer access to these kinds of credit products.

Date of effect

Part 1 of Schedule 2 to the Bill commences the day after Royal Assent.

Parts 2 to 10 of Schedule 2 to the Bill commence on a single day to be fixed by Proclamation. However, if the provisions do not commence within 6 months from the day of receiving Royal Assent, they commence on the day after that 6-month period.

Proposal announced

The Government undertook public consultation on a potential regulatory framework for BNPL from 21 November 2022 to 23 December 2022. The amendments in Schedule 2 to the Bill were announced by the Assistant Treasurer on 22 May 2023 in an address to the Responsible Lending & Borrowing Summit.

Financial impact

Schedule 2 to the Bill will have no or minimal financial impact.

Impact Analysis

The Impact Analysis relating to Schedule 2 to the Bill has been included at Attachment 2.

Human rights implications

Schedule 2 to the Bill does not raise any human rights issues because, to the extent that it may limit human rights, those limitations are reasonable, necessary and proportionate. See Statement of Compatibility with Human Rights — Chapter 8.

Compliance cost impact

Schedule 2 to the Bill is expected to have a moderate impact on compliance costs.

Schedule 3 — Medicare levy exemption for lump sum payments

Outline

Schedule 3 to the Bill amends the Medicare Levy Act to make changes to how certain eligible lump sum payments in arrears are assessed for the purposes of the Medicare levy.

The changes ensure low-income taxpayers are not denied concessional Medicare levy treatment solely as a result of receiving an eligible lump sum payment, for example as compensation for past underpaid wages. This amendment seeks to put eligible recipients of lump sum payments in arrears into a similar position that they would have been had they been paid correctly.

Date of effect

Schedule 3 to the Bill commences on the first 1 January, 1 April, 1 July or 1 October to occur after the date the Bill receives Royal Assent.

Proposal announced

Schedule 3 to the Bill implements the measure Personal Income Tax – exempting lump sum payments in arrears from the Medicare levy from the 2023-24 Budget.

Financial impact

This measure is estimated to decrease taxation receipts by $2.0 million over the 5 years from 2022–23.

All figures in this table represent amounts in $ million.

Human rights implications

Schedule 3 to the Bill is compatible with human rights. See Statement of Compatibility with Human Rights — Chapter 8.

Compliance cost impact

Low.

Schedule 4 — Multinational tax transparency – country by country reporting

Outline

Schedule 4 to the Bill implements Australia's public CBC reporting regime by amending the TAA to require certain large multinational enterprises (defined as CBC reporting parents) to publish selected tax information on a CBC basis for specified jurisdictions, and on either a CBC basis or an aggregated basis for the rest of the world. The information is to be published on an Australian government website, with publication facilitated by the Commissioner. The objective of these amendments is to improve information flows to help the public, including investors, to compare entity tax disclosures, to better assess whether an entity's economic presence in a jurisdiction aligns with the amount of tax they pay in that jurisdiction.

Date of effect

Schedule 4 to the Bill will commence on the first 1 January, 1 April, 1 July or 1 October to occur after Royal Assent. The amendments apply to reporting periods commencing on or after 1 July 2024.

Proposal announced

Schedule 4 to the Bill partially implements the 'Multinational Tax Integrity Package – improved tax transparency' measure from the October 2022-23 Budget.

Financial impact

This measure is estimated to have an unquantifiable impact on receipts.

Impact Analysis

The Impact Analysis relating to the amendments in Schedule 4 to the Bill has been included in Attachment 3.

Human rights implications

Schedule 4 to the Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 8.

Compliance cost impact

The measure is expected to have an initial compliance cost as affected entities familiarise themselves with the new reporting requirements. However, the design approach adopted is intended to minimise the cumulative cost on tax entities by aligning, to the extent possible, with existing reporting and governance processes. The compliance cost is expected to decrease over time as it becomes part of standard reporting requirements.

Schedule 5 – Deductible gift recipients

Outline

Schedule 5 to the Bill amends the ITAA 1997 to list as deductible gift recipients:

•

Australian Democracy Network Ltd; and

•

Australian Science Media Centre Incorporated; and

•

Centre for Australian Progress Ltd; and

•

Combatting Antisemitism Fund Limited; and

•

Ethnic Business Awards Foundation Limited; and

•

International Campaign to Abolish Nuclear Weapons, Australia Inc.; and

•

Ourschool Ltd; and

•

Susan McKinnon Charitable Foundation Ltd; and

•

Tasmanian Leaders Inc.; and

•

The Hillview Foundation Australia Limited.

Date of effect

The amendments in Schedule 5 to the Bill apply to gifts made in the period on or after:

•

1 July 2023 and on or before 30 June 2028 to Susan McKinnon Charitable Foundation Ltd; and

•

1 July 2024 and on or before 30 June 2029 to all other entities listed in the Schedule.

Proposal announced

Schedule 5 to the Bill partially implements:

•

the Philanthropy – updates to the list of specifically listed deductible gift recipients measure in the 2023-24 Budget;

•

the Philanthropy – updates to the list of specifically listed deductible gift recipients measure in the 2023-24 MYEFO; and

•

the Philanthropy – updates to the list of specifically listed deductible gift recipients measure in the 2024-25 Budget.

Financial impact

Schedule 5 to the Bill is estimated to decrease the underlying cash balance by $4.3 million over the five years from 2023-24.

All figures in this table represent amounts in $m.

Human rights implications

Schedule 5 to the Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 8.

Compliance cost impact

The measure has a low compliance cost impact.

Schedule 6 - National skills and workforce development payments

Outline

Schedule 6 to the Bill amends the FFR Act to support Commonwealth payments to the States in accordance with the National Skills Agreement and any successor agreements.

Date of effect

Schedule 6 to the Bill commences the day after Royal Assent. The amendments apply in relation to the 2024-25 financial year and later financial years. The amendments provide for transitional arrangements in relation to the 2023-24 and 2024-25 financial years.

Proposal announced

Schedule 6 to the Bill supports the National Skills Agreement which was announced on 17 October 2023.

Financial impact

Nil.

Human rights implications

Schedule 6 to the Bill raises human rights issues. See Statement of Compatibility with Human Rights — Chapter 8.

Compliance cost impact

Nil.

Schedule 7 - $20,000 instant asset write-off for small business entities

Outline

Schedule 7 to the Bill amends the IT(TP) Act to extend the $20,000 instant asset write-off by 12 months until 30 June 2025. This will allow small businesses (with an aggregated annual turnover of less than $10 million) to immediately deduct the full cost of eligible depreciating assets costing less than $20,000 that are first used or installed ready for use on or before 30 June 2025. The extension will improve cash flow and reduce compliance costs for small businesses.

Date of effect

Schedule 7 to the Bill commences on the later of:

•

the first 1 January, 1 April, 1 July or 1 October to occur after the day the Bill receives the Royal Assent; and

•

immediately after the commencement of Schedule 1 to the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2024.

However, Schedule 7 to the Bill does not commence at all if Schedule 1 to the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2024 does not commence.

Proposal announced

Schedule 7 to the Bill fully implements the 'Small Business Support – $20,000 instant asset write-off' measure in the 2024-25 Budget.

Financial impact

Schedule 7 to the Bill is estimated to decrease receipts by $290.0 million over the five years from 2023-24.

All figures in this table represent amounts in $m.

Human rights implications

Schedule 7 to the Bill does not raise human rights issues. See Statement of Compatibility with Human Rights — Chapter 8.

Compliance cost impact

Schedule 7 to the Bill is expected to have a minimal regulatory impact.

Chapter 1: Build to rent developments

Outline of chapter

1.1 Schedule 1 to the Bill amends the ITAA 1997, TAA 1953, and ITAA 1936 to improve incentives for investors to invest in new BTR developments by:

•

increasing the capital works deduction rate from 2.5 per cent to 4 per cent per year; and

•

reducing the final withholding tax rate on eligible fund payments (distributions of rental income and capital gains) from eligible MIT investments from 30 per cent to 15 per cent with application from 1 July 2024.

1.2 Schedule 1 to the Bill provides that to access one or both concessions the BTR development must meet the following eligibility criteria:

•

the development's construction commenced after 7:30PM, by legal time in the Australian Capital Territory, on 9 May 2023;

•

the development consists of 50 or more residential dwellings made available for rent to the general public;

•

all dwellings in the development (and common areas that are part of the BTR development) continue to be owned together by a single entity, at any one time, for at least 15 consecutive years (although the BTR development can be sold to another single entity during the period and remain eligible for the concessions);

•

dwellings in the BTR development must be available for lease terms of at least three years (although a tenant can request a shorter period); and

•

at least 10 per cent of the dwellings are available as affordable tenancies.

1.3 The Imposition Bill imposes a misuse tax when one or both tax concessions are claimed in circumstances where they are not available due to BTR development ineligibility.

Context of amendments

1.4 According to Australian Bureau of Statistics Census data for 2011, 2016 and 2021, there is a long-term trend increase of Australians renting and a decline in home ownership. Incentivising construction of new BTR developments has the potential to increase rental supply at scale at a time when there is an acute shortage of new rental stock.

1.5 BTR developments are multi-unit buildings where the units, instead of being sold, are typically rented out through a single management entity. BTR is an established practice in the United States of America and the United Kingdom. BTR is still a nascent industry in Australia, meaning there is significant scope for BTR developments to contribute to increasing rental housing supply.

Summary of new law

1.6 Schedule 1 to the Bill makes amendments to the ITAA 1936, ITAA 1997 and TAA 1953.

1.7 To encourage investment and construction in BTR developments, Schedule 1 to the Bill:

•

increases the rate of the capital works tax deduction from 2.5 per cent per year to 4 per cent per year for active BTR developments; and

•

reduces the final withholding tax rate on eligible fund payments (distributions of rental income and capital gains) from eligible MITs for active BTR developments from 30 per cent to 15 per cent with application from 1 July 2024.

1.8 The creation of new BTR dwellings will expand Australia's rental housing supply.

1.9 These tax benefits only apply to BTR developments that remain continuously active for the 15-year compliance period. If a BTR tax concession is claimed for a particular year, and the development subsequently becomes ineligible (during the 15-year compliance period), then the tax benefit is clawed back. The 15 per cent reduced MIT final withholding tax rate can continue to apply beyond the 15-year compliance period as long as a BTR development meets the eligibility criteria.

1.10 Schedule 1 to the Bill introduces a specific reporting mechanism to enable the Commissioner to receive information from entities participating in active BTR developments.

Comparison of key features of new law and current law

Table 1.1 Comparison of new law and current law

Detailed explanation of new law

1.11 Schedule 1 to the Bill amends the ITAA 1936, ITAA 1997 and the TAA 1953 to implement improved incentives for investors to invest in new BTR developments. All references to Schedule 1 refer to Schedule 1 to the Bill.

1.12 The Imposition Bill implements the BTR development misuse tax to prevent abuse of the system.

Active build-to-rent developments

1.13 A BTR development will be an active BTR development if it fulfils the following conditions:

•

the BTR development's construction commenced after 7:30PM, by legal time in the Australian Capital Territory, on 9 May 2023;

•

the BTR development consists of 50 or more dwellings made available to the public to be tenanted by way of lease or made available to the public and tenanted as a result of being made available as such;

•

all of the dwellings in the BTR development (and common areas that are part of the development) continue to be directly owned together by a single entity, at any one time, for at least 15 years;

•

dwellings in the BTR development must be available for lease terms of at least three years (although the tenant can request a shorter term); and

•

at least 10 per cent of the dwellings in the BTR development must be affordable tenancies. [Schedule 1 to the Bill, items 9 and 25, sections 43-152 and 43-153 of the ITAA 1997]

1.14 There are additional criteria that relate to the supply of affordable tenancies in a BTR development. These are discussed at paragraphs 1.52 to 1.65 of this Explanatory Memorandum below.

1.15 A BTR development will cease to be an active BTR development if it fails to meet any of these criteria during the 15-year BTR compliance period, including the criteria that relate to affordable tenancies. As the concept of 'cease' is tied to the compliance period, an active BTR development does not cease to be an active BTR development after the compliance period. However, the ability to access the tax concessions may end in certain circumstances (see paragraphs 1.112 to 1.123 below). [Schedule 1 to the Bill, item 9, subsection 43-152(4) of the ITAA 1997]

Commencement of construction

1.16 For a BTR development to be an active BTR development and eligible for the concessional tax treatment, its construction must have commenced after 7:30 PM, by legal time in the Australian Capital Territory, on 9 May 2023. [Schedule 1 to the Bill, item 25]

Example 1.1 – Pre and post 9 May 2023 developments

An entity constructs a BTR development project in two stages, with each stage involving the construction of 50 dwellings in two separate buildings, and each building complex having common areas that can only be accessed and used for the benefit of their tenants.

Construction for the dwellings and common areas in the first building commenced before 9 May 2023, such that the 50 dwellings and the common areas in this building cannot be an active BTR development.

Construction for the 50 dwellings and common areas in the second building commenced on 1 June 2023. The commencement of construction eligibility requirement is satisfied as construction for the second building commenced after 7:30 PM, by legal time in the Australian Capital Territory, on 9 May 2023. The dwellings and common areas in the second building (BTR development) can form an active BTR development on and after the first day on which the BTR development satisfies the eligibility criteria to be an active BTR development.

Example 1.2 – Post 9 May 2023 development

An entity owns an empty warehouse and converts it into a BTR development with 100 dwellings. The refurbishments to convert the warehouse into the BTR development begin on 1 June 2024, satisfying the eligibility condition in relation to the commencement of construction. The dwellings in the BTR development can form an active BTR development on and after the first day on which the BTR development satisfies the eligibility criteria to be an active BTR development.

Commencement of being an active BTR development

1.17 The dwellings in a BTR development and common areas for those dwellings will commence to be an active BTR development on and after the first day on which the BTR development satisfies the eligibility criteria noted in paragraph 1.13 of this Explanatory Memorandum, and the single entity owner of the dwellings and common areas chooses to form a BTR development. [Schedule 1 to the Bill, item 9, subsection 43-152(1) of the ITAA 1997]

1.18 To make the choice to form a BTR development, the entity must make the choice in the approved form (the form approved in writing by the Commissioner) and provide it to the Commissioner. [Schedule 1 to the Bill, item 9, subsection 43-152(6) of the ITAA 1997]

1.19 The choice is taken to be made on the day nominated by the entity in the approved form provided to the Commissioner, subject the Commissioner receiving the approved form before the nominated day. Otherwise, the choice is taken to be made on the day the Commissioner receives the approved form. For example, if the entity does not nominate a day in the approved form or the entity nominates a day that is before the day the Commissioner receives the approved form, then the choice is treated as being made on the day the Commissioner received the approved form. [Schedule 1 to the Bill, item 9, subsection 43-152(7) of the ITAA 1997]

1.20 Where there is an active BTR development, and the entity has another 50 or more dwellings that satisfy the eligibility criteria noted in paragraph 1.13 of this Explanatory Memorandum, there are two options available to the entity: the entity could expand the existing active BTR development; or the entity could create a separate active BTR development in addition to the existing active BTR development.

1.21 For illustrative purposes, this could arise in the case where a building with 110 BTR dwellings is being constructed in multiple stages, with half of the dwellings made available in the first stage and the remaining being made available in the second stage.

1.22 Where the entity decides to create a separate active BTR development, the 50 or more dwellings (that will be within the new separate active BTR development) must satisfy the eligibility criteria noted in paragraph 1.13 of this Explanatory Memorandum, and the entity must choose to form a BTR development and provide this choice to the Commissioner in the approved form. [Schedule 1 to the Bill, item 9, subsection 43-152(2) of the ITAA 1997]

1.23 Where the entity decides to expand the existing BTR development, the 50 or more new dwellings (that will be added to the existing BTR development) must satisfy the eligibility criteria noted in paragraph 1.13 of this Explanatory Memorandum, and the entity must choose to form part of the existing active BTR development and provide this choice to the Commissioner in the approved form. [Schedule 1 to the Bill, item 9, subsection 43-152(3) of the ITAA 1997]

Active BTR development area

1.24 Active BTR developments include new developments as well as alterations and structural improvements that re-purpose an existing building into BTR (for example, the conversion of a warehouse to BTR apartments).

1.25 If a new building was initially commenced as a build-to-sell development but converted to a BTR development during construction, it can be an active BTR development.

1.26 An active BTR development area refers to the part of a building consisting of the dwellings in the active BTR development and the common areas for those dwellings. [Schedule 1 to the Bill, item 9, subsection 43-151(1) of the ITAA 1997]

1.27 An active BTR development is a BTR development that has commenced and not ceased. [Schedule 1 to the Bill, item 9, subsection 43-151(2) of the ITAA 1997]

1.28 The active BTR development area can be part of a building. For example, if the active BTR development area represents 90 per cent of a building's floorspace, the development proponent can claim the MIT withholding tax concession in respect of 90 per cent of the rental income attributable to that building's entire floor area. This 90 per cent of the entire rental income would represent the amount of rental income derived from BTR dwellings within the building and is therefore subject to the MIT withholding tax concession. [Schedule 1 to the Bill, item 9, section 43-153 of the ITAA 1997]

1.29 There can also be two or more active BTR developments that are part of a building. In the case of two active BTR developments being part of a building, there will be two active BTR development areas that correlate to each of the active BTR developments and the common areas for the relevant dwellings. Each active BTR development will be subject to its own compliance period and adherence to the eligibility criteria noted in paragraph 1.13 of this Explanatory Memorandum. [Schedule 1 to the Bill, item 9, subsection 43-153(1) of the ITAA 1997]

1.30 A BTR development can also consist of more than one building on the same or adjacent land. For example, if there are two towers on one plot of land, and both are BTR, the two towers combined would be considered a single BTR development. In this circumstance, eligibility for the tax concessions can be met if the structures meet the eligibility criteria in aggregate. In other words, one of the structures can satisfy more of the eligibility criteria allowing the other to meet less of the eligibility criteria. So long as between the structures the eligibility criteria are met, the BTR development is considered an active BTR development. [Schedule 1 to the Bill, item 9, section 43-154A of the ITAA 1997]

Number of dwellings

1.31 The BTR development must consist of at least 50 dwellings that are made available for rent to the public.

1.32 To avoid doubt, a dwelling in a BTR development cannot be a dwelling in a retirement village or student accommodation. This is because the dwellings must be made available for rent to the public and tenanted as a result of being made available to the public. Dwellings in a retirement village or student accommodation are only available to a limited subset of the public. [Schedule 1, item 9, paragraph 43-153(1)(a) of the ITAA 1997]

1.33 'Dwelling' has the same meaning as it has in section 118-115 of the ITAA 1997 which provides that a dwelling includes:

•

a unit of accommodation that:

-

is a building or is contained in a building; and

-

consists wholly or mainly of residential accommodation; and

•

a unit of accommodation that is a caravan, houseboat, or other mobile home; and

•

any land immediately under the unit of accommodation, however, does not include any land adjacent to a building.

1.34 Some scenarios may arise during the 15-year period where the BTR development does not meet this eligibility requirement (i.e., less than 50 dwellings either rented or available for rent). For instance, some dwellings may require renovation or repairs to be available for lease (for example, as a result of fire damage). Dwellings can continue to be considered as used as rentals or available for rent:

•

when dwellings are not being used as rentals or made available for rent because of the construction of an extension, alteration or improvement; or the making of a repair; and

•

it reasonable to expect the dwellings to be used as rentals for lease terms of at least three years or made available for rent for lease terms of at least three years once the construction or repairs are completed. [Schedule 1 to the Bill, item 9, subsection 43-153(6) of the ITAA 1997]

1.35 If new dwellings are added to a building which is an active BTR development, where the combined BTR development satisfies the requirements for an active BTR development, the existing active BTR development expands to comprise the dwellings of the existing development and the new dwellings. For the new dwellings to form part of the existing active BTR development, the entity must choose that the new dwellings form part of the existing active BTR development and provide this choice to the Commissioner in the approved form. The 15-year compliance period starts afresh for the new dwellings (commencing on the day on which the new dwellings are added to the existing active BTR development), but the existing dwellings in the BTR development are still subject to the original 15-year compliance period (which commenced on the day on which the development became an active BTR development). [Schedule 1 to the Bill, item 9, subsections 43-152(3), (5), (6) and (7) of the ITAA 1997]

1.36 There can be multiple construction expenditure areas (within the meaning of section 43-75 of the ITAA 1997) in the same active BTR development. Where the active BTR development expands (as described in the paragraph above), the active BTR development area also expands through the addition of the new dwellings. The expansion results in the entity having more than one construction expenditure area (within the meaning of section 43-75 of the ITAA 1997) as the existing dwellings and common areas consists of one construction expenditure area and the new dwellings consists of the other construction expenditure area. Both these construction expenditure areas form part of the active BTR development area. Any further expansion will result in additional separate construction expenditure areas.

Common area

1.37 A common area for dwellings of a BTR development is an area, facility or amenity intended for use either for the purposes of those dwellings or for the purpose of those dwellings and any other dwellings in the same building. [Schedule 1 to the Bill, item 9, subsection 43-151(3) of the ITAA 1997]

1.38 In other words, a common area could include an area, facility or amenity intended to be used by or for the benefit of tenants in dwellings of a BTR development. The common area does not need to be solely used by or for the benefit of tenants in dwellings in the BTR development (for example, tenants could bring guests to a common area, or a common area could be used for the purposes of the BTR dwellings and for the purposes of other dwellings in the same building).

1.39 Examples of a common area could include:

•

an outdoor space (such as a rooftop garden) that is accessible to tenants of the dwellings in the BTR development and can be used by them;

•

a shared laundry space that is accessible to tenants of the dwellings in the BTR development and can be used by them;

•

an area related to the maintenance of the dwellings in the BTR development, which is located in a building (such as a mechanical service room for the air-conditioning of dwellings in the BTR development and other dwellings situated in the building);

•

a shared gym or pool that is accessible to tenants of the dwellings in the BTR development and can be used by them;

•

a thoroughfare that is accessible and used by tenants of the dwellings in the BTR development and that allows access to those dwellings (for example, delivery persons can make deliveries to a tenant through use of the thoroughfare); and

•

a shared car park area that is accessible to tenants of the dwellings in the BTR development and can be used by them; and

•

an area that is accessible by tenants of the dwellings in the BTR development (such as a seating area for tenants) and can be used by them but is also accessed by persons cleaning or making repairs to that area.

1.40 Examples of an area which is not a common area include:

•

a restaurant located within the building that contains the BTR development where the restaurant is accessible by the general public; and

•

a grocery store located within the building that contains the BTR development where the grocery store is accessible by the general public; and

•

a gym or pool located within the building that contains the BTR development where the gym or pool is accessible by the general public.

1.41 To avoid doubt, an entity of two active BTR developments with common areas shared between both developments cannot deduct construction expenditure in relation to the common areas for both developments for the BTR capital works deduction. This is a result of the operation of section 43-15 of the ITAA 1997, which ensures that no more than 100 per cent of the entity's construction expenditure can be deducted. The entity can either deduct the construction expenditure in relation to one active BTR development or apportion the expenditure between the active BTR developments and deduct the apportioned amounts for each active BTR development.

1.42 In a mixed-use development, where there is an active BTR development as well as other dwellings (e.g., build-to-sell apartments, serviced apartments, hotel rooms, etc.) in the same building, the common area construction expenditure can be subject to the BTR accelerated capital works deduction. However, this only applies if the common area is an area, facility or amenity that is intended for use for the purposes the active BTR development, regardless of whether the common area is also intended for use for the purposes of any other dwellings in the same building.

Single entity

1.43 All dwellings (and common areas for the dwellings) in a BTR development must be directly owned by a single entity. The entity may sell to a new entity (or group of entities that invests directly via a single entity) and the development would still satisfy the single entity requirement. However, this only applies if the dwellings (and common areas for the dwellings) in the BTR development continue to be owned directly as a whole by a single entity. [Schedule 1 to the Bill, item 9, paragraph 43-153(1)(c) of the ITAA 1997]

1.44 If the original entity sells the entire BTR development to another entity during the 15-year period, all dwellings in the BTR development (and common areas that are part of the BTR development) must continue to be owned by a single entity for the balance of the 15 years. This requirement ensures that the entity has control over the BTR development and is responsible for maintaining its eligibility for the MIT withholding tax concession and the accelerated capital works deduction.

1.45 For an active BTR development that has not expanded, the 15-year period commences when all dwellings in the BTR development are first made available for rent. The 15-year period does not reset if the BTR development is sold by an entity to another entity.

1.46 For an active BTR development that has expanded, the 15-year period for the existing dwellings commenced when all the existing dwellings were first made available for rent, while the 15-year period for the new dwellings commences on the day on which the new dwellings are added to the existing active BTR development area. The two 15-year periods do not reset if the BTR development is sold by an entity to another entity. [Schedule 1 to the Bill, item 9, subsection 43-152(5) of the ITAA 1997]

1.47 Once the compliance period has completed, contravention of the single entity ownership requirement is the only non-compliance that will end access to the BTR accelerated capital works deduction. Contravention of the single entity ownership requirement will also end access to the concessional rate of withholding tax (however, non-compliance with any of the other eligibility criteria in subsection 45-153(1) of the ITAA 1997 will also end access). See paragraph 1.112 and 1.123 below for further details. [Schedule 1 to the Bill, items 7 and 18, subsection 43-145(2) of the ITAA 1997 and subsection 12-450(6) in Schedule 1 to the TAA 1953]

Minimum lease period

1.48 Dwellings in a BTR development must be either made available to the public to be tenanted for a lease term of at least three years or tenanted to tenants for lease terms of at least three years throughout the 15-year period. [Schedule 1 to the Bill, item 9, paragraph 43-153(1)(a) of the ITAA 1997]

1.49 This requirement does not apply where a tenant requests a shorter lease term. A tenanted dwelling in this circumstance remains a dwelling in a BTR development. Nor does the requirement apply where the dwelling is not available to be tenanted to tenants for lease terms of at least three years as a result of repairs, construction of an extension, alteration or improvement to the dwelling or the building (in which the dwelling is located). For example, if repairs are being made to a dwelling with fire or water damage. [Schedule 1 to the Bill, item 9, note to subsection 43-153(1) and subsection 43-153(6) of the ITAA 1997]

Dwelling type

1.50 All of the dwellings in a BTR development must:

•

be residential premises (as defined in section 995-1 of the ITAA 1997); and

•

be taxable Australian real property (as defined in section 855-20 of the ITAA 1997); and

•

not be commercial residential premises (with commercial residential premises defined in section 995-1 of the ITAA 1997).

1.51 To avoid doubt, dwellings in a BTR development cannot be commercial residential premises. Examples of commercial residential premises include hostels, boarding houses, hotels, motels, and inns. [Schedule 1 to the Bill, item 9, subparagraph 43-153(1)(b)(iii) of the ITAA 1997]

Minimum affordable dwellings

1.52 At least 10 per cent of the dwellings in a BTR development must be affordable dwellings (where the 10 per cent figure results in a whole number). Where 10 per cent of the dwellings in a BTR development is not a whole number, the number must be rounded down to the nearest whole number to determine the minimum number of affordable dwellings that must be tenanted or available as affordable dwellings. This eligibility condition applies during the 15-year compliance period, and on an on-going basis in relation to eligibility for the MIT withholding tax concession. [Schedule 1 to the Bill, item 9, paragraph 43-153(1)(d) of the ITAA 1997]

1.53 For example, where a BTR development has 124 dwellings, the minimum number of affordable dwellings that must be tenanted or available as affordable dwellings in the BTR development are 12 affordable dwellings (rounded down from 12.4 affordable dwellings). Throughout the 15-year compliance period, at least 12 affordable dwellings must be either tenanted (after being made available for a lease of three or more years) or available for tenancy for a 3-year lease or more.

1.54 Dwellings will be considered affordable dwellings if the rent payable under the lease for the dwellings is 74.9 per cent or less of the market value of the right to occupy the dwelling under that lease, and if any requirements determined by the Minister by legislative instrument are met. [Schedule 1 to the Bill, item 9, subsections 43-153(2) and (3) of the ITAA 1997]

1.55 To be an affordable dwelling, the rent payable under the lease for the dwelling must be 74.9 per cent or less of the market value of the right to occupy the dwelling under that lease (i.e., the rent otherwise payable for that dwelling in an open market). Market value has its ordinary meaning when used in the ITAA 1997 (as affected by Subdivision 960-S where relevant).

1.56 For the purposes of determining 74.9 per cent or less of the market value of the right to occupy the dwelling under that lease, regard should be had to the rent payable for a comparable dwelling. A comparable dwelling should be comparable to the affordable dwelling in terms of:

•

general physical condition, including the number of rooms, floor area and the standard of the facilities available (for example, heating, cooling, cooking etc.);

•

the existence and condition of inclusions (such as carpets, drapes, blinds etc.); and

•

location and setting (for example, whether or not the dwelling is in an inner or outer suburb of a city or regional area, how far it is located from community amenities, whether it is affected by industrial noise and pollution etc).

1.57 Calculating the market value and determining whether a dwelling is an affordable dwelling should occur at the time a lease is entered into, and would generally not need to reoccur during the period of a lease except in exceptional circumstances, such as an unreasonable rent increase.

1.58 The entity bears the evidentiary burden of proving that the rent payable under the lease is 74.9 per cent or less of the market value of the right to occupy the dwelling under that lease. Determining whether a dwelling is an affordable dwelling for this purpose is expected to involve a valuation exercise similar to that undertaken by charitable social housing providers under Subdivision 38-G of the A New Tax System (Goods and Services Tax) Act 1999. For taxpayers wanting additional certainty as to whether a dwelling satisfies the definition of affordable dwelling can seek a private ruling from the Commissioner.

1.59 To avoid doubt, affordable dwellings must only be made available for rent to a segment of the public and tenanted by that segment only if the requirements determined by the Minister require that an affordable dwelling be tenanted, or be available to be tenanted, only to that segment of the public. [Schedule 1 to the Bill, item 9, subsection 43-153(4) of the ITAA 1997]

1.60 Made available to the public to be tenanted or being tenanted is intended to cover the situation where the affordable dwelling is actually leased by a tenant whose rent payable is 74.9 per cent or less of the market value of the right to occupy the dwelling under that lease. Made available to the public to be tenanted or being tenanted is not intended to cover a situation where the dwelling is listed as an affordable dwelling, with the rent payable under the lease being 74.9 per cent of the market value but, due to rent bidding or some other conduct, the rent payable is actually higher than 74.9 per cent of the market value when the dwelling is leased.

Comparable affordable dwellings and comparable non-affordable dwellings

1.61 In an active BTR development, there will likely be different types of dwellings with different total floor area and different numbers of bedrooms.

1.62 For each affordable dwelling (the test dwelling), the number of comparable non-affordable dwellings must be greater than or equal to the number of comparable affordable dwellings.

1.63 The number of comparable affordable dwellings refers to the number of affordable dwellings (including the test dwelling) that has the same number of bedrooms as the test dwelling and a floor area that is at least equal to the floor area of the test dwelling, but does not exceed 110 per cent of the floor area of the test dwelling.

1.64 The number of comparable non-affordable dwellings refers to the number of non-affordable dwellings that have the same number of bedrooms as the test dwelling and a floor area that is at least equal to the floor area of the test dwelling, but does not exceed 110 per cent of the floor area of the test dwelling.

1.65 This is to prevent a BTR entity from allocating only the lowest standard dwellings in a development as affordable dwellings (i.e., lowest total floor area, least number of bedrooms etc.). [Schedule 1 to the Bill, item 9, subsection 43-153(5) of the ITAA 1997]

Example 1.3 – Number of comparable dwellings

An entity of a BTR development has 100 apartments where there are 6 types of apartments (based on floor area and number of bedrooms). The entity must make available at least 10 per cent of the apartments as affordable dwellings (i.e., the entity must ensure at least 10 apartments are affordable dwellings). The 6 types of apartments are as follows:

•

comparable affordable dwelling type A (this is comparable to 'Comparable non-affordable dwelling type A') with the apartments having a floor area ranging between 90 and 99 square metres (inclusive) and 1 bedroom;

•

comparable non-affordable dwelling type A (this is comparable to 'Comparable affordable dwelling type A') with the apartments having a floor area ranging between 90 and 99 square metres (inclusive) and 1 bedroom;

•

comparable affordable dwelling type B (this is comparable to 'Comparable non-affordable dwelling type B') with the apartments having a floor area ranging between 180 and 198 square metres (inclusive) and 2 bedrooms;

•

comparable non-affordable dwelling type B (this is comparable to 'Comparable affordable dwelling type B') with the apartments having a floor area ranging between 180 and 198 square metres (inclusive) and 2 bedrooms;

•

comparable affordable dwelling type C (this is comparable to 'Comparable non-affordable dwelling type C') with the apartments having a floor area ranging between 270 and 297 square metres and 3 bedrooms; and

•

comparable non-affordable dwelling type C (this is comparable to 'Comparable affordable dwelling type C') with the apartment having a floor area of between 270 and 297 square metres and 3 bedrooms.

In this example, the test dwellings would be one of each of the comparable affordable dwelling types A, B and C with floor areas of 90, 180 and 270 square metres respectively. The entity decides to make available 20 type A, 20 Comparable non-affordable dwellings type A, 15 comparable affordable dwellings type B, 16 Comparable non-affordable dwellings type B, 12 comparable affordable dwellings type C and 17 Comparable non-affordable dwellings type C.

For the test dwelling for the comparable affordable dwelling type A, the number of Comparable non-affordable dwellings type A (20 dwellings) is equal to the number of comparable affordable dwellings type A (20 dwellings including the test dwelling) and satisfies the requirement in paragraph 1.63 of this Explanatory Memorandum.

Similarly, the requirement is satisfied for the test dwelling for the comparable affordable dwelling type B as the number of Comparable non-affordable dwellings type B (16 dwellings) is greater than the number of comparable affordable dwellings type B (15 dwellings including the test dwelling). The requirement is also satisfied for the test dwelling for the comparable affordable dwelling type C as the number of Comparable non-affordable dwellings type C (17 dwellings) exceeds the number of comparable affordable dwellings type C (12 dwellings including the test dwelling).

Minister's determination

1.66 As noted in paragraph 1.54 of this Explanatory Memorandum, any requirements determined by the Minister by way of legislative instrument must be satisfied for a dwelling to be considered an affordable dwelling. These requirements can only relate to the income of the tenant or prospective tenant. [Schedule 1 to the Bill, item 9, subsection 43-153(3) of the ITAA 1997]

1.67 This is because access to the affordable dwellings in a BTR development is intended to be subject to an eligibility criterion based on the income of the tenant or prospective tenant.

1.68 This delegation of legislative power is appropriate as the income requirements may need to be varied on a regular basis given that income levels generally change year-on-year depending on economic factors. Providing for the income requirements by way of legislative instrument will enable responsive management of income requirements, which adds to the integrity of the measure by ensuring that limited affordable dwellings are not provided to those with adequate means to access normal market tenancies. The legislative instrument would be subject to disallowance and sunset after no more than 10 years and will therefore be subject to appropriate parliamentary scrutiny.

Accelerated capital works deductions for active BTR developments

1.69 Division 43 of the ITAA 1997 allows an entity to claim a deduction for capital expenditure incurred in constructing capital works, including buildings and structural improvements. The Division sets the rules for working out those deductions.

1.70 Division 43 allows a deduction for construction expenditure for an income year. To be eligible for the deduction, the capital works must have a construction expenditure area for which there must be a pool of construction expenditure and the entity must use that area in a deductible way (section 43-10 of the ITAA 1997).

1.71 A deduction is not allowable until after construction of the capital works is completed (section 43-30 of the ITAA 1997).

1.72 A deduction for construction expenditure is allowed to the extent that the deduction does not exceed the amount of the undeducted construction expenditure for the construction expenditure area (section 43-15 of the ITAA 1997).

•

Calculation of the undeducted construction expenditure for an active BTR development that has ceased is provided for in section 43-237 of the ITAA 1997, which is a new provision inserted by Schedule 1 to the Bill. See paragraph 1.1111.111 of this Explanatory Memorandum for more information.

1.73 Section 43-140 of the ITAA 1997 provides that to work out if the entity's area is used in a deductible way during the income year, reference must be made to when the capital works started being constructed and the type of capital works.

1.74 Section 43-25 of the ITAA 1997 sets out the rate of deduction. Currently, the deduction is either 2.5 per cent or 4 per cent of the construction expenditure, depending on when construction started and how the area is used.

1.75 Post-26 February 1992 capital works (per subsection 43-25(1) of the ITAA 1997):

•

If capital works on which construction started after 26 February 1992 are used in a deductible way (by reference to the Table in section 43-140) during an income year, there is a basic entitlement to a capital works deduction rate of 2.5 per cent of the construction expenditure.

1.76 However, capital works on which construction started after 26 February 1992, which are used in a manner consistent with the Table in section 43-145, qualify for a capital works deduction rate of 4 per cent of the construction expenditure. This includes use of part of the area for the purposes of producing assessable income, and that part is:

•

wholly or mainly used for:

-

industrial activities (as defined in section 43-150),

-

the provision of employee amenities for workers (or their immediate supervisors) carrying out industrial activities, or

-

office accommodation for the immediate supervisors of those workers; or

•

used wholly or mainly to operate a hotel, motel, or guesthouse where the buildings have at least 10 bedrooms that are for use wholly to provide short-term traveller accommodation (i.e., hotel buildings), or

•

consists of at least 9 apartments, units or flats that are for use wholly to provide short-term traveller accommodation (i.e., apartment buildings). The 4 per cent rate is still available if the buildings also have facilities that are mainly for use in association with providing short-term traveller accommodation.

1.77 The amount of the deduction is calculated under section 43-210 or section 43-215 of the ITAA 1997 (depending on whether the capital works are pre-27 or post-26 February 1992 capital works).

1.78 The 4 per cent capital works deduction rates (as provided for in subsection 43-25(1) and section 43-145 of the ITAA 1997) now apply to active BTR developments. [Schedule 1 to the Bill, items 6 and 7, section 43-145 of the ITAA 1997]

1.79 The active BTR development area can be referred to as the eligible development.

1.80 The accelerated capital works concession applies during the compliance period, as well as after the compliance period has ended provided that:

•

no other entity (apart from entities providing management services) uses the eligible development (or any part of the eligible development) for the purpose of producing assessable income; and

•

at each earlier time (if any) at which the entity or another entity used the eligible development (or any part of the eligible development) for the purpose of producing assessable income while it was an active BTR development, no other entity (apart from entities providing management services) used the eligible development (or any part of the eligible development) for the purpose of producing assessable income. [Schedule 1 to the Bill, item 7, section 43-145 of the ITAA 1997]

Example 1.4 - Change of single entity owner before end of the compliance period

The compliance period has ended. Entity B acquired the eligible development at the start of year 10 of the compliance period. From that point in time, Entity B used and continues to use the eligible development for the purposes of producing assessable income. No other entity used the eligible development for the purposes of producing assessable income from that point in time. From the start of the compliance period to the end of year 9 of the compliance period, the previous owner, Entity A, used the eligible development for the purposes of producing assessable income. Between that period, no other entity used the eligible development for the purposes of producing assessable income. In this scenario, the concession continues to apply for Entity B after the end of the compliance period.

Example 1.5 – Single entity owner contracts another entity to provide management services

The compliance period has ended. Entity C uses the eligible development for the purposes of producing assessable income throughout the compliance period and beyond. Throughout this period, Entity C contracts an entity to provide management services (Entity D) in the form of leasing activities and facilities management with respect to the eligible development. This means that Entity D is also using the eligible development to produce assessable income while it is an active BTR development. Given Entity D is providing management services, the entity's use of the eligible development is to be disregarded and the concession continues to apply for Entity C after the end of the compliance period.

Reduced withholding rates for MITs and AMITs

1.81 A MIT is a type of trust in which members of the public collectively invest in passive income activities, including owning property.

1.82 An AMIT is a MIT that has elected to be subject to the AMIT regime.

1.83 Section 275-10 of the ITAA 1997 defines MIT by setting out the requirements for a trust to be a MIT for the purposes of Division 275 of the ITAA 1997 and Division 12 in Schedule 1 to the TAA 1953. The requirements are that:

•

the trustee is an Australian resident, or the central management and control of the trust is in Australia;

•

the trust does not carry on or control an active trading business (this means that the MIT's investments must all be 'eligible investment business' (see section 102M of ITAA 1936));

•

the trust is a managed investment scheme (within the meaning of section 9 of the Corporations Act 2001);

•

the trust meets the widely held requirements (see subsections 275-20(1) and 275-25(1) of the ITAA 1997);

•

the trust meets the closely held restrictions (see subsection 275-30(1) of the ITAA 1997); and

•

the trust is operated or managed by an appropriately regulated entity.

1.84 The first three requirements are general requirements that apply to all trusts in the same way. The last three requirements are specific requirements that apply in different ways to some trusts.

1.85 Section 840-805 of the ITAA 1997 provides that a foreign resident must pay income tax on certain amounts of Australian sourced net income – i.e., a 'fund payment' – of a 'withholding MIT' that the foreign resident is either paid or which they are presently entitled to. This tax is called a 'MIT withholding tax'.

1.86 A 'withholding MIT' is defined in section 12-383 in Schedule 1 to the TAA 1953. Broadly, a MIT or AMIT is a withholding MIT if it is a MIT in relation to the income year because of paragraph 275-10(1)(a) or subsection 274-10(2) of the ITAA 1997 and it carries out, in Australia, a substantial proportion of its investment management activities in relation to certain Australian assets, including assets situated in Australia and securities listed on an approved Australian stock exchange.

1.87 A 'fund payment' is a component of a payment made by the trustee of a MIT or AMIT that effectively represents a distribution of a MIT or AMIT's net income to the members of the MIT or AMIT. A fund payment specifically excludes certain types of income such as dividend, interest or royalty income, capital gain and losses from a CGT asset that is not taxable Australian property, income that is not from an Australian source, and deductions relating to these sources of income.

1.88 Section 3 of the MIT Tax Act imposes the MIT withholding tax on the fund payment part of income paid to a foreign resident member of a MIT or AMIT.

1.89 Section 4 of the MIT Tax Act sets out the rate of income tax imposed:

•

if the entity is a resident of an information exchange country, the rate is 15 per cent for fund payments except:

-

to the extent they are, or are attributable to, fund payments from a clean building MIT (and are not attributable to non-concessional MIT income) – in which case the rate of tax imposed is 10 per cent; or

-

to the extent they are attributable to non-concessional MIT income – in which case the rate of tax imposed is 30 per cent;

•

if the entity is not a resident of an information exchange country, the rate of tax imposed is 30 per cent.

1.90 Withholding obligations at these same rates are imposed by section 12-385 in Schedule 1 to the TAA 1953.

1.91 Currently, fund payments to a foreign resident that represent rental income from a BTR development is taxed at 30 per cent as it is treated as non-concessional MIT income due to the operation of section 12-435 in Schedule 1 to the TAA 1953, which includes MIT residential housing income as non-concessional MIT income.

1.92 The definition of MIT residential housing income in Schedule 1 to the TAA 1953 (which is incorporated into the ITAA 1997 and the MIT Tax Act) is therefore adjusted to exclude all amounts that:

•

are, or are referrable to, a payment of rental income under a lease of a dwelling that is part of an active BTR development; and

•

are, or are attributable to, a capital gain from a CGT event in relation to a dwelling that is part of an active BTR development; and

•

are, or are attributable to, a part of a capital gain from a CGT event in relation to a 'membership interest in an entity' (as defined in section 960-130 of the ITAA 1997) provided that:

-

all or part of the market value of the membership interest is referrable to a dwelling that is part of an active BTR development, immediately before the time of the CGT event; and

-

the apportionment methodology in paragraph 1.94 applies to part of the capital gain.

1.93 The first type of capital gains (the second bullet point in paragraph 1.92) covers capital gains from the disposal of BTR dwellings while the second type of capital gain (third bullet point in paragraph 1.92) covers capital gains from the disposal of membership interests in an entity to the extent that the market value of the interest is referrable to a dwelling in an active BTR development (for example, disposal of units in an intermediary trust in between the withholding MIT and the trust that directly owns the BTR development).

1.94 The apportionment methodology apportions the capital gain from the disposal of a membership interest in the entity on the basis of the value of the interest in the BTR dwelling as a proportion of the overall value of the membership interest. This methodology is worked out by dividing:

•

the product of the amount of the capital gain with the 'value of the interest in the dwelling' (which is the value of the membership interest as is referrable to the dwelling that is part of an active BTR development); by

•

the value of the membership interest (market value of the membership interest immediately before the time of the CGT event) in the entity.

1.95 The part of a fund payment to a foreign resident that is attributable to income noted in paragraph 1.92 above is then subject to the concessional 15 per cent rate of tax, provided the BTR development satisfies the BTR eligibility criteria over the 15-year compliance period. The misuse tax will apply where the BTR eligibility criteria over the 15-year compliance period has not been satisfied. [Schedule 1 to the Bill, item 18, subsections 12-450(5), (6) and (7) in Schedule 1 to the TAA 1953]

Example 1.6 – Capital gain on sale of membership interests attributable to residential dwelling assets that are part of BTR development

MIT Q is a withholding MIT and is the sole unit holder of MIT X. The unit holders (beneficiaries) of MIT Q include non-resident and residents (pool of unit holders).

The legal person who is the trustee of MIT Q is also the trustee of MIT X, MIT A and MIT B. MIT X is the sole unit holder of MIT A and MIT B.

MIT A's only assets are residential dwelling assets. The market value of MIT A's assets is $80 million. Of these assets, most are part of active BTR developments (market value of $70 million). The remaining assets are residential dwellings sold at market rate (market value of $10 million).

MIT B's only assets are commercial properties that are leased to a third party. The market value of MIT B's assets is $20 million.

As MIT X's interest in MIT A constitutes 80 per cent of MIT X's assets, MIT Q's interest in MIT X passes the modified principal asset test. This is because:

•

MIT X's interest in MIT A makes up more than 50 per cent of MIT X's assets; and

•

under the modified principal asset test, this interest is treated as having the same character as the underlying assets.

Passing the modified principal asset test in subsections 12-453(3) and (4) in Schedule 1 to the TAA 1953 means that MIT Q's entire interest in MIT X is treated as being an asset that is a residential dwelling asset.

When MIT Q disposes of its units in MIT X, the resulting capital gain is treated for the purposes of subsection 12-450(2) in Schedule 1 to the TAA 1953 as being wholly attributable to a residential dwelling asset (see subparagraph 12-453(2)(a)(ii) in Schedule 1 to the TAA 1953).

The amount of capital gain on MIT Q's disposal of the entire interest in MIT X is $10 million.

Applying the apportionment methodology, the relevant portion of the capital gain is worked out by dividing:

•

the product of the amount of the capital gain with the value of the interest in the dwelling (that is,$700 million, which is the product of $10 million and $70 million); by

•

the value of the membership interest ($100 million).

The resultant amount is $7 million.

This amount is a capital gain attributable to dwellings in an active BTR development. The amount is treated as a capital gain from a CGT event in relation to a dwelling in an active BTR development (in accordance with subsection 12-450(5) in Schedule 1 to the TAA 1953). Accordingly, it is not MIT residential housing income, and the concessional 15 per cent rate of tax applies to it.

1.96 However, the concessional 15 per cent rate of tax does not apply if:

•

The payment that an entity makes to a foreign resident is attributable to a payment the entity received from a withholding MIT that was referable to a dwelling that is part of an active BTR development. This includes circumstances where there is more than one withholding MIT in a chain of trusts and the second withholding MIT makes an on-payment to a foreign resident, or where a custodian or other entity makes an on-payment to a foreign resident.

•

Any other circumstance in which:

-

the trustee of the withholding MIT does not own the dwelling of the eligible development mentioned in subsection 12-450(5) of Schedule 1 to the TAA 1953; and

-

the fund payment is attributable to a payment from another entity (an intermediary), which can be the BTR development owner), that is referable to a dwelling that is part of an active BTR development (i.e. an amount to which subsection 12-450(5) of Schedule 1 of the TAA 1953 applies); and

-

the intermediary is (or any intermediaries are):

•

not a trust; or

•

the same person is not the trustee of both the intermediary trust/s and the withholding MIT

1.97 This carve-out from the concessional 15 per cent rate of tax is to support the administration of the tax concession, in particular the BTR misuse tax. [Schedule 1 to the Bill, items 14 and 15, subsections 12-385(6) and 12-390(8A) in Schedule 1 to the TAA 1953]

Specific reporting mechanism

1.98 Entities participating in BTR developments must notify the Commissioner of events and information when required. Events that trigger the requirement to notify the Commissioner are:

•

the BTR development commences to be an active BTR development (as this determines the start date of the minimum ownership/operational period and the scope of the BTR development is known with certainty);

•

expansion of an active BTR development during the minimum period of ownership/operation;

•

change of the ownership interest in an active BTR development;

•

a BTR development ceases to be an active BTR development. [Schedule 1 to the Bill, item 9, subsection 43-154(1) of the ITAA 1997]

1.99 The notification must be given within 28 days of the trigger event. This notification must occur by way of a form approved by the Commissioner. [Schedule 1 to the Bill, item 9, subsection 43-154(2) of the ITAA 1997]

1.100 The entities that must notify the Commissioner of these events are:

•

the owner of the development at the time immediately before the event happens; and

•

if for the income year in which the event happens, the entity is a trustee of a MIT and is required to notify the Commissioner of amounts as described in paragraph 1.101 below. [Schedule 1 to the Bill, item 9, subsection 43-154(3) of the ITAA 1997]

Specific reporting for MIT fund payments

1.101 Further, a trustee of a MIT must notify the Commissioner prior to making a fund payment where all or part of that fund payment consists of rental income under a lease of a dwelling that is part of an active BTR development. A trustee of a MIT is also required to notify the Commissioner prior to making a fund payment where all or part of that fund payment consists of capital gains obtained upon sale of the BTR development or capital gains from the disposal of a membership interest in an entity that is referable to a BTR dwelling. This supersedes existing reporting requirements under section 16-150 in Schedule 1 to the TAA 1953. [Schedule 1 to the Bill, items 19 and 20, subsections 16-150(1) and (4) in Schedule 1 to the TAA 1953]

1.102 This notice must be in the approved form and must be provided on or before the day provided in a determination made by the Commissioner. This determination would be made by legislative instrument. If no determination has been made, such notice must be provided on or before the day on which the amount is due to be paid. The legislative instrument would be subject to disallowance and sunset after no more than 10 years and will therefore be subject to appropriate parliamentary scrutiny. This delegation of legislative power is appropriate as it is of a minor administrative nature. [Schedule 1 to the Bill, item 20, subsection 16-150(4) in Schedule 1 to the TAA 1953]

Cessation of being an active BTR development

1.103 An active BTR development will cease to be an active BTR development if any of the dwellings 'cease' to meet an eligibility condition. Cessation can only occur during the 15year compliance period as the definition is linked to the compliance period. [Schedule 1 to the Bill, item 9, subsection 43-152(4) of the ITAA 1997]

Compliance period

1.104 The BTR compliance period for a dwelling of an active BTR development is 15 years beginning on:

•

in the case of a development that does not expand, the day on which the development commenced being an active BTR development.

•

in the case of a development that does expand:

-

for the dwellings that were made available as part of the initial construction of the BTR development (referred to as 'existing dwellings'), the day on which the development commenced being an active BTR development; and

-

for the dwellings incorporated into an active BTR development through expansion (referred to as 'new dwellings'), the date on which the expansion dwellings were incorporated into the BTR development. [Schedule 1 to the Bill, item 9, subsection 43-152(5) of the ITAA 1997 ]

1.105 In effect, if expansion does occur, there will be separate compliance periods for the existing dwellings and the new dwellings.

Consequences of ceasing to be an active BTR development during the compliance period

1.106 If an active BTR development ceases to be an active BTR development during the 15-year compliance period, the imposition and application of the BTR development misuse tax will apply to approximately claw back the tax benefits obtained both through the reduced MIT withholding rates and the accelerated capital works deduction.

1.107 As discussed at paragraph 1.98, the entity owning the BTR development must notify the Commissioner when the BTR development ceases to be an active BTR development so that the time period to which the BTR development misuse tax applies can be determined.

1.108 If a person claims BTR development tax benefits after the BTR development ceased to be an active BTR development, then the Commissioner may amend these assessments, regardless of the provisions of section 170 of the ITAA 1936 relating to limitations on time for amending assessments.

1.109 In other words, if there is a delay between when a BTR development ceases to be an active BTR development and notification of that cessation, the BTR misuse tax will apply to the tax benefits obtained from commencement of the active BTR development through to cessation of the active BTR development. For any period from cessation through to notification, tax benefits obtained will be dealt with by way of the ordinary income tax assessment process (including through amended assessments). [Schedule 1 to the Bill, items 1 and 11, subsection 170(10AA) of the ITAA 1936, sections 44-1, 44-5, 44-10, 44-20, 44-25 and 44-30 of the ITAA 1997]

Example 1.7 – Amended assessment to claw back tax benefit

An entity's BTR development commences being an active BTR development in 2026. The entity has claimed the accelerated capital works deduction from 2026 to 2035.

However, in 2033, the entity required that a tenant enter into a one-year lease, contrary to paragraph 43-153(1)(a) of the ITAA 1997. As this occurred during the 15-year compliance period, the BTR development ceases to be an active BTR development through the operation of subsection 43-152(4) of the ITAA 1997.

The entity notifies the Commissioner of the ineligibility in 2035.

The BTR development misuse tax will apply to the tax benefits derived by the entity for the period while the BTR development was an active BTR development (i.e., from 2026 to 2033).

Under subsection 170(10AA) of the ITAA 1936, the Commissioner may amend the entity's assessments for the period after the BTR development ceased to be an active BTR development (i.e., between 2034 and 2035), clawing back any tax benefits wrongfully claimed during that time.

1.110 It is noted that an entity is required to notify the Commissioner of cessation no later than 28 days after the event. Thus, the entity in Example 1.7 will have breached the requirements in section 43-154 of the ITAA 1997.

1.111 In relation to the BTR accelerated capital works deduction, if an active BTR development ceases to be an active BTR development during the compliance period, then the development is treated as having been subject to the 2.5 per cent deduction rate for the time when it had been subject to a 4 per cent deduction rate. This is to ensure the BTR development is depreciated over 40 years instead of 25 years. [Schedule 1 to the Bill, item 10, section 43-237 of the ITAA 1997]

Consequences of non-compliance after the compliance period

1.112 After the BTR development has been an active BTR development for the 15year compliance period, it can no longer be subject to the BTR misuse tax in the event of non-compliance. When cessation occurs after the compliance period has been completed, the benefit derived from the tax concession(s) will be addressed by amended assessment.

1.113 What triggers non-compliance after the compliance period differs between the BTR accelerated capital works deduction and the withholding tax concession.

1.114 In relation to the BTR accelerated capital works deduction, after the 15-year compliance period has been completed, the only eligibility condition that must continue to be met is the single ownership requirement. If the single ownership requirement is contravened after the compliance period has ended, the ability to claim BTR accelerated capital works deduction will cease. [Schedule 1 to the Bill, item 7, subsection 43-145(2) of the ITAA 1997]

1.115 In relation to the 15 per cent concessional rate of MIT withholding tax, after the 15-year compliance period has been completed, all eligibility criteria must continue to be met in order to continue to claim the concessional rate of MIT withholding tax. [Schedule 1 to the Bill, item 18, subsection 12-450(6) in the Schedule 1 to the TAA 1953]

1.116 Consequently, it is possible for a BTR development to continue to be eligible for the BTR accelerated capital works deduction but not the concessional rate of MIT withholding tax if there is non-compliance after the compliance period.

1.117 For example, if, in year 20 of the BTR development, the requirement for 10 per cent of the BTR dwellings to be affordable dwellings is breached, this will result in the concessional rate of MIT withholding no longer being available to the BTR development. However, as the single ownership requirement has not been breached, the BTR accelerated capital works deduction can continue to be claimed.

1.118 In relation to the accelerated depreciation concession, the single entity owner of the BTR development will be required to notify the Commissioner if the ownership of the BTR development changes. [Schedule 1 to the Bill, item 9, paragraph 43-154(1)(c) of the ITAA 1997]

1.119 In relation to the concessional rate of MIT withholding tax, an entity must notify the Commissioner if it is paying BTR withholding amounts to the Commissioner in the approved form. The Commissioner can require information about compliance with eligibility requirements, regardless of whether the compliance period has ceased, to be included in the approved form. [Schedule 1 to the Bill, item 20, subsection 16-150(4) in Schedule 1 of the TAA 1953]

Consequences of non-compliance when there is an expansion of the BTR development

1.120 As discussed at paragraph 1.35 above, an active BTR development can expand to include new dwellings. Importantly, the compliance period for the new dwellings will be different to the compliance period for the existing dwellings.

1.121 To illustrate, a BTR development can contain 50 dwellings for which the compliance period has ended (original dwellings) as well as 30 dwellings that are still subject to the compliance period because these dwellings were added to the BTR development as part of a subsequent expansion (expansion dwellings). If the 30 expansion dwellings subject to the compliance period continue to meet the eligibility criteria, the development remains an active BTR development. If any of the 50 original dwellings (for which the compliance period has ended) no longer meet an eligibility criterion, this does not affect the status of the active BTR development. [Schedule 1 to the Bill, item 9, subsections 43-152(3) and (4) of the ITAA 1997]

1.122 In the above example, the ability to claim the BTR accelerated capital works deduction in relation to the 50 original dwellings would not be affected because the compliance period has ended. The 30 expansion dwellings can continue to claim the BTR accelerated capital works deduction as eligibility has not been breached. [Schedule 1 to the Bill, item 7, paragraph 43-145(2)(c) of the ITAA 1997]

1.123 Further in relation to the above example, the ability to claim the concessional rate of MIT withholding tax would end for the original 50 dwellings. The ability to claim the concessional rate of MIT withholding tax in relation to the expansion dwellings would continue as they have continued to meet the eligibility criteria. [Schedule 1 to the Bill, item 18, subsections 12-450(5) and (6) in Schedule 1 to the TAA 1953]

Commissioner's discretion

1.124 The dwellings in an active BTR development could have failed to satisfy one or more of the following eligibility criteria during the 15-year compliance period due to events outside of the entity's control:

•

the requirement that each dwelling is available to the public to be tenanted for a lease term of at least 3 years or tenanted as a result of being made available as such;

•

the requirement that at least 10 per cent (rounded down if required) of the dwellings are affordable dwellings; and

•

the requirement that applies to each of the affordable dwellings, requiring that the number of comparable non-affordable dwellings is greater than or equal to the number of comparable affordable dwellings.

1.125 Examples of events outside of the entity's control could include:

•

a temporary unforeseeable event (such as a fire, flood or earthquake) resulting in a dwelling no longer being available to the public for rent or tenanted for a period of 3 years or more;

•

requirements determined by the Minister relating to the income of the tenant of an affordable dwelling not being satisfied and requirements in relation to the minimum number of dwellings offered as affordable dwellings not being met as a result of changes to a tenant's income with the entity unaware of the requirements not being met; or

•

a tenant becomes ineligible to continue to occupy an affordable dwelling due to a salary increase but they cannot leave the dwelling because of a lack of alternative accommodation.

1.126 In such scenarios (as well as others – the above should not be taken to be exhaustive), the Commissioner has discretion to determine that the dwellings satisfy one or more of the eligibility criteria in paragraph 1.124 above (the particular eligibility criteria) at all times during a particular period.

1.127 The particular period is not specified but it is expected that it would reflect the time taken to have rectified the cause of the ineligibility.

1.128 For the Commissioner to exercise the discretion, the entity must apply to the Commissioner in the approved form, requesting the Commissioner to exercise the discretion. It is expected that the entity applies to the Commissioner as soon as the cause of the ineligibility has been rectified. While the Commissioner may temporarily delay making an assessment of misuse tax if an entity signals an intent to apply to the Commissioner for exercise of the discretion, the Commissioner need not do so. Where the Commissioner proceeds to assess an entity in relation to misuse tax, and the entity later applies for exercise of the discretion, the entity will also need to request an amendment to their assessment of misuse tax. The period of review for a misuse tax assessment is generally 4 years after notice of the assessment was first given to the taxpayer. After the period of review has lapsed, the Commissioner will no longer be able to consider an application for exercise of the discretion. Taxpayers should apply for the exercise of the discretion as soon as possible to avoid having to pay misuse tax, and the costs of having to engage in the amended assessment or objection and review processes that arise where applications are not made promptly.

1.129 The Commissioner must be satisfied of the following to determine that the dwellings satisfied one or more of the particular eligibility criteria at all times during the specified period:

•

the dwellings did not satisfy one or more of the particular eligibility criteria at all times during the specified period a result of events outside of the entity's control;

•

the entity took all reasonable steps to ensure that the dwellings would satisfy that eligibility criteria;

•

the dwellings satisfy that eligibility criteria at the time of the determination; and

•

the entity intends that each dwelling will satisfy the eligibility criteria in subsection 43-153(1) (including the particular eligibility criteria) for the remainder of its compliance period. [Schedule 1 to the Bill, item 9, subsection 43-153(7) of the ITAA 1997]

1.130 To avoid doubt, a determination has effect according to its terms. [Schedule 1 to the Bill, item 9, subsection 43-153(8) of the ITAA 1997]

1.131 To avoid doubt, the Commissioner may decline to exercise this discretion if the circumstances warrant it. Consistent with existing provisions, an entity is able to object to the Commissioner declining to exercise this discretion by objecting against an assessment of the misuse tax in the manner set out under Part IVC of the TAA 1953.

The build to rent development misuse tax

1.132 The BTR development misuse tax is a key integrity feature of the BTR scheme and aims to ensure that BTR developments are available for rent throughout the 15-year compliance period. The misuse tax approximately claws back tax benefits claimed by entities where the BTR development ceases to be an active BTR development during the 15year BTR compliance period. As discussed at paragraph 1.112 above, the misuse tax does not apply where a BTR development ceases to be an active BTR development after the compliance period. Any non-compliance is dealt with through the amended assessment process. [Schedule 1 to the Bill, item 11, sections 44-1 and 44-5 of the ITAA 1997]

1.133 Schedule 1 to the Bill inserts new Division 44 into the ITAA 1997 which, together with the Imposition Bill, imposes BTR development misuse tax for an income year. The misuse tax is only payable if the entity has a BTR misuse amount for the income year. An entity only has a BTR misuse amount for an income year if the entity is non-compliant with the eligibility criteria for an active BTR development. [Schedule 1 to the Bill, item 11, section 44-15 of the ITAA 1997, and section 4 of the Imposition Bill]

1.134 This tax is imposed under section 4 of the Imposition Bill.

1.135 The tax is calculated based on the sum of an entity's BTR capital works deduction amounts and that entity's BTR withholding amounts. The sum of these two amounts is the BTR misuse amount. An entity is not liable to pay BTR development misuse tax for a year if that person has no BTR misuse amount for the year. [Schedule 1 to the Bill, item 11, sections 44-15 and 44-20 of the ITAA 1997, and section 5 of the Imposition Bill]

1.136 The BTR misuse amount for an income year is the sum of an entity's BTR capital works deduction amounts and 10 times the sum of the entity's BTR withholding amounts.

1.137 To avoid doubt, where an entity only claimed the BTR capital works deduction, the BTR misuse tax is only the sum of the capital works deductions. Similarly, where an entity only claimed the concessional MIT withholding rate, the BTR misuse tax is only 10 times the sum of the BTR withholding amounts. Where an entity claimed both the capital works deduction and the concessional MIT withholding rate, the amount is the sum of the entity's BTR capital works deduction amounts and 10 times the sum of the entity's BTR withholding amounts. [Schedule 1 to the Bill, item 11, section 44-20 of the ITAA 1997]

1.138 This amount is subject to a tax rate of 1.5 per cent. The total amount of tax is roughly equal to the tax benefit gained, increased by 8 per cent, which represents interest and costs associated with the tax shortfall. [Schedule 1 to the Bill, item 11, sections 44-25 and 44-30 of the ITAA 1997, and section 5 of the Imposition Bill]

BTR capital works deduction amount

1.139 The method statement in section 44-25 instructs how to calculate a BTR capital works deduction amount. This amount is roughly equal to the accelerated capital works tax benefit plus 8 per cent. This process is summarised below.

•

Step 1: identify each income year in which (at any time during that year) the BTR development was an active BTR development.

•

Step 2: for each of these years, identify the portion of construction expenditure attributable to the active BTR part that was used in the 4 per cent manner (see subsection 43-145(2)), multiply that by the proportion of days of the income year that the person owned, was lessee of, or was holder of, the active BTR part, and divide by 365.

•

Step 3: reduce the amount previously calculated by the extent to which the active BTR part was used only partly for the purpose of producing assessable income in the year. This only applies if part of the income from the active BTR part of the construction expenditure area is exempt income; part of the active BTR part of the construction expenditure area was not used for the purpose of producing assessable income or was not available for that use; or the active BTR part of the construction expenditure area was not used for such a purpose during part of the days used period.

•

Step 4: for each year, add up the amounts calculated in Step 3 for each construction expenditure area.

•

Step 5: add up the amounts worked out under Step 4 for each year.

•

Step 6: multiply the Step 5 amount by the applicable tax rate. The applicable tax rate is:

-

for a company (other than in the capacity as trustee): the corporate tax rate for the year in which the BTR development ceases to be an active BTR development (the 'cessation year');

-

in any other case: the maximum rate specified in the table in Part I of Schedule 1 to the Income Tax Rates Act 1986 for the cessation year. At present, this rate is 45 per cent.

•

Step 7: the BTR capital works deduction amount is the Step 6 amount multiplied by 1.08.

BTR withholding amount

1.140 The method statement at section 44-30 instructs how to calculate a BTR withholding amount. The BTR withholding amount is equal to 1.08 times the sum, over each year in which the BTR development was an active BTR development, of the total sum of fund payments made where:

•

the BTR development was an active BTR development;

•

the fund payments were subject to the 15 per cent rate of tax; and

•

those payments were attributable to rental income under a lease of a dwelling that is part of an active BTR development. [Schedule 1 to the Bill, item 11, section 44-30 of the ITAA 1997]

Power to make an assessment

1.141 The amount of BTR development misuse tax is defined as an assessable amount. This enables the Commissioner to make an assessment for BTR development misuse tax. [Schedule 1 to the Bill, item 21, subsection 155-5(2) of Schedule 1 to the TAA 1953]

1.142 However, a person cannot force the Commissioner to make an assessment of the BTR development misuse tax. This is to minimise administration requirements for the Commissioner because the BTR development misuse tax is used to roughly claw back tax benefits incorrectly claimed and will not apply to all entities. [Schedule 1 to the Bill, item 22, paragraph 155-30(3)(e) of Schedule 1 to the TAA 1953]

When is tax payable

1.143 The rules regarding the payment of the BTR misuse tax are contained in the new Subdivision 44-C of the ITAA 1997. [Schedule 1 to the Bill, item 11, section 44-35 of the ITAA 1997]

1.144 The BTR development misuse tax is due and payable at the end of 21 days after the Commissioner gives a person notice of assessment of the amount of BTR development misuse tax payable. [Schedule 1 to the Bill, item 11, section 44-40 of the ITAA 1997]

1.145 If the Commissioner amends an entity's assessment, the extra assessed amount of BTR development misuse tax is due and payable at the end of 21 days after the Commissioner gives the entity notice of the amended assessment. [Schedule 1 to the Bill, item 11, section 44-45 of the ITAA 1997]

General interest charge

1.146 Similar to most taxes (which are listed in subsection 8AAB(4) of the TAA 1953), the general interest charge applies, calculated daily based for each day on the unpaid amount, starting on the day the assessed BTR development misuse tax was due to be paid, and ending at the end of the last day where any of the following remains unpaid:

•

the assessed BTR development misuse tax; or

•

general interest charge on such assessed BTR development misuse tax. [Schedule 1 to the Bill, items 11 and 13, section 44-50 of the ITAA 1997 and subsection 8AAB(4) of the TAA 1953]

1.147 The amount of general interest charge is worked out in accordance with Part IIA of the TAA 1953. [Schedule 1 to the Bill, item 11, note to section 44-50 of the ITAA 1997]

No deduction available for BTR development misuse tax

1.148 No deduction is available for an amount of BTR development misuse tax that an entity pays. [Schedule 1 to the Bill, items 2 and 3, sections 12-5 and 26-99B of the ITAA 1997]

Rulings

1.149 The Commissioner can issue rulings with respect to the BTR development misuse tax. [Schedule 1 to the Bill, item 24, section 357-55 of Schedule 1 of the TAA 1953]

Further minor and consequential amendments

1.150 A minor editorial amendment is made to a heading before a section for added clarity on the operation of the section. [Schedule 1 to the Bill, item 4, section 43-140 of the ITAA 1997]

1.151 A minor editorial amendment is made to the start of a section, to accommodate the addition of a new subsection. [Schedule 1 to the Bill, item 5, section 43-145 of the ITAA 1997]

1.152 A new heading, 'Industrial activities', is inserted before a section for added clarity on the operation of the section and for consistency with other headings throughout the subdivision in which the section is contained. [Schedule 1 to the Bill, item 8, section 43-150 of the ITAA 1997]

1.153 References to terms newly defined for these amendments are included in the Dictionary of the ITAA 1997. [Schedule 1 to the Bill, item 12, subsection 995-1(1) of the ITAA 1997]

1.154 An amendment is made to the TAA 1953 to identify that the BTR development misuse tax is a tax-related liability. [Schedule 1 to the Bill, item 23, subsection 250-10(2) in Schedule 1 to the TAA 1953]

1.155 Amendments are made to two subsections in Schedule 1 to the TAA 1953, by inserting new paragraphs, to extend the requirement for an entity to give the recipient of a fund payment written notice or make information available on a website that the recipient can readily access for not less than five continuous years to cover fund payments in relation to income from a BTR development. [Schedule 1 to the Bill, items 16 and 17, paragraphs 12-395(3)(ad) and 12395(6)(ad) of Schedule 1 of the TAA 1953]

Commencement, application, and transitional provisions

1.156 The Imposition Bill commences on the first 1 January, 1 April, 1 July or 1 April to occur after the day the Imposition Bill receives Royal Assent. [Section 2 of the Imposition Bill]

1.157 Schedule 1 to the Bill commences at the same time as the Imposition Bill. However, the provisions of the Bill do not commence at all if the Imposition Bill does not commence. [Section 2 of the Bill]

1.158 The amendments in Schedule 1 to the Bill (other than the amendments to section 12-450 of Schedule 1 to the TAA 1953) apply to capital works that commence after 7:30 pm, by legal time in the Australian Capital Territory, on 9 May 2023.

1.159 The amendment of section 12-450 in Schedule 1 to the TAA 1953 made by Schedule 1 to the Bill apply to an amount that is referrable to a payment of rental income made on or after 1 July 2024; or an amount that is, or is attributable to a capital gain, or part of a capital gain, from a CGT event that happens on or after 1 July 2024. [Schedule 1 to the Bill, item 25]

Chapter 2: Buy Now, Pay Later

Outline of chapter

2.1 Schedule 2 to the Bill extends the application of the Credit Code to BNPL contracts and establishes LCCCs as a new category of regulated credit. LCCCs are continuing or non-continuing credit contracts for providing credit to consumers on a low cost basis. Most BNPL contracts will be regulated as LCCCs. Schedule 2 to the Bill amends the Credit Act to establish an optional modified RLO framework available to LCCCs. Schedule 2 to the Bill also creates new regulation-making powers in respect of LCCCs. The overarching aim of this measure is to provide appropriate and proportionate protections to consumers who enter LCCCs, while maintaining the benefits of consumer access to these kinds of credit products.

2.2 Schedule 2 to the Bill seeks to achieve this outcome by:

•

requiring providers of LCCCs to hold and maintain an Australian credit licence and comply with the relevant licensing requirements and licensee obligations, with some modifications to ensure regulation is proportionate to the relatively low risk posed by LCCCs;

•

modifying the existing RLO framework to create an alternative, opt-in framework that scales better with the risks posed to consumers and requires each LCCC provider to develop and review a written policy on assessing whether an LCCC would be unsuitable for the consumer;

•

allowing LCCC providers and consumers to exchange information via mobile applications (apps) and other technologies; and

•

engaging existing anti-avoidance prohibitions to prevent LCCC providers from structuring their business models to avoid regulation.

Context of amendments

2.3 Safe and well-regulated markets for consumer credit products are necessary for an efficient financial system. Credit products allow consumers to smooth the up-front cost of purchasing a good or service over a period of time, generally for a fee or charge.

2.4 Historically, credit regulation in Australia has focused on protecting consumers from deceptive or predatory lending practices and excessively high fees. This is reflected in the Credit Act, which does not apply to low cost continuing credit or low cost, short term credit products. More recently, credit regulation has focused on alleviating high cost debt burdens.

2.5 In recent years, advancements in technology have enabled credit businesses to build a profitable market for low cost credit and credit-like arrangements. These arrangements are currently covered by the low cost continuing and short term credit exemptions in the Credit Code.

2.6 New credit products, such as BNPL, can offer consumers a cheaper and easier way to access credit when compared to traditional forms of credit such as credit cards, small amount credit contracts, and consumer leases.

2.7 BNPL arrangements generally involve a third-party providing consumer finance to cover purchases of goods and services and the payment of bills. BNPL consumers generally pay no interest for the finance, but some BNPL providers charge a small fee. BNPL providers may also charge merchants a service fee for accepting BNPL transactions.

2.8 BNPL providers do not provide cash to consumers. Instead, they pay the merchant the value of the purchase upfront (less any merchant fee). Providers then collect repayments from consumers in instalments.

2.9 Many popular BNPL products facilitate general retail purchasing up to a spending limit of $2,000 or less. A smaller proportion of the BNPL market offers higher value finance for specific purchases, such as solar panels and other renewable energy home upgrades.

2.10 According to the Reserve Bank of Australia data, the value of BNPL transactions during the 2022-23 financial year was around $19 billion, equivalent to approximately 2 per cent of all Australian card purchases.

2.11 BNPL products have a range of benefits to both consumers and the economy. They also place competitive pressure on traditional forms of credit, reducing the cost of some products and triggering innovation in product design. BNPL has also generated increased business for merchants as consumers have been able to access credit to increase their purchasing power.

2.12 In some cases, this has increased levels of financial inclusion as consumers with limited access to mainstream, traditional credit have been able to access low cost credit through BNPL arrangements. A trend involving users of more expensive and more problematic forms of credit shifting to BNPL instead of, or in addition to, mainstream credit has also been observed.

2.13 BNPL arrangements are already covered by consumer protection provisions in the Australian Securities and Investments Commission Act 2001, including those relating to misleading, deceptive and unconscionable conduct. BNPL products are also subject to Product Intervention Power and Design and Distribution Obligation regimes under the Corporations Act.

2.14 Self-regulation has contributed to the development of BNPL industry standards. The majority of BNPL providers adhere to the Australian Finance Industry Association's voluntary Buy Now, Pay Later Industry Code, which came into effect on 1 March 2021. The Association estimates that adherents of the Code account for approximately 90 per cent of the BNPL market. Breaches of the Code are subject to monitoring, investigation and sanctions by the Buy Now, Pay Later Code Compliance Committee. Consumers can also obtain remedies against Code members from AFCA, or directly against members through contract law. However, the Code is not enforceable by ASIC and the failure of Code signatories to comply with their obligations does not attract criminal or civil penalties.

2.15 As noted above, BNPL arrangements are not currently regulated under the Credit Act because they typically fall under the exemptions available to certain types of credit in the Credit Code. Credit products that operate within these exemptions are not subject to RLOs or other Credit Act requirements, and providers do not need to hold an Australian credit licence.

2.16 The growth of the BNPL market sector was not contemplated by policy makers when the Credit Code exemptions were designed. While other forms of third-party merchant finance did exist at that time, innovation in technology and business models has resulted in new credit products operating under these exemptions with far greater accessibility, convenience, immediacy and volume than originally envisaged. In consequence, poor consumer outcomes are being observed at sufficient levels to justify regulatory intervention.

2.17 The key concerns that have been identified relate to unaffordable lending practices, unsatisfactory complaint resolution and hardship assistance, excessive late payment fees, and a lack of transparency in the context of product disclosures and warnings.

2.18 The industry is not homogenous; BNPL providers offer a range of diverse products. As a result, the nature and severity of the concerns vary from product to product, and from provider to provider.

2.19 Australian consumers and merchants have benefited from the rise of the BNPL industry. It is important to ensure, however, that these benefits are accompanied by appropriate mitigation of the risk of consumer harm.

Summary of new law

2.20 The key objective of Schedule 2 to the Bill is to regulate BNPL contracts under the Credit Act. This involves establishing LCCCs as a new category of regulated credit. BNPL contracts are a class of LCCCs. A BNPL arrangement is defined to capture an arrangement where the merchant is the initial lender, but the bulk of the credit is provided by another provider. However, the new framework does not cover entities that merely accept BNPL products or are engaged in their promotion.

The Credit Act

2.21 Schedule 2 to the Bill defines an LCCC as a BNPL contract or another kind of contract prescribed by the regulations, under which credit may be provided, and which satisfies prescribed requirements relating to fees, charges and other matters.

2.22 Credit providers are prohibited from engaging in behaviour that has the effect of restructuring their credit activities so as to fall outside the regulatory framework for LCCCs.

2.23 Because LCCCs are subject to the Credit Code, LCCC providers are required to comply with the licensing requirements in Chapter 2 of the Credit Act. They are required to hold and maintain an Australian credit licence and to comply with the relevant licensing requirements and licensee obligations.

2.24 LCCC providers that do not hold an Australian credit licence are required to obtain one. If an LCCC provider holds a licence to engage in a different kind of credit activity, they may be required to vary their existing licence. This is a matter for ASIC to determine.

2.25 If a credit contract falls within the definition of an LCCC but could also be characterised as a small amount credit contract or a medium amount credit contract for the purposes of the Credit Act, it is regulated as an LCCC only.

2.26 The Reference Checking and Information Sharing Protocol does not apply to LCCC providers. This protocol sets out reference checking and information sharing obligations for licensees and credit representatives in the mortgage industry. These obligations have minimal application to the LCCC business model.

2.27 Credit representatives of LCCC providers are not required to meet requirements relating to sub-authorisation and associated obligations to report to ASIC, provide credit guides and join AFCA unless they also engage in debt collection.

2.28 ASIC retains the power to suspend, cancel and vary an LCCC provider's Australian credit licence in accordance with Division 6 of Part 2-2 of the Credit Act.

2.29 LCCC providers can elect to either be subject to the modified RLO framework or to comply with the existing RLO framework in Divisions 1 to 4 of Part 3-2 of the Credit Act.

2.30 Both RLO frameworks require LCCC providers to take appropriate and proportionate steps to assess whether entering into a credit contract or increasing a consumer's credit limit would be unsuitable for the consumer.

2.31 Under the existing RLO framework, regulated consumer credit products are subject to principles-based obligations to make reasonable inquiries into, and ensure reasonable verification of, the financial circumstances of the borrower (referred to collectively as 'reasonable steps'), before assessing the suitability of any proposed credit offering. The scope of these reasonable steps, by implication, affects the level of rigour of the suitability assessment.

2.32 These provisions still apply to LCCCs under the modified RLO framework. However, the extent of these obligations will be influenced by consideration of a range of factors relating to the risks of unaffordable lending occurring and the expected harm mitigation if unaffordable lending does occur. These factors primarily relate to the risks arising from the product and target market, and the LCCC provider's documented processes to mitigate these risks and harms.

2.33 Broadly speaking, these factors are intended to reduce the scope and intensity of existing information gathering and verification requirements under Part 3-2 of the Credit Act. However, the modified RLOs may not have this effect if, for example, a provider has a particularly risky target market or offers poorly designed products.

2.34 In order to balance this increased scalability with consumer protection, the modified RLOs require LCCC providers to:

•

comply with specific requirements, to be prescribed in regulations, before entering a new LCCC with a consumer; and

•

have a written policy (known as an unsuitability assessment policy) that is formulated with regard to certain matters, is evidence-based and is regularly reviewed.

2.35 The ability to choose between the two RLO frameworks allows firms that offer both LCCCs and currently regulated consumer credit products to align responsible lending processes for both product types if they wish.

2.36 No new or additional penalty provisions are created by Schedule 2 to the Bill. However, LCCC providers will be subject to existing civil and criminal penalties for breaches of the Credit Act. In addition, all credit licensees are subject to a general obligation to comply with credit legislation. Breaching any part of the Credit Act may expose an LCCC provider to cancellation or suspension of their credit licence.

The Credit Code

2.37 The Credit Code is intended to apply to LCCCs and LCCC providers, with minor modifications. The requirements relating to interest rates and charges only apply to LCCC providers that charge interest for the provision of credit. LCCC providers are also permitted to prompt consumers to increase their credit limits, and to increase those limits with consumer permission.

2.38 To enable consumers to more accurately assess the relative cost of certain types of credit, Part 10 of the Credit Code sets out requirements relating to comparison rates. These do not apply to LCCCs. Comparison rates are unlikely to provide LCCC consumers with useful additional information, given the fact that all LCCCs are required to adhere to the fee caps prescribed in the regulations.

2.39 The default notice requirements in section 87 of the Credit Code are expanded beyond direct debit to cover a broader range of payment types, including creditor-initiated charges on a credit card and creditor-initiated charges via the New Payment Platform's PayTo service.

Comparison of key features of new law and current law

Table 2.1 Comparison of new law and current law

Detailed explanation of new law

2.40 Schedule 2 to the Bill amends the Credit Act to create a modified RLO framework that LCCC providers can opt in to for some or all of their LCCC products. If they do not opt in, LCCC providers (and the LCCC products they offer) are subject to the existing RLO framework in Divisions 1 to 4 of Part 3-2 of the Credit Act.

Defining low cost credit contracts

2.41 Schedule 2 to the Bill introduces definitions for the key terms 'buy now, pay later arrangement', 'buy now, pay later contract', and 'low cost credit contract'. These terms are set out in the Credit Code and referenced in signpost definitions in the Credit Act. [Schedule 2, Part 1, items 1, 5-6, subsection 5(1) of the Credit Act and sections 13D, 13E and 204 of the Credit Code]

2.42 The definition of 'low cost credit contract' provides that a contract is an LCCC if:

•

credit is, or may be, provided under the contract; and

•

the contract is a BNPL contract, or a contract of a kind prescribed by the regulations; and

•

the period during which credit is, or may be, provided under the contract is no longer than the period (if any) prescribed by the regulations; and

•

the contract satisfies any requirements prescribed by the regulations that relate to fees or charges payable under the contract; and

•

the contract satisfies any other requirements prescribed by the regulations.

2.43 Although this definition only currently applies to BNPL contracts, other types of credit contracts (such as wage advance) may be brought within scope if prescribed by the regulations.

2.44 The reference in the definition of LCCCs to 'fees and charges' includes interest charges (including default charges), but excludes:

•

any fees or charges that are payable to or by a credit provider in connection with a credit contract in connection with which both credit and debit facilities are available if the fees or charges would be payable even if credit facilities were not available;

•

government charges or duties on receipts or withdrawals; and

•

enforcement expenses.

[Schedule 2, Part 1, item 5, subsections 13E(1) and (3) of the Credit Code]

2.45 A 'buy now, pay later arrangement' is an arrangement under which a BNPL provider directly or indirectly pays a merchant some or all of the price of goods or services purchased by a consumer, and where there is a contract between the BNPL provider and the consumer for the provision of credit in relation to the transaction.

2.46 Certain arrangements or series of arrangements prescribed by the regulations are excluded. For example, there may be situations in which the merchant and the BNPL provider are separate but related entities, such that the arrangement more closely resembles a vendor finance model.

2.47 Certain circumstances are stated not to affect whether an arrangement is a BNPL arrangement. These include whether any fees or charges are payable by the consumer or the merchant in connection with the arrangement; when payment by the BNPL provider occurs; and whether the contract is a continuing credit contract. In order for an arrangement to meet the definition, it is not necessary for it to include a contract to which the merchant, consumer and BNPL provider are all parties.

2.48 The definitions of LCCC and BNPL arrangement operate in conjunction with any other criteria prescribed in regulations. It is intended that the regulations will prescribe maximum fees and charges payable under an LCCC.

2.49 A 'buy now, pay later contract' is defined as a contract between the BNPL provider and a consumer pursuant to a BNPL arrangement, under which the BNPL provider provides credit to the consumer in connection with a transaction between the merchant and consumer for goods or services. [Schedule 2, Part 1, item 5, section 13D of the Credit Code]

2.50 The definitions of 'short term credit contract', 'small amount credit contract' and 'medium amount credit contract' are amended to exclude LCCCs. [Schedule 2, Part 1, items 2, 3 and 7, subsection 5(1) of the Credit Act and subsection 204(1) of the Credit Code]

Extending the application of the Credit Code

2.51 Schedule 2 to the Bill amends the Credit Code to extend its application to the provision of credit either under a BNPL contract or an LCCC.

2.52 If the Credit Code already applies to the provision of credit under a BNPL contract or an LCCC, it continues to apply to the provision of such credit. [Schedule 2, Part 1, item 5, subsections 13B(1) and 13C(1) of the Credit Code]

2.53 The application of the Credit Code is extended to the provision of credit under a BNPL contract or an LCCC if provided by a constitutional corporation and if the exclusions in subsections 6(1) and (5) and paragraph 5(1)(c) of the Credit Code are disregarded. This means that the exemptions available to certain types of credit in the Credit Code, which would typically apply to BNPL arrangements, are disapplied. The effect of this is that all contracts that meet the definition of a BNPL contact are subject to the Credit Code. A contract that also meets the definition of an LCCC is regulated as an LCCC. A contract that does not meet the definition of an LCCC – for example, because the fees and charges payable exceed the limit prescribed by regulations – is not regulated as an LCCC, but remains subject to the Credit Code and may be regulated in some other way (for example, as a credit contract, small amount credit contract or continuing credit contract).

2.54 In the case of an LCCC, subsections 6(13), (14) and (17) of the Credit Code are also disregarded such that neither regulations nor an ASIC instrument can exclude an arrangement from the definition of LCCC. This is because an LCCC that is not a BNPL contract must be another kind of contract prescribed by regulations. Unless and until an arrangement is prescribed for this purpose, it is excluded from the definition of an LCCC, so additional specific exclusions would be redundant. [Schedule 2, Part 1, item 5, sections 13B and 13C of the Credit Code]

2.55 A consequential amendment is made to the note to subsection 160G(2) of the Credit Act to include sections 13B and 13C in the list of sections which set out the kinds of provision of credit to which the Credit Code does or does not apply. [Schedule 2, Part 1, item 4, note to subsection 160G(2) of the Credit Act]

Responsible lending conduct

2.56 As noted above, licensees that are LCCC providers are required to choose between complying with either:

•

the modified RLO framework exclusively for LCCCs, which allows the requirements to expressly scale according to certain risk factors; or

•

the existing RLO framework in Divisions 1 to 4 of Part 3-2 of the Credit Act.

2.57 However, regardless of their choice, all LCCC providers are exempt from compliance with Division 4 of Part 3-1 of the Credit Act (which relates to obligations on credit assistance providers before providing credit assistance for credit contracts). [Schedule 2, Part 2, item 10, section 115A of the Credit Act]

2.58 Section 128 of the Credit Act sets out the obligation to assess the unsuitability of credit contracts. Schedule 2 to the Bill clarifies how the operation of this section is to be affected by other provisions in relation to certain LCCCs. [Schedule 2, Part 2, items 11 and 12, section 128 of the Credit Act]

2.59 Schedule 2 to the Bill amends paragraph 133(4)(b) of the Credit Act to clarify that a responsible lending assessment can occur on the same day as credit is offered or credit limits are increased, so long as the assessment happens before either of those actions occur. [Schedule 2, Part 2, item 13, paragraph 133(4)(b) of the Credit Act]

Licensees that are credit providers under credit contracts

2.60 Schedule 2 to the Bill sets out additional rules relating to LCCCs, namely:

•

the process by which LCCC providers can elect for the additional rules to apply;

•

the additional requirements applying to licensees that have assessed an LCCC as unsuitable; and

•

the requirement on licensees to have and regularly update an unsuitability assessment policy.

[Schedule 2, Part 2, item 14, Part 3-2BA of the Credit Act]

2.61 As noted above, Schedule 2 to the Bill allows LCCC providers to elect to be bound by the modified RLO framework in relation to some or all classes of their LCCC products. Elections must be in writing, and an electing licensee must keep a written copy until 6 years after the election ceases to be in force. An LCCC provider may revoke an election and must also keep a copy of the revocation for 6 years from the day of revocation. An election remains in force until it is revoked.

2.62 If an LCCC provider opts in to the modified RLO framework in relation to an LCCC product, each contract document must (while the election is in force) contain a statement that the credit provider has made such an election. This is intended to make clear which RLO framework applies to a given LCCC product. [Schedule 2, Part 2, item 15, subsection 17(15B) of the Credit Code]

2.63 The ensuing commentary relates only to LCCC providers who have elected to operate under the modified RLO framework.

Unsuitable low cost credit contracts

2.64 Division 3 of Part 3-2 of the Credit Act contains the core obligations of the existing RLO framework. These concern assessing the suitability of credit contracts and include requirements to:

•

make reasonable inquiries as to the requirements and objectives of the consumer;

•

make reasonable inquiries as to their financial situation;

•

take reasonable steps to verify their financial situation; and

•

subsequently assess whether the credit contract is unsuitable (including by assessing affordability and whether the credit meets the requirements and objectives of the consumer).

2.65 Under the modified RLO framework introduced by Schedule 2 to the Bill, LCCC providers are still required to perform the steps listed above before entering an LCCC or increasing a consumer's credit limit. However, the modified RLO framework:

•

eases some requirements about the timing of inquiries and verification in relation to the assessment of suitability;

•

provides that specified risk factors ('relevant matters') must be taken into account in determining what constitutes reasonable inquiries and reasonable verification (referred to collectively as 'reasonable steps');

•

clarifies that a provider may conduct inquiries and an assessment for an amount of credit larger than that initially offered to the consumer, and that this assessment will also suffice for any subsequent credit limit increases up to that amount, up to a period of 2 years; and

•

creates a rebuttable presumption that LCCCs with a credit limit of $2,000 or less meet the consumer's requirements and objectives for the purposes of sections 131 and 133 of the Credit Act.

•

[Schedule 2, Part 2, item 14, Part 3-2BA of the Credit Act]

2.66 Schedule 2 to the Bill modifies the operation of section 128 of the Credit Act, which creates an obligation to assess contractual suitability. LCCC providers are not required to undertake a preliminary assessment prior to informing a consumer of their eligibility for a credit contract or credit limit increase. However, although an assessment is no longer required to be undertaken before an unconditional representation is made, such a representation could still be found to be misleading. [Schedule 2, Part 2, item 14, paragraph 133BXB(a) of the Credit Act]

2.67 LCCC providers may satisfy the obligations in section 128 of the Credit Act to make an assessment of unsuitability and make inquiries and verification about the consumer within the period of 90 days (or other period prescribed by regulations) ending immediately before either entering into an LCCC, or increasing the credit limit of an LCCC. [Schedule 2, Part 2, item 14, paragraph 133BXB(b) of the Credit Act]

2.68 Schedule 2 to the Bill modifies the operation of section 130 of the Credit Act, which sets out the reasonable steps requirement, outlined above. In determining whether an LCCC provider has complied with the reasonable steps requirement, the following matters must be considered:

•

the nature of the LCCC, including its terms and the type and amount of credit provided under it;

•

if there is a target market determination for the LCCC, the nature of the target market as described in the determination;

•

whether the consumer is financially vulnerable;

•

the existence of, and compliance with, any procedures to reduce the risk of providing credit to a consumer on unaffordable terms or to mitigate the harm that may be caused if credit is provided on such terms; and

•

any other matters prescribed by regulations.

2.69 These matters do not limit what may be taken into account in determining what is reasonable. Rather, consideration of these matters is intended to lower the scope and intensity of the inquiries and verification required under section 130. However, the relevant matters may in fact increase the requisite rigour of the inquiries and verification. This may be the case if products are poorly designed or attract especially vulnerable consumers. [Schedule 2, Part 2, item 14, subsections 133BXC(2) and (3) of the Credit Act]

2.70 When considering the nature of the product, relevant matters include: the amount of credit made available to the consumer; the basis on which it is made available; the amount of repayments; how much time is allowed to make repayments; fees and charges payable under the contract (including default fees and the circumstances in which they are payable); and other terms and conditions of the contract. [Schedule 2, Part 2, item 14, paragraph 133BXC(3)(a) of the Credit Act]

2.71 The reference to the 'target market' of an LCCC is to the target market as defined in the target market determination for that type of product, as required by the design and distribution obligation regime in Part 7.8A of the Corporations Act.

2.72 When considering the target market determination for an LCCC (if there is one), an LCCC provider may be able to augment their analysis by historical data they possess on the likely credit risks associated with the target market, including data on bad debt and arrears rates, hardship arrangements and complaints relating to unaffordability. These matters are relevant to determining how the target market for an LCCC impacts on what is required to meet the 'reasonable inquiries' and 'reasonable steps' requirements. Exclusion of higher risk customer groups from a target market would be expected to reduce the extent of the steps that need to be taken. [Schedule 2, Part 2, item 14, paragraph 133BXC(3)(b) of the Credit Act]

2.73 LCCC providers must consider an individual consumer's circumstances and whether those circumstances indicate financial vulnerability. [Schedule 2, Part 2, item 14, paragraph 133BXC(3)(c) of the Credit Act]

2.74 LCCC providers may have procedures that, while designed for other purposes, nonetheless have the effect of reducing the risk of unaffordable lending or mitigating harms of actual unaffordable lending. Unaffordability is not defined, but is broadly intended to refer to the same circumstances set out in paragraphs 131(2)(a) and 133(2)(a) of the Credit Act. Those provisions state that a contact or increase is unsuitable if the consumer will be unable to comply with their financial obligations, or could only comply with substantial hardship.

2.75 Examples of procedures to reduce the risk of unaffordable lending include: suspending access to credit in the event of customer arrears or defaults; undertaking supplementary real-time monitoring of creditworthiness during the life of an LCCC; or using specific protocols that govern when credit limits are to be increased or decreased. Harm mitigation strategies include the LCCC provider's approach to debt collection, hardship applications, and procedures for engaging with vulnerable consumers.

2.76 The existence of such procedures, and the provider's compliance with them, would be expected to decrease a product's consumer risk. The intensity of the requisite inquiries and steps would be proportionately reduced. [Schedule 2, Part 2, item 14, paragraphs 133BXC(3)(d) and (e) of the Credit Act]

2.77 Additionally, in making reasonable inquiries into, and taking reasonable steps to verify, the consumer's requirements, objectives and financial situation, any matters prescribed by the regulations must be taken into account. These may include the types of information the LCCC provider must use in the assessment of unsuitability; the content and level of detail of the information to be used; whether the information in the LCCC provider's possession is sufficient; and whether and to what extent an LCCC provider may obtain additional information from the consumer. [Schedule 2, Part 2, item 14, paragraph 133BXC(3)(f) of the Credit Act]

Assessments in relation to larger contracts

2.78 The modified RLO framework inserted by Schedule 2 to the Bill adjusts the existing assessment requirements to accommodate an assessment made for a larger contract than the LCCC that is actually entered. Schedule 2 to the Bill includes definitions of the terms 'initial contract', 'larger contract', 'protected increase', and 'protected period' for the purposes of this modified rule. [Schedule 2, Part 2, item 14, subsections 133BXD(1) and (7) of the Credit Act]

2.79 Schedule 2 to the Bill clarifies that an LCCC provider is taken to have satisfied their obligations to assess unsuitability under section 128 of the Credit Act if:

•

they conduct an initial assessment for a larger contract (ie, a contract for an amount of credit larger than the credit limit of the LCCC);

•

the provider subsequently increases the credit limit;

•

after the increase, the LCCC has a credit limit that is no greater than the maximum credit limit of the initial assessment; and

•

the terms of the LCCC after the increase are otherwise substantially the same as were it terms immediately before the increase.

2.80 In these circumstances, the initial assessment will suffice for any subsequent credit limit increases up to the maximum credit limit, up to a period of 2 years, thereby allowing for what is termed a 'protected increase'. This is intended to support the practice of providers offering gradual credit limit increases to consumers who make timely repayments. [Schedule 2, Part 2, item 14, subsections 133BXD(1)-(4) of the Credit Act]

2.81 A 'protected increase' of the initial contract is an amount that is no greater than the maximum credit limit made within the 'protected period', which is the shorter of the period covered by the initial assessment or the period of 2 years beginning when the period covered by the initial assessment begins. However, an LCCC provider is not precluded from making a new assessment in relation to the protected increase before sanctioning it. [Schedule 2, Part 2, item 14, subsections 133BXD(6)-(7) of the Credit Act]

2.82 An LCCC provider cannot make a protected increase if the provider has information that indicates the increase would be unsuitable for the consumer. The LCCC provider is not obliged to actively seek additional information about the unsuitability of the protected increase, but must not disregard information that is actually within its possession. Information that would make an increase unsuitable could include, for example, that the consumer has defaulted on repayments or has recently requested a hardship arrangement. [Schedule 2, Part 2, item 14, subsection 133BXD(5) of the Credit Act]

Presumptions where the credit limit of the contract is not above a threshold amount

2.83 Section 131 of the Credit Act sets out circumstances in which a credit contract must be assessed as unsuitable for the consumer. Schedule 2 to the Bill includes a presumption that can be relied upon by LCCC providers in relation to unsuitability assessments for the purposes of that section. [Schedule 2, Part 2, item 14, section 133BXE of the Credit Act]

2.84 If the credit limit of an LCCC is $2,000 or less, then the initial contract is presumed to meet the consumer's requirements and objectives, despite paragraph 131(2)(b) of the Credit Act. The presumption operates only in relation to the consumer's requirements and objectives. It does not apply to the consumer's ability to comply with their financial obligations under the contract. The presumption is rebutted by evidence to the contrary. For example, if a consumer indicates that they are seeking finance for a specific purchase and do not require an ongoing line of credit, that may rebut the presumption of suitability in respect of a continuing credit contract. [Schedule 2, Part 2, item 14, subsection 133BXE(2) of the Credit Act

2.85 The presumption applies to LCCCs with a credit limit of $2,000 or less, or another threshold prescribed by regulations. It is not intended that an alternative threshold amount will be prescribed immediately. However, the regulation-making power provides flexibility to adjust the threshold in future to ensure its value remains appropriate (for example, to take into account the effects of inflation). [Schedule 2, Part 2, item 14, subsection 133BXE(6) of the Credit Act]

2.86 The presumption does not apply if a licensee has entered an LCCC based on an assessment made in relation to a 'larger contract' (a defined term) and the credit limit of the larger contract is greater than the threshold amount. The presumption is restricted to low value BNPL contracts only. A small proportion of LCCCs relate to high value items such as batteries and solar panels. In these cases, it is reasonable to require the consumer's objectives and requirements to be assessed. [Schedule 2, Part 2, item 14, subsections 133BXE(3) and (6) of the Credit Act]

2.87 If an LCCC provider increases the credit limit of an LCCC, and the credit limit of the initial contract after the increase is $2,000 or less, then the LCCC is presumed to meet the 'requirements and objectives' limb of the unsuitability test if the increase occurs in the period covered by the assessment. This presumption operates unless the contrary is proved. [Schedule 2, Part 2, item 14, subsection 133BXE(4) of the Credit Act]

2.88 This presumption does not apply if the LCCC provider's initial assessment was for an amount of credit over $2,000 and the provider then seeks to rely on that assessment in relation to a credit limit increase. For example, a licensee may assess a contract of $5,000 as suitable for a consumer and, on the strength of that, enter an initial contract for $1,000. Relying on section 133BXD(4) of the Credit Act, the LCCC provider then seeks to increase the credit limit to $1,500, pointing to the $5000 suitability assessment as authorisation. In these circumstances, the LCCC provider cannot also rely on the presumption in section 133BXE(4) to conclude that the increase would meet the consumer's requirements and objectives. [Schedule 2, Part 2, item 14, subsection 133BXE(5) of the Credit Act]

Prohibition on entering unsuitable low cost credit contracts

2.89 Section 133 of the Credit Act prohibits an LCCC provider entering, or increasing the credit limit of, unsuitable credit contracts. Under the modified RLO framework, LCCCs with a credit limit less than or equal to the 'threshold amount' (defined as $2,000 or a dollar amount prescribed by the regulations), are presumed to not be unsuitable, in terms of meeting the consumer's requirements and objectives, for the purposes of section 133.

2.90 The presumption is rebutted by evidence to the contrary. For example, if a consumer indicates that they are seeking finances for a specific purchase and do not require an ongoing line of credit, that may rebut the presumption of suitability in respect of a continuing credit contract. [Schedule 2, Part 2, item 14, section 133BXF of the Credit Act]

Unsuitability assessment policies

2.91 To utilise the modified RLO framework, LCCC providers must prepare written policies that set out processes for ensuring compliance with sections 128 and 131 of the Credit Act. Such a document is defined as an 'unsuitability assessment policy'.

2.92 Providers must ensure that their policies, if followed, make it likely that they themselves will be in compliance with sections 128 and 131 of the Credit Act. They must also comply with any policy-related requirements in the regulations. Such regulations may relate, but are not confined, to the content of policies and obligations to review or update them. [Schedule 2, Part 2, items 9 and 14, subsection 5(1) of the Credit Act and section 133BXG of the Credit Act]

Credit representatives

2.93 Part 2-3 of the Credit Act regulates credit representatives and other representatives of licensees. A credit representative is a person who is authorised by an Australian credit licensee to act on behalf of the licensee for the purposes of carrying out the licensee's authorised credit activity. Merchants are not credit representatives of LCCC providers simply because they process transactions or advertise that they accept LCCCs.

2.94 Licensees are permitted to authorise credit representatives under section 64 of the Credit Act. Under section 65 of the Credit Act, credit representatives that are body corporates may sub-authorise natural persons to engage in credit activities.

2.95 Schedule 2 to the Bill amends sections 64 and 65 of the Credit Act to exempt credit representatives of LCCC providers from requirements in relation to AFCA membership, and to exempt sub-authorised persons from requirements in relation to AFCA membership and ASIC notification. It further amends sections 158 and 160 of the Credit Act to adjust requirements in relation to credit guides. The excluded requirements are unnecessarily burdensome in light of the very minimal benefit they might provide to consumers who enter LCCCs.

AFCA membership

2.96 Currently, paragraph 64(5)(c) of the Credit Act provides that the authorisation of a credit representative has no effect if the person is not a member of the AFCA scheme. 'AFCA scheme' is defined in accordance with Chapter 7 of the Corporations Act as the external dispute resolution scheme for which an authorisation under Part 7.10A of that Act is in force.

2.97 Paragraph 65(6)(c) of the Credit Act similarly provides that sub-authorisation of a natural person by a credit representative has no effect if the person is not a member of the AFCA scheme.

2.98 Schedule 2 to the Bill amends these paragraphs to remove the requirements for credit representatives and sub-authorised persons in relation to an LCCC to be AFCA members. [Schedule 2, Part 3, items 20-22, paragraphs 64(5)(c) and (ca) and 65(6)(c) and (ca) of the Credit Act]

2.99 LCCC providers must be AFCA members themselves and are ultimately responsible for the conduct of their credit representatives. Requiring those representatives to also hold AFCA membership would offer limited additional consumer protection.

ASIC notification

2.100 Section 71 of the Credit Act requires credit representatives to notify ASIC about sub-authorisations (including their variation and revocation) under section 65. Schedule 2 to the Bill amends section 71 to remove this requirement for LCCCs. [Schedule 2, Part 3, item 23, subsection 71(5A) of the Credit Act]

2.101 ASIC must still be notified of authorisations (including variations and revocations) of credit representatives by an LCCC provider under section 64 of the Credit Act.

Credit guides

2.102 Schedule 2 to the Bill eases certain requirements in relation to the content and giving of credit guides. It amends section 158 of the Credit Act, which requires a credit representative to give a consumer the licensee's credit guide under Part 3-2 of the Credit Act, along with the credit representative's own credit guide. Only the former requirement applies to LCCC providers. [Schedule 2, Part 3, item 24, subsection 158(1A) of the Credit Act]

2.103 In addition, minor changes are made to section 160 of the Credit Act, which sets out mandatory features of the credit guide that is given to the debtor by a licensee or a credit representative on being authorised by a credit provider under a credit contract. The changes reflect the removal of the requirement to notify ASIC of any sub-authorisations. [Schedule 2, Part 3, item 25, paragraph 160(3)(e) of the Credit Act]

Precontractual disclosure

2.104 Part 2, Division 1 of the Credit Code establishes the requirements for negotiating and entering credit contracts. Subsection 16(1) of the Credit Code provides that before a credit provider enters a credit contract with a consumer, they must give the consumer a precontractual statement and an information statement.

2.105 Schedule 2 to the Bill amends section 16 of the Credit Code to extend the requirement of precontractual disclosure to LCCC providers. The requirement to give a precontractual statement is replicated for LCCC providers, and there are additional requirements with respect to the information statement. The amendments includes a regulation-making power to prescribe mandatory inclusions in the information statement. Additionally, there is a power for ASIC to determine any requirements by way of legislative instrument, so long as they are consistent with those prescribed by the regulations. [Schedule 2, Part 4, items 27-28, subsections 16(1)-(1B) of the Credit Code]

Contract documents and statements of account

2.106 Section 17 of the Credit Code sets out the matters that must be in a credit contract.

2.107 Schedule 2 to the Bill modifies this by providing that if a credit contract is an LCCC under which no interest charges are payable, then subsections 17(4) to (6) of the Credit Code do not apply in relation to the contract document.

•

Subsection 17(4) of the Credit Code requires a credit contract to disclose the annual percentage rate or rates.

•

Subsection 17(5) of the Credit Code requires a credit contract to disclose the method of calculation of interest charges payable under the contract and the frequency with which interest charges are to be debited under the contract.

•

Subsection 17(6) of the Credit Code requires a credit contract to contain the total amount of interest charges payable under the contract, if ascertainable.

2.108 These requirements apply only to LCCCs that charge interest on the provision of credit. If no interest charges are payable, the contract document is required to contain a statement to that effect. [Schedule 2, Part 5, item 30, subsection 17(6A) of the Credit Code]

2.109 Section 17 of the Credit Code is further amended to include additional content requirements for contract documents in respect of LCCCs. In view of the nature of LCCCs and the way in which credit is to be repaid, the contract document must specify the frequency of repayments (including when payments must be made, including the first repayment, if ascertainable); the amount and the number of the repayments and the total amount of the repayments; and, if the amount of the repayments is not ascertainable, the method of calculating it. These requirements are substantially similar to the existing requirements under subsection 17(7) of the Credit Code. However, that subsection distinguishes minimum repayments under a continuing credit contract from other repayments. As this may not be relevant to LCCCs, subsection 17(7A) of the Credit Code does not make this distinction. [Schedule 2, Part 5, items 31-32, subsections 17(7)-(7A) of the Credit Code]

2.110 Subsection 17(10) of the Credit Code provides that contract documents of credit contracts must contain details of the frequency with which statements of account are to be provided to the consumer. Schedule 2 to the Bill seeks to ensure that these requirements are adaptable to a wide range of technologies, giving LCCC providers the flexibility to determine the appropriate means by which they provide information to their customers.

2.111 If an LCCC provider proposes to give statements of account electronically, the contract document must contain information about the manner of doing so. [Schedule 2, Part 5, item 33, subsection 17(10A) of the Credit Code]

2.112 Subsection 33(3) of the Credit Code sets out circumstances in which a statement of account need not be given by credit providers. Schedule 2 to the Bill inserts a regulation-making power to prescribe requirements which, if met, will exempt LCCC providers from giving statements of account. For example, the regulations may provide that if an LCCC provider has made certain information permanently available to the consumer on its website, a statement of account need not be given. [Schedule 2, Part 5, item 34, paragraph 33(3)(g) of the Credit Code]

2.113 If statements of account need not be given because an LCCC provider satisfies prescribed requirements under subsection 33(3), the contract document must set out any information prescribed by the regulations. [Schedule 2, Part 5, item 33, subsection 17(10B) of the Credit Code]

Increasing credit limits

2.114 Section 67 of the Credit Code sets out the requirements for increasing the credit limit on a continuing contract. Subsection 67(4) of the Credit Code provides that a credit provider may increase the credit limit under a continuing credit contract only at the request of the debtor or with the debtor's written consent. Schedule 2 to the Bill amends Part 4, Division 1 of the Credit Code to apply this requirement to LCCCs. [Schedule 2, Part 6, items 37-40, paragraph 61(2)(b), sections 67 and 67AA and subsection 68(4) of the Credit Code]

2.115 Section 133BE of the Credit Act provides that a credit provider under a credit card contract must not make a credit limit increase invitation to the debtor under the contract. The note to that section mentions other requirements in relation to increasing credit limits. For clarity, Schedule 2 to the Bill amends the note to include a reference to LCCCs. [Schedule 2, Part 6, item 36, paragraph (b) of the note to subsection 133BE(1) of the Credit Act]

Interest rates and comparison rates

2.116 Part 2, Division 4A of the Credit Code sets out how to calculate the annual cost rate of a credit contract and associated prohibitions.

2.117 Schedule 2 to the Bill amends section 32A of the Credit Code to ensure that the prohibitions relating to credit contracts if the annual cost rate exceeds 48 per cent do not apply to LCCCs. [Schedule 2, Part 7, item 41, paragraph 32A(4)(b) of the Credit Code]

2.118 Subsection 34(6) of the Credit Code requires a statement of account for a credit contract to include certain information about interest charges. Schedule 2 to the Bill clarifies that subsection 34(6) only applies in relation to LCCCs under which interest charges are payable. [Schedule 2, Part 7, item 42, subsection 34(6A) of the Credit Code]

2.119 Part 10 of the Credit Code sets out requirements relating to comparison rates, which enable consumers to more accurately assess the relative cost of certain types of credit. Section 158 of the Credit Code provides that Part 10 does not apply to continuing credit contracts.

2.120 Schedule 2 to the Bill amends section 158 of the Credit Code to exclude LCCCs from the application of Part 10 of the Credit Code. Comparison rates are unlikely to provide consumers with useful additional information given that all LCCCs are required to adhere to the same fixed amount fee limits prescribed by regulations. Also, consumers may be confused by receiving interest disclosure information for a product that does not charge interest. A number of consequential amendments are made to take account of this exclusion. [Schedule 2, Part 7, items 43-47, sections 157, 158 and 159 of the Credit Code]

Default notices

2.121 Part 5 of the Credit Code relates to ending and enforcing credit contracts, mortgages and guarantees. Division 1 of Part 5 of the Credit Code deals with the ending of a credit contract by the debtor or guarantor. Subdivision C of Division 1 of the Credit Code relates to a credit provider providing notice of first direct debit default.

2.122 Schedule 2 to the Bill makes several minor amendments that, taken together, expand the first time default notice requirements in section 87 of the Credit Code to apply beyond direct debits to cover a broader range of payment types, including creditor-initiated charges on a credit card and creditor-initiated charges via the New Payment Platform's PayTo service. These amendments include a number of machinery changes to headings and subheadings.

2.123 Payment defaults for LCCCs are captured by new subsection 87(1A) of the Credit Code, which applies if the debtor under an LCCC is in default in relation to the payment of an amount under the LCCC, and it is the first occasion that the debtor is in default in relation to such a payment. [Schedule 2, Part 8, items 52-56, section 87 of the Credit Code]

2.124 Part 2 of the Credit Code sets out rules relating to credit contracts. Division 5A of Part 2 of the Credit Code contains additional rules relating to small amount credit contracts. Section 39C of the Credit Code provides that a credit provider must do prescribed things if a default in payment by direct debit occurs.

2.125 Schedule 2 to the Bill makes a minor amendment to section 39C of the Credit Code to remove the definition of 'direct debit'. That term is already defined in the main definition section of the Credit Code. [Schedule 2, Part 8, items 49-50, section 39C of the Credit Code]

Avoidance schemes

2.126 Part 7-1 of the Credit Act deals with miscellaneous matters. Division 1A of Part 7-1 of the Credit Act has rules that prohibit schemes designed to avoid the application of the Credit Act in relation to small amount credit contracts and consumer leases or to avoid the application of product intervention orders.

2.127 LCCCs (including BNPL contracts) are not currently regulated by the Credit Act. With the introduction of the modified RLO framework, there is a risk that providers will seek to structure their activities to fall outside the definition of LCCC or BNPL in order to remain exempt from licensing, RLO and other regulatory requirements under the Credit Act.

2.128 Schedule 2 to the Bill amends section 323, paragraphs 323A(2)(a) to (d), subparagraphs 323B(1)(a)(i) and (ii), and subparagraphs 323B(1)(b)(i) and (ii) of the Credit Act to include LCCCs in Division 1A of Part 7-1 of the Credit Act, thereby bringing LCCCs within the scope of the anti-avoidance provisions. [Schedule 2, Part 9, items 58-61, sections 323, 323A and 323B of the Credit Act]

2.129 Failure to comply with the anti-avoidance provisions could incur the penalties that currently apply under section 323A of the Credit Act. Further, the presumptions and exemptions in Division 1A of Part 7-1 of the Credit Act also apply to LCCCs, as they apply to small amount credit contracts and consumer leases.

•

For example, an avoidance strategy could involve the provision of credit to a consumer by the vendor (not by a third party) at the time of the purchase, but for this credit to be immediately refinanced by a third-party credit provider. Although this would not meet the definition of BNPL (which involves the provision of credit by a third party), the amendments to Division 1A of Part 7-1 of the Credit Act catch and penalise these avoidance strategies and others.

Giving information or documents

2.130 Schedule 2 to the Bill allows LCCC providers to provide information to consumers exclusively via electronic means (including apps or other technologies as they emerge). It does so by allowing an LCCC provider to give information or documents to a recipient by:

•

notifying the recipient that the material is available for retrieval on an electronic document retrieval system;

•

making the material available for a reasonable period after so notifying; and

•

ensuring that the material can be saved and printed by the recipient.

2.131 The notice must explain the nature of the material and include any information needed for its retrieval. The material is taken to be given as soon as the recipient has been notified and is able to retrieve it.

2.132 To the extent of inconsistency with other requirements in the Credit Act or Credit Code, this new mechanism of 'giving' information prevails. It does not, however, apply to credit contracts other than LCCCs. [Schedule 2, Part 10, item 64, section 331 of the Credit Act]

2.133 Definitions for 'information system' and 'electronic communication' cross-referring to definitions in the Electronic Transactions Act 1999 have been included in the Credit Act. Definitions for 'information system' and 'electronic communication' have also been included or amended in the Credit Code with consequential amendments to subsection 16(11) of the Credit Code and the heading for section 187 of the Credit Code. [Schedule 2, Part 10, items 63 and 65-68, subsection 5(1) of the Credit Act, and subsection 16(11), section 187 (heading) and subsection 204(1) of the Credit Code]

2.134 The regulations may prescribe additional requirements for material to be given in accordance with this new mechanism. If the regulations set out requirements for making material available, and those requirements are not satisfied, the material is not considered to have been made available. [Schedule 2, Part 10, item 64, subsection 331(6) of the Credit Act]

Commencement, application, and transitional provisions

Commencement

2.135 Part 1 of Schedule 2 to the Bill commences the day after Royal Assent.

2.136 Parts 2 to 10 of Schedule 2 to the Bill commence on a single day to be fixed by Proclamation. However, if the provisions do not commence within 6 months from the day of receiving Royal Assent, they commence on the day after that 6-month period (the 'delayed commencement time').

Extending the application of the Credit Act

2.137 As a general rule, the amendments made by Part 1 of Schedule 2 to the Bill apply on and after the delayed commencement time (meaning the time when Part 2 of Schedule 2 to the Bill commences) in relation to contracts entered into before, on or after the commencement of Part 1. Even though this is the general rule, certain provisions of the Credit Code (for example, section 17) have separate application rules. While the amendments will apply prospectively, they will have retrospective effect (unless provided otherwise in separate application rules) for existing LCCCs on the basis that any further action taken by an LCCC provider under an existing contract (for example, a credit limit increase) should be subject to the new obligations, including the modified RLO framework. To the extent existing provisions of the Credit Code (for example, sections 76 and 78) will apply and potentially affect a credit provider's rights under an existing LCCC even if no changes have been made to the contract after commencement, such retrospectivity is considered justified as the persons who are likely to be detrimentally affected are LCCC providers who are found by a court to have acted in a way that is unjust or unconscionable and their interests will be affected to the extent that a court takes action to rectify that unjust or unconscionable activity. [Schedule 2, Part 1, subitems 8(1) and (5)]

2.138 For the purposes of Divisions 2, 3, 4 and 6 of Part 2-2 of the Credit Act (licensing of persons who engage in credit activities) and Part 2-3 of the Credit Act (credit representatives), the amendments made by Part 1 of Schedule 2 to the Bill apply on and after commencement of that Part. This is intended to allow certain preparatory steps to occur before the delayed commencement time (for example, to apply for a licence to engage in certain credit activities), but does not have the effect that a licence is in fact required until the delayed commencement time. [Schedule 2, Part 1, subitem 8(2)]

2.139 If, before Part 2 of Schedule 2 to the Bill commences, an applicant applies for a licence to engage in credit activity relating to a BNPL contract or an LCCC, or applies to ASIC to vary the conditions of an existing licence to engage in such credit activity, and that application has not been withdrawn or dealt with before Part 2 commences, and the applicant is an AFCA member at all times during this transition period, then the Credit Act does not apply during this transition period to the applicant, particular persons acting on behalf of the applicant or a prospective credit representative of the applicant. This is included as a contingency to ensure that providers will not be prevented from engaging in credit activity through no fault of their own if there is a delay in processing a licence application. After the transition period, by virtue of the general rule at subitem 8(1), the Credit Act will apply to all BNPL contracts and LCCCs even if there was credit activity in relation to those contracts engaged in during the transition period. For example, after the transition period, existing provisions of the Credit Code (for example, sections 76 and 78) will apply and potentially affect a credit provider's rights under a BNPL contract or an LCCC that was entered into or varied during the transition period even if no changes have been made to the contract since the transition period. [Schedule 2, Part 1, subitems 8(3)-(4)]

Responsible lending conduct

2.140 The amendments made by Part 2 of Schedule 2 to the Bill to Division 4 of Part 3-1 of the Credit Act (obligations of credit assistance providers before providing credit assistance) apply in relation to credit assistance provided on or after the commencement of Part 2. [Schedule 2, Part 2, item 17]

2.141 An LCCC provider may elect to be covered by the modified RLO framework for LCCCs entered into before, on or after the commencement of Part 2 of Schedule 2 to the Bill. [Schedule 2, Part 2, subitem 18(1)]

2.142 The modified obligation to assess unsuitability when entering a credit contract, or increasing the credit limit of a credit contract, but not when making an unconditional representation in relation to a consumer's eligibility to enter a credit contract or increase the contract's limit, applies in relation to conduct that occurs on or after the commencement of Part 2 of Schedule 2 to the Bill. The permitted 90-day period for the unsuitability assessment may start before, on or after that commencement. [Schedule 2, Part 2, subitems 18(2) and (3)]

2.143 The modified obligation to make reasonable inquiries and verification applies in relation to entering, or increasing the credit limit of, an LCCC that occurs on or after the commencement of Part 2 of Schedule 2 to the Bill and determining whether a licensee has met that obligation based on things done before, on or after commencement. [Schedule 2, Part 2, subitem 18(4)]

2.144 An LCCC provider may satisfy their obligations under section 128 of the Credit Act with respect to an initial LCCC entered on or after the commencement of Part 2 of Schedule 2 to the Bill when making an assessment, inquiries and verification with respect to a larger contract on or after the commencement. For subsequent credit increases, an LCCC provider can rely on an initial assessment and reasonable inquiries and verification within the protected period if the contract is entered on or after commencement, and the assessment, inquiries and verification are similarly made on or after the commencement of Part 2 of Schedule 2 to the Bill. [Schedule 2, Part 2, subitems 18(5) and (6)]

2.145 The presumptions in sections 133BXE and 133BXF of the Credit Act apply in relation to assessments made, or conduct that occurs, on or after the commencement of Part 2 of Schedule 2 to the Bill. [Schedule 2, Part 2, subitems 18(7) and (8)]

2.146 If a licensee has elected to comply with the modified RLO framework in relation to an LCCC, the amendment requiring the contract document to contain a statement to that effect applies in relation to contract documents entered into on or after the commencement of Part 2 of Schedule 2 to the Bill. [Schedule 2, Part 2, item 19]

2.147 To avoid doubt, regulations prescribing a period for the purposes of section 128 of the Credit Act that were in force immediately before commencement of Part 2 of Schedule 2 to the Bill continue in force, on and after that commencement, and are taken from that commencement to be made for the purposes of that section as amended by Part 2. [Schedule 2, Part 2, item 16]

Credit representatives

2.148 The amendments to the Credit Act made by Schedule 2 to the Bill to disapply AFCA membership requirements apply on and after the commencement of Part 3 of Schedule 2 to the Bill in relation to authorisations given before, on or after that commencement.

2.149 The amended obligation to notify ASIC applies in relation to authorisations given on or after the commencement of Part 3 of Schedule 2 to the Bill, and the requirement to notify ASIC of changes in details applies, on and after that commencement, to authorisations given before, on or after that commencement. [Schedule 2, Part 3, item 26]

Precontractual disclosure

2.150 The amendments to section 16 of the Credit Code to extend the precontractual disclosure requirement to providers of LCCCs and impose any additional requirements with respect to the information statement via regulations or as determined by ASIC apply in relation to entering into an LCCC on or after the commencement of Part 4. They do not, however, apply if the precontractual statement and information statement were given before commencement and in accordance with the version of section 16 of the Credit Code in force at the time of the giving. [Schedule 2, Part 4, item 29]

Contract documents and statements of account

2.151 On and after the commencement of Part 5 of Schedule 2 to the Bill, section 17 of the Credit Code (matters that must be in the contract document) applies in relation to a BNPL contract or an LCCC only if the contract was entered into on or after that commencement. New paragraph 33(3)(g) of the Credit Code applies on and after commencement of Part 5 of Schedule 2 to the Bill in relation to LCCCs entered into before, on or after that commencement. [Schedule 2, Part 5, item 35]

Interest rates and comparison rates

2.152 The amendments of sections 157, 158 and 159 of the Credit Code to exclude LCCCs from the application of Part 10 of the Credit Code apply in relation to a credit advertisement that is published on or after the commencement of Part 7 of Schedule 2 to the Bill. A credit advertisement that began to be published before commencement, and remains published on or after commencement, is taken to be published on or after that commencement. [Schedule 2, Part 7, item 48]

Default notices

2.153 The amendments of section 87 of the Credit Code to expand the first time default notice requirements beyond direct debits to cover a broader range of payment types apply in relation to a default that occurs on or after the commencement of Part 8 of Schedule 2 to the Bill. [Schedule 2, Part 8, item 57]

Avoidance schemes

2.154 The amendments made by Part 9 of Schedule 2 to the Bill to apply the anti-avoidance provisions to LCCCs apply in relation to conduct mentioned in subsections 323A(1), (3), (4) or (5) of the Credit Act if the conduct occurs wholly or partly on or after the commencement of Part 9. [Schedule 2, Part 9, item 62]

Giving information or documents

2.155 The amendments made by Part 10 of Schedule 2 to the Bill apply in relation to information or documents given on or after the commencement of Part 10. [Schedule 2, Part 10, item 69]

Chapter 3: Medicare levy exemption for lump sum payments

Outline of chapter

3.1 Schedule 3 to the Bill amends the Medicare Levy Act to make changes to how certain eligible lump sum payments in arrears are assessed for the purposes of the Medicare levy.

3.2 The changes ensure low-income taxpayers are not denied concessional Medicare levy treatment solely as a result of receiving an eligible lump sum payment, for example as compensation for past underpaid wages. This amendment seeks to put eligible recipients of lump sum payments in arrears back into a similar position that they would have been had they been paid correctly.

Context of amendments

Medicare levy and reductions and exemptions

3.3 The Medicare levy is a levy that is payable by resident taxpayers and is used to help fund some of the cost of Australia's health care system. A resident taxpayer's liability for the Medicare levy is assessed against their taxable income each income year and the levy is payable if the individual's income exceeds the relevant Medicare levy threshold amount.

3.4 To determine if no Medicare levy is payable or a reduction applies, an individual's income is assessed against the Medicare levy individual or family low-income threshold, or individual income phase-in threshold in the Medicare Levy Act 1986. Where the taxable income or combined family taxable income exceeds the stated threshold amounts, the Medicare levy phases in at a rate of ten cents in the dollar until it reaches the full rate of levy.

3.5 Prescribed persons receive a full or partial exemption from the Medicare levy. An individual is considered to be a prescribed person for the purposes of the Medicare levy for all or part of an income year, if they meet one or more of the criteria in existing section 251U of the ITAA 1936. Examples of prescribed persons include certain defence force members, blind pensioners and sickness allowance recipients, foreign residents and certain veterans and military rehabilitation and compensation recipients.

3.6 There are two tax offsets for lump sum payments which can reduce the liability for income tax and the Medicare levy surcharge:

•

the lump sum payment in arrears tax rebate, and

•

the Medicare levy surcharge lump sum payments in arrears tax offset.

3.7 The lump sum payments in arrears tax rebate in existing section 159ZR of the ITAA 1936 provides a tax offset to limit the tax payable by an individual for eligible lump sum payments. The tax payable (excluding Medicare levy) is limited to an amount comparable to the amount that would have been payable, had the income been received in the year in which it was accrued, provided certain criteria are met.

3.8 The Medicare levy surcharge lump sum payments in arrears tax offset in Subdivision 61-L of the ITAA 1997 applies to reduce Medicare levy surcharge payable (but not the ordinary amount of Medicare levy) when a substantial lump sum is paid to a person in the current year and the lump sum was accrued in whole or in part in a previous year.

3.9 These two tax concessions apply to reduce the recipient's liability for the Medicare levy surcharge, or limit the tax payable, when the recipient has received an eligible lump sum in arrears. However, neither of these two tax concessions reduce the ordinary amount of Medicare levy payable if a recipient receives a lump sum payment in arrears that was accrued in the previous year or years that increases the individual's current year Medicare levy liability as a result of the Medicare levy threshold being exceeded.

3.10 The Senate Economics Committee's Inquiry into unlawful underpayment of employees' remuneration released in March 2022 highlighted that receipt of a lump sum in arrears adversely affect these individuals by increasing their liability for the Medicare levy.

3.11 This amendment is intended to address this and compensate taxpayers by calculating the Medicare levy as if the eligible lump sum in arrears had not been paid in the current income year where correct payment arrangements would have resulted in no Medicare levy being payable or a reduced amount of Medicare levy being paid.

Summary of new law

3.12 Schedule 3 to the Bill amends the Medicare levy Act to exclude eligible lump sum payments in arrears when working out a resident taxpayer's liability for the Medicare levy.

3.13 A taxpayer receiving a lump sum payment in arrears is eligible for the exemption from the Medicare levy if specific criteria are met.

Comparison of key features of new law and current law

Table 3.1 Comparison of new law and current law

Detailed explanation of new law

Lump sum payments in arrears

3.14 Schedule 3 to the Bill makes changes to how eligible lump sum payments in arrears are taken into account in working out an individual's liability for the Medicare levy. [Schedule 3, item 1, section 9A of the Medicare Levy Act 1986]

Eligible income

3.15 Schedule 3 to the Bill provides that to qualify for the exemption of a lump sum payment in arrears for the Medicare levy, an individual's assessable income for the year must include one or more eligible lump sum payments in arrears, in addition to satisfying other criteria. [Schedule 3, item 1, paragraph 9A(1)(a) of the Medicare Levy Act 1986]

3.16 Eligible lump sum is defined by reference to the term in existing subsection 159ZR(1) of the ITAA 1936 as a lump sum payment of an amount that is assessable income that was accrued in part or whole in an earlier income year: comprising:

•

salary or wages that accrued during a period of more than 12 months before they were paid;

•

salary and wages paid to a person after re-instatement to duty following a period of suspension to the extent the payment accrued during the suspension period;

•

a payment covered by section 12-80 or 12-120 in Schedule 1 to the Taxation Administration Act 1953 (superannuation income streams, annuities, compensation, sickness and accident payments);

•

a Commonwealth education or training payment;

•

a payment that is covered by Divisions 52, 53, or 55 of the ITAA 1997 (exempt pensions, benefits, allowances and settlement amounts); or

•

payments under a law of a foreign country of exempt pensions, benefits, allowances and settlement amounts.

[Schedule 3, item 1, definition of eligible lump sum in subsection 9A(4) of the Medicare Levy Act 1986]

Other criteria

3.17 Schedule 3 provides that for Medicare levy relief to apply, the amount of the total arrears amount must be ten per cent or more of the individual's normal taxable income after the deduction of the total arrears amount. [Schedule 3, item 1, paragraph 9A(1)(b) of the Medicare Levy Act 1986]

3.18 Total arrears amount is defined by reference to its definition in existing subsection 159R(1) of the ITAA 1936. It is defined as the total of the eligible lump sums included in the assessable income of a taxpayer that accrued in an earlier year or years of income.

3.19 Normal taxable income is defined in existing subsection 159ZR(1) of the ITAA 1936 broadly as taxable income excluding certain:

•

employment termination payment, unused leave payments and superannuation benefits and net capital gains;

•

net capital gains included in assessable income; and

•

above-average special professional income.

[Schedule 3, item 1, definition of normal taxable income and total arrears amount in subsection 9A(4) of the Medicare Levy Act 1986]

3.20 In addition, to qualify for concessional treatment at least one of the following must apply to the individual for each relevant accrual year:

•

their taxable income, adjusted by the amount of the lump sum accrued (but not received in that year), was below the relevant Medicare levy threshold for which no levy is payable or the Medicare levy phase in rate applies; or

•

they were a prescribed person for a least one day.

[Schedule 3, item 1, paragraph 9A(1)(c) of the Medicare Levy Act 1986]

3.21 The term relevant accrual years is defined as:

•

if there are two or more accrual years for the total arrears amount then the most recent two years; and

•

otherwise the accrual year for the total arrears amount. The definition of relevant accrual year means that the two most recent accrual years are taken into account to determine if concessional Medicare levy treatment applied in past years. This will reduce compliance costs and ensure that taxpayers are more likely to have all available records if there is more than one accrual year.

3.22 Accrual year takes its meaning from the definition of the term in existing subsection 159ZR(1) of the ITAA 1936. It is defined as any year/s of income in which any part of the eligible lump sum that has been received was accrued.

3.23 The term annual arrears amount takes its meaning from the definition of the term in existing subsection 159ZR(1) of the ITAA 1936. It is defined as the part of the total arrears amount that was accrued in the accrual year. [Schedule 3, item 1, definition of accrual year, relevant accrual years and annual arrears amount in subsection 9A(4) of the Medicare Levy Act 1986]

Adjustment of taxable income for lump sum payments in arrears

3.24 Under Schedule 3 to the Bill an individual that meets the eligibility requirements has their individual taxable income for Medicare levy liability purposes adjusted. Under the adjustment the total arrears amount is excluded for the income year in which they have been received for the purposes of the Medicare levy. This adjustment has the effect of ensuring that no or a lower rate of Medicare levy potentially applies in respect of the other income of the individual and no Medicare levy applies to the eligible lump sum. [Schedule 3, item 1, subsections 9A(2) and (3) of the Medicare Levy Act 1986]

3.25 A note to Schedule 3 clarifies that the adjustment of the total arrears amount for the income year in which it was received by the individual, is only adjusted for the individual and has no effect on the family income assessment that also considers the taxable income of the individual's spouse. [Schedule 3, item 1, note to subsection 9A(3) of the Medicare Levy Act 1986]

Commencement, application, and transitional provisions

3.26 Schedule 3 to the Bill provides that the amendments commence on the first 1 January, 1 April, 1 July or 1 October to occur after the date the Bill receives Royal Assent. [Clause 2]

3.27 The amendments apply to:

•

assessments for the 2024-25 income year and later income years; and

•

accrual years that begin before, at or after the commencement of Schedule 3 to the Bill.

[Schedule 3, item 2]

3.28 Although the amendments can apply to accrual years that begin before commencement of Schedule 3 to the Bill, the amendments affect assessments prospectively and are wholly beneficial to affected taxpayers as they allow past accrued lump sums to qualify for a concessional treatment for eligible lump sums received for the 2024-25 income years and later income years.

Chapter 4: Multinational tax transparency - country by country reporting

Outline of chapter

4.1 Schedule 4 to the Bill implements Australia's public CBC reporting regime by amending the TAA to require certain large multinational enterprises (defined as CBC reporting parents) to publish selected tax information on a CBC basis for specified jurisdictions, and on either a CBC basis or an aggregated basis for the rest of the world. The information is to be published on an Australian government website, with publication facilitated by the Commissioner. The objective of these amendments is to improve information flows to help the public, including investors, to compare entity tax disclosures, to better assess whether an entity's economic presence in a jurisdiction aligns with the amount of tax they pay in that jurisdiction.

Context of amendments

4.2 The Australian Government announced in the October 2022-23 Budget a package of targeted measures to improve corporate tax transparency disclosures. The measures form part of the Government's multinational tax integrity election commitment package, helping to ensure a fairer and more sustainable tax system.

4.3 The tax transparency measures complement the Government's broader regulatory mix to improve corporate disclosures and reflects the shifting public sentiment for greater transparency and accountability on corporate activity, particularly from large businesses. This includes from investors and capital providers.

4.4 The shifting attitude for enhanced corporate disclosures is observed across the corporate governance landscape, including environmental and sustainability claims and on climate related financial disclosures.

4.5 Tax transparency has generally lagged other forms of corporate disclosures. But there is momentum internationally to improve this, with the GRI 207 and European Union's public CBC reporting Directive (EU Directive 2021/2101) constituting two examples of schemes intended to enhance the tax transparency of multinational enterprises.

4.6 It is in this broader context that the Government is committed to improving the quality and comparability of tax disclosures by large businesses in Australia, by introducing standardised reporting requirements for large businesses.

4.7 Currently, large multinational enterprises are subject to confidential CBC reporting (in accordance with Action 13 of the OECD/G20 Base Erosion and Profit Shifting Project). In addition, some companies voluntarily disclose some CBC information, but disclosures are fragmented leading to inconsistencies and difficulties interpreting and comparing the information.

4.8 To enhance transparency, as well as improve comparability and accessibility, these amendments will require certain large multinationals to publicly disclose selected tax information based on the GRI 207. While there is significant overlap in the required data disclosures between the OECD confidential CBC reporting, the EU Directive 2021/2101, and the GRI 207, the GRI 207 provides for a broader set of disclosures, consistent with the intended policy outcome. To assist taxpayer compliance and minimise compliance costs, the amendments align with these CBC regimes where possible.

4.9 The information required to be disclosed is on a CBC basis for specified jurisdictions and on either a CBC basis or an aggregated basis for the rest of the world. This builds on global trends to help inform the public debate on the tax affairs of large multinationals. The information will be reported in a standardised format and will be centrally hosted to facilitate comparability across entities, jurisdictions, and reporting periods – building up a database that will increase in value over time for the public to access.

Summary of new law

4.10 Schedule 4 to the Bill amends the TAA to impose a new reporting obligation on certain large multinational enterprises.

4.11 Unless otherwise exempt, the reporting obligation applies to CBC reporting parents that are certain types of constitutional corporations, partnerships or trusts, and that are members of a CBC reporting group. Further, the CBC reporting parent is only subject to the reporting obligation if $10 million or more of their aggregated turnover for the income year is Australian-sourced. The CBC reporting parent is required to publish selected tax information on an Australian government website by giving the information in the approved form to the Commissioner, with the Commissioner facilitating publication. Penalties apply for non-compliance.

Detailed explanation of new law

Entities covered by the amendments

4.12 The requirement to publish selected tax information applies to entities that are a CBC reporting parent within the meaning provided by section 815-375 of the ITAA 1997 and:

•

if the CBC reporting parent is a company, it is a constitutional corporation; or

•

if the CBC reporting parent is a trust, each of the trustees is a constitutional corporation; or

•

if the CBC reporting parent is a partnership, each of the partners is a constitutional corporation.

Constitutional corporation is defined in subsection 995-1(1) of the ITAA 1997. [Schedule 4, item 1, paragraph 3D(1)(a) of the TAA]

4.13 In addition, the CBC reporting parent is only required to publish information in relation to a reporting period if:

•

they were a CBC reporting parent for a period that includes the whole or a part of the preceding reporting period; and

[Schedule 4, item 1, paragraph 3D(1)(b) of the TAA]

•

they are a member of a CBC reporting group at any time during the reporting period; and

[Schedule 4, item 1, paragraph 3D(1)(c) of the TAA]

•

at any point during the reporting period, they, or a member of their CBC reporting group, is an Australian resident or foreign resident with an Australian permanent establishment; and

[Schedule 4, item 1, paragraph 3D(1)(d) of the TAA]

•

$10 million or more of their aggregated turnover for the income year is Australian-sourced; and

[Schedule 4, item 1, paragraph 3D(1)(e) of the TAA]

•

they are not an exempt entity or included in a class of exempt entities.

[Schedule 4, item 1, paragraphs 3D(1)(f) and (g) of the TAA]

4.14 CBC reporting parents that are Australian residents without foreign operations are still required to publish the selected tax information, provided they meet all other requirements. This requirement differs from OECD CBC reporting obligations and supports the policy intent of the measure which includes enhancing the tax transparency of large businesses operating in Australia.

4.15 The obligation is placed on the CBC reporting parent as the selected tax information required to be published is likely to be more accessible to a CBC reporting parent as opposed to a local subsidiary, helping to support compliance.

Entities with a small Australian presence excluded

4.16 CBC reporting parents are not required to publish the selected tax information if their aggregated turnover for the income year includes less than a total of $10 million of Australian-sourced income. 'Aggregated turnover' has the meaning given by section 328-115 of the ITAA 1997 and is calculated for an entity's income year. If a CBC reporting parent's reporting period is not an income year, they must assume their reporting period is an income year for the purposes of calculating their aggregated turnover. [Schedule 4, item 1, paragraph 3D(1)(e) of the TAA]

4.17 The concept of a materiality threshold aligns with the approach in the EU Directive 2021/2101 and ensures that CBC reporting groups with genuinely small Australian operations are not subject to the reporting requirements. The $10 million threshold aligns with the small business entity threshold provided by section 328-110 of the ITAA 1997.

Other exemptions

4.18 The CBC reporting parent must publish selected tax information that relates to itself and its CBC reporting group. This extends to public and private groups, which is consistent with the EU Directive 2021/2101. However, the amendments provide exemption powers to respond to exceptional circumstances where disclosure of information by a class of entities or a specific entity would be inappropriate.

4.19 A class of entities may be exempt from having to publish the selected tax information. This can either be by way of the Commissioner specifying the class of entity as exempt by legislative instrument, or the class of entity being prescribed by regulation. Section 18 of the TAA provides that the Governor-General may prescribe matters that the TAA permits to be prescribed. [Schedule 4, item 1, paragraph 3D(1)(f) and subsection 3DB(4) of the TAA]

4.20 The Commissioner may also exempt specific entities from having to publish the selected tax information for a single reporting period through a written notice. Such a notice is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003 as it is of an administrative character. [Schedule 4, item 1, paragraph 3D(1)(g) and subsections 3DB(5), (7) and (8) of the TAA]

4.21 In addition, the Commissioner may specify that an entity is exempt from publishing information of a particular kind for a single reporting period through a written notice. Providing an exemption for only a particular kind of information reflects the intent that an entity should comply with the reporting requirements to the greatest extent possible. Such a notice is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003 as it is of an administrative character. [Schedule 4, item 1, paragraph 3D(3)(a) subsections 3DB(6), (7) and (8) of the TAA]

4.22 Where the Commissioner exempts a specific entity from publishing or exempts a specific entity from publishing information of a particular kind, the exemption only applies for a single reporting period. This reflects that the circumstances of individual entities may change over time and that the exemption powers are expected to be exercised in limited circumstances. [Schedule 4, item 1, subsection 3DB(7) of the TAA]

4.23 In exercising these discretions, it is expected the Commissioner would have regard to the primary purpose of the amendments which is to enhance tax transparency. In considering an exemption request, it may be appropriate for the Commissioner to consider matters such as whether disclosure of the information would:

•

impact national security;

•

breach Australian law (disregarding the requirements imposed by these amendments) or breach the laws of another jurisdiction; and

•

result in substantial ramifications for an entity (by an objective standard) by revealing commercially sensitive information.

4.24 It is expected that the Commissioner will provide more comprehensive guidance in relation to how these exemption powers will be applied. It is also expected that the CBC reporting parent will have the option to disclose where an exemption has been granted to differentiate this from non-compliance.

4.25 As the requirement to publish the selected tax information will cover a wide range of entities, there is a chance that it may apply to government entities that are subject to alternative disclosure or accountability regimes through government budget processes. The Commissioner may exempt government related entities from this requirement. This ensures that the application of these reporting requirements does not inappropriately affect these entities. [Schedule 4, item 1, subsections 3D(5) and (6) of the TAA]

Reporting period

4.26 An entity's reporting period will be the period for which audited consolidated financial statements for the entity are prepared. For CBC reporting parents that are Australian residents, this will typically be an income year. [Schedule 4, item 1, paragraph 3D(2)(a) of the TAA]

4.27 If the entity does not prepare audited consolidated financial statements, their reporting period will be the period that the entity would have prepared such statements for had it been a listed entity within the meaning of section 26BC of the ITAA 1936. This is intended to aid consistency in the selected tax information published. This differs from confidential CBC reporting which allows entities to choose its data source from its consolidated reporting packages, separate entity statutory financial statements, regulatory financial statements, or internal management accounts. [Schedule 4, item 1, paragraph 3D(2)(b) of the TAA]

Information that must be published

4.28 The CBC reporting parent is required to publish selected tax information that relates to itself and its CBC reporting group. Broadly, the information required to be published relates to presence and tax dealings in particular jurisdictions. For Australia and specified jurisdictions determined by the Minister, particular information must be published on a CBC basis. For all other jurisdictions the CBC reporting group operates in, the CBC reporting parent has a choice to publish that same information on either a CBC basis or an aggregated basis. [Schedule 4, item 1, paragraphs 3DA(1)(d) and (e) and subsection 3DA(2) of the TAA]

General information

4.29 The CBC reporting parent is required to publish the following general information:

•

its own name;

•

the names of each entity in the CBC reporting group; and

•

a description of the CBC reporting group's approach to tax.

[Schedule 4, item 1, paragraphs 3DA(1)(a) to (c) of the TAA]

Information on a CBC basis

4.30 For Australia and specified jurisdictions determined by the Minister that the CBC reporting group operates in, the CBC reporting parent must publish, at a group level:

•

the name of the jurisdiction;

•

a description of main business activities;

•

the number of employees (on a full-time equivalent basis) at the end of the reporting period;

•

revenue from unrelated parties;

•

revenue from related parties that are not tax residents of the jurisdiction;

•

profit or loss before income tax;

•

book value at the end of the reporting period of tangible assets, other than cash and cash equivalents;

•

income tax paid (on a cash basis);

•

income tax accrued (current year);

•

the reasons for the difference between income tax accrued (current year) and the amount of income tax due if the income tax rate applicable to the jurisdiction were applied to profit and loss before income tax; and

•

the currency used in calculating and presenting the above information.

[Schedule 4, item 1, paragraph 3DA(1)(d) and sections 3DA(3) and (4) of the TAA]

4.31 In addition to Australia and specified jurisdictions determined by the Minister, the CBC reporting parent can choose to publish the information listed above for all jurisdictions that the CBC reporting group operates in. In this case, the CBC reporting parent would not need to publish the same information on an aggregated basis. This choice reflects that reporting on a CBC basis for Australia and specified jurisdictions is the minimum compliance standard, and that entities may already report on a global CBC basis or may be inclined to voluntarily report in this manner in the future. [Schedule 4, item 1, section 3DA(2) of the TAA]

4.32 Jurisdictions determined by the Minister are expected to be informed by the Commissioner of Taxation's International Dealings Schedule specified countries or jurisdictions list and taxpayer behavioural trends. The list is intended to complement the EU Directive 2021/2101 to support the policy intent of meaningful improvements to global multinational tax transparency.

4.33 Multinationals may have an incentive to enter into arrangements to lower (or avoid) their Australian tax liability. In this regard, it may be appropriate for the Minister to consider Australian specific circumstances in deciding whether to specify a jurisdiction. This could include the quantum of international related party dealings relative to trade and investment flows, cross-border financing, intangibles arrangements, loan arrangements, and subsidiary structures; combined with other factors, for example, subsidiary employee numbers.

4.34 The determination of jurisdictions for the purpose of public CBC reporting is provided by legislative instrument. It is appropriate to provide the Minister with the power to determine these jurisdictions to allow the Government to consider current and emerging circumstances and respond in a timely manner. The legislative instrument would be subject to disallowance and sunsetting and will therefore be subject to appropriate parliamentary scrutiny. [Schedule 4, item 1, subsection 3DA(4) of the TAA]

Information on an aggregated basis

4.35 If the CBC reporting parent chooses to report on a CBC basis for all jurisdictions the CBC reporting group operates in, it does not need to publish any information on an aggregated basis. However, if the CBC reporting parent only publishes information on a CBC basis for Australia and specified jurisdictions determined by the Minister, it must publish the following information on an aggregated basis for all other jurisdictions the CBC reporting group operates in:

•

a description of main business activities;

•

the number of employees (on a full-time equivalent basis) at the end of the reporting period;

•

revenue from unrelated parties;

•

revenue from related parties that are not tax residents of the jurisdiction;

•

profit or loss before income tax;

•

book value at the end of the reporting period of tangible assets, other than cash and cash equivalents;

•

income tax paid (on a cash basis);

•

income tax accrued (current year); and

•

the currency used in calculating and presenting the above information.

Amounts should be added for a cumulative total and positive and negative amounts should 'net off' if applicable. [Schedule 4, item 1, paragraph 3DA(1)(e) and subsection 3DA(5) of the TAA]

4.36 The currency used in calculating and presenting the information is required to provide necessary context and assist in comparing disclosures.

Other requirements for reporting

4.37 These disclosures have been adopted from the GRI 207, which also covers a number of disclosure items that form part of the OECD recommendations for CBC reporting.

4.38 There is significant overlap between the requirements in the GRI 207 and the requirements in the OECD Transfer Pricing Guidelines. The GRI 207 should be treated as the primary source of guidance in interpreting the requirements entities must publish under these amendments, including where there is any inconsistency between guidance materials. Where relevant, the disclosures are intended to align with the meaning of those in the GRI 207, even where the terminology is not identical. This is to ensure the terminology used in the amendments is appropriate for, and consistent with, Australia's domestic law. For example, the data disclosure on revenues from unrelated parties reflects the equivalent GRI 207 data label 'revenue from third party sales'.

4.39 Regard can be had to the BEPS Action 13 Guidance and the OECD Transfer Pricing Guidelines, particularly Chapter V and Annexes I to IV to Chapter V (which incorporates the OECD/G20 Base Erosion and Profit Shifting Project Action 13 - 2015 Final Report), where they provide greater detail on the interpretation of particular terms.

4.40 The inclusion of the OECD Transfer Pricing Guidelines is intended to reduce the compliance burden on entities already familiar with its interpretation as it is used by these entities in meeting their existing obligations for confidential CBC reporting under paragraph 815-355(3)(c) of the ITAA 1997. [Schedule 4, item 1, subsection 3DA(7) of the TAA]

4.41 The combination of information required to be published is intended to provide the public with a comprehensive picture of the CBC reporting group's tax affairs while minimising the compliance and administrative burden imposed on the CBC reporting parent. To further support these disclosures, where a CBC reporting group has prepared a report under the EU Directive 2021/2101, they are expected to publish a link to, or copy of, this report when publishing the tax information required by these amendments. CBC reporting groups may also provide further context to their reports on their own websites.

4.42 The selected tax information must be published within 12 months after the end of the reporting period to which it relates. [Schedule 4, item 1, subsection 3D(3) of the TAA]

4.43 The selected tax information published by the CBC reporting parent must be sourced from audited consolidated financial statements. The intent is for the data to be reconcilable and verifiable, and of a generally high standard for public release, without necessitating additional auditing. [Schedule 4, item 1, paragraph 3DA(6)(a) of the TAA]

4.44 In circumstances where the CBC reporting parent has not prepared audited consolidated financial statements for the reporting period, the information published must be based on amounts that would be shown in such statements, had the entity been a listed company within the meaning of section 26BC of the ITAA 1936 and been required to prepared them. [Schedule 4, item 1, paragraph 3DA(6)(b) of the TAA]

Regulation making power to require additional information

4.45 The amendments include a power to make regulations to prescribe further tax information that must be published in addition to the requirements set out above. This could include information that the CBC reporting parent must publish in relation to itself, or on a CBC or aggregated basis in relation to the CBC reporting group. [Schedule 4, item 1, paragraph 3DA(1)(f) of the TAA]

4.46 The regulation-making power will allow the Government the ability to ensure the requirements are kept up to date and reflect changes in the tax landscape. For example, if an additional requirement was added to the GRI 207, the Government may include this in the regulations if it was determined that the publication of this information was important in improving tax transparency. This update would provide certainty to taxpayers on their reporting obligations in a timely manner. The regulations would be subject to disallowance and therefore would be subject to appropriate parliamentary scrutiny.

4.47 Pursuant to section 17 of the Legislation Act 2003, additional information that is included through regulations would be subject to appropriate consultation.

Interaction with confidential CBC reporting

4.48 The existing confidential CBC reporting obligations required under Subdivision 815-E of the ITAA 1997 and the new public CBC reporting obligations introduced in these amendments will operate in parallel, but they are distinct and separate reporting regimes. This approach is consistent with the approach taken by the EU, whose public CBC reporting regime also operates as a distinct and separate reporting regime compared to the confidential regime devised under Action 13 of the OECD/G20 Base Erosion and Profit Shifting Project.

4.49 The 'CBC report' required to be provided to the Commissioner under paragraph 815-355(3)(c) of the ITAA 1997 is subject to strict confidentiality and cannot be publicly disclosed under Australia's international obligations under Action 13 of the OECD/G20 Base Erosion and Profit Shifting Project.

4.50 The information in the CBC report that is given to the Commissioner under Subdivision 815-E, or that is received on exchange pursuant to international exchange agreements, will not be published. This principle applies even in the event that a CBC reporting parent fails to publish the information required under these amendments.

Publication facilitated by the Commissioner

4.51 The CBC reporting parent will fulfil its requirement to publish the selected tax information by providing the information in the approved form to the Commissioner, for the purpose of the information being made public. The Commissioner will then make the information available on an Australian government website as soon as practicable. [Schedule 4, item 1, subsections 3D(3) and (4) of the TAA]

4.52 The Commissioner's role is limited to facilitating the publication of the selected tax information. The Commissioner cannot amend or modify any of the information provided by the entity before it is published.

4.53 The concept of approved forms is used in the tax laws to provide administrative flexibility to specify the precise form of information required and the manner of providing it. This includes the particular electronic format and form of electronic transmission, which is necessary for the Commissioner to make the information available as soon as practicable using administratively convenient processes.

Correction of errors

4.54 If a CBC reporting parent becomes aware of a material error contained in any of the selected tax information that has been published, the CBC reporting parent must, no later than 28 days after the entity becomes aware of the material error, publish information that corrects the material error by giving a document containing the information to the Commissioner in the approved form. [Schedule 4, item 1, paragraph 3DB(1)(a) and subsection 3DB(2) of the TAA]

4.55 Materiality is a matter of professional judgement. It is expected that CBC reporting parents would have regard for their relevant Accounting Standard in determining whether an item, or an aggregate of items, is material, and would be required to be recognised and corrected.

4.56 If a CBC reporting parent becomes aware of a non-material error in any of the selected tax information that has been published, the CBC reporting parent may publish information that corrects the error by giving a document containing the information to the Commissioner in the approved form. This may cover circumstances such as where an entity makes a typographical error that it seeks to correct. [Schedule 4, item 1, paragraph 3DB(1)(b) of the TAA]

4.57 Upon receiving the document containing the information to correct the material or non-material error from the CBC reporting parent, the Commissioner must make the information available on an Australian government website as soon as practicable. [Schedule 4, item 1, subsection 3DB(3) of the TAA]

Disclosure of protected information

4.58 Secrecy provisions in Division 355 of Schedule 1 to the TAA apply to protected information of entities. These provisions make it an offence for a taxation officer to disclose protected information, except in certain circumstances.

4.59 Imposing a statutory duty on the Commissioner to publish information provided by CBC reporting parents under sections 3D and 3DB ensures that the publication does not contravene the existing taxpayer confidentiality provisions of the TAA. This is because the publication falls within an existing exception (in subsection 355-50(1) of Schedule 1 to the TAA) for disclosures in the performance of a taxation officer's duties. [Schedule 4, item 1, subsections 3D(4) and 3DB(3) of the TAA]

Penalties for non-compliance

4.60 Australian resident entities will be subject to the penalties under section 8E of the TAA if they commit an offence under section 8C of the TAA by refusing or failing to comply with their obligation to publish the selected tax information. Section 8C of the TAA has been amended to ensure it applies to this obligation. [Schedule 4, item 2, paragraph 8C(1)(ab) of the TAA]

4.61 A CBC reporting parent is liable to an administrative penalty if the entity is required to publish information under section 3D of the TAA and fails to do so on time. That is, if the entity does not publish the information by giving the information to the Commissioner in the approved form within 12 months after the end of the reporting period to which it relates. [Schedule 4, item 3, subsection 288-140(1) of Schedule 1 to the TAA]

4.62 A CBC reporting parent is also liable to an administrative penalty if the entity is required to publish information to correct a material error and fails to do so on time. That is, if the entity does not publish the information to correct the material error by giving the information to the Commissioner in the approved form within 28 days of the entity becoming aware of the error. [Schedule 4, item 3, subsection 288-140(1) of Schedule 1 to the TAA]

4.63 An entity will be penalised 500 penalty units for each period of 28 days or part of a period of 28 days starting on the day when the information is required to be published and ending when the entity provides the information to the Commissioner (up to a maximum of 2,500 penalty units). The administrative penalty incentivises CBC reporting parents to comply with these reporting obligations and is consistent with the penalties for failing to lodge the confidential CBC reporting statements required under Subdivision 815-E of the ITAA 1997. [Schedule 4, item 3, subsection 288-140(2) of Schedule 1 to the TAA]

Commencement, application, and transitional provisions

4.64 The amendments commence on the first 1 January, 1 April, 1 July or 1 October to occur after Royal Assent.

4.65 The amendments apply to reporting periods commencing on or after 1 July 2024. For example, where an entity has a reporting period ending 31 December, the first reporting period for that entity commences on 1 January 2025. [Schedule 4, item 4]

Chapter 5: Deductible gift recipients

Outline of chapter

5.1 Schedule 5 to the Bill amends the ITAA 1997 to list as deductible gift recipients:

•

Australian Democracy Network Ltd; and

•

Australian Science Media Centre Incorporated; and

•

Centre for Australian Progress Ltd; and

•

Combatting Antisemitism Fund Limited; and

•

Ethnic Business Awards Foundation Limited; and

•

International Campaign to Abolish Nuclear Weapons, Australia Inc.; and

•

Ourschool Ltd; and

•

Susan McKinnon Charitable Foundation Ltd; and

•

Tasmanian Leaders Inc.; and

•

The Hillview Foundation Australia Limited.

Context of amendments

5.2 The income tax law allows income tax deductions for taxpayers who make gifts of $2 or more to deductible gift recipients. To be a deductible gift recipient, an organisation must fall within one of the general categories set out in Division 30 of the ITAA 1997 or be listed by name in that Division.

5.3 Deductible gift recipient status helps eligible organisations attract public financial support for their activities.

5.4 Australian Democracy Network Ltd (ABN 35 655 372 133) is a charity that aims to support the strength of Australian democracy through law reform advocacy, and promotion of civil society participation and accountable government.

5.5 Australian Science Media Centre Incorporated (ABN 61 630 690 296) is a charity that seeks to enhance the quality and accuracy of coverage in the media by linking journalists writing about science with scientific experts.

5.6 Centre for Australian Progress Ltd (ABN 76 158 172 484) is a charity that supports civil society participants to strengthen their advocacy and foster community connections which positively impact the health of Australian democracy.

5.7 Combatting Antisemitism Fund Limited (ABN 37 674 413 622) is a charity that seeks to combat antisemitism in Australia and educate the broader public about antisemitism.

5.8 Ethnic Business Awards Foundation Limited (ABN 13 627 348 976) is a charity that seeks to acknowledge the contributions made to the Australian economy and community by Indigenous and migrant entrepreneurs.

5.9 International Campaign to Abolish Nuclear Weapons, Australia Inc. (ABN 96 291 421 937) is a charity that advocates for the prohibition of nuclear weapons, and adherence to and implementation of the United Nations Treaty on the Prohibition of Nuclear Weapons.

5.10 Ourschool Ltd (ABN 47 633 875 288) is a charity that seeks to benefit high school students by supporting public high schools to establish and grow their alumni networks.

5.11 Susan McKinnon Charitable Foundation Ltd (ABN 12 653 756 597) is a charity that seeks to nurture a transparent, effective and fit-for-purpose political and policy landscape in Australia.

5.12 Tasmanian Leaders Inc. (ABN 65 917 243 507) is a charity that aims to contribute to the development of leadership skills and abilities by delivering a series of leadership programs and connecting leaders across communities.

5.13 The Hillview Foundation Australia Limited (ABN 27 675 950 606) is a charity that seeks to promote sustainable urbanism, protect and regenerate Australia's built heritage, and facilitate the improvement of welfare through education and training programs relating to sustainability, the environment, traditional heritage trades, building crafts, and design and art principles.

Summary of new law

5.14 Schedule 5 to the Bill amends the ITAA 1997 to list the following entities as deductible gift recipients under the income tax law:

•

Australian Democracy Network Ltd; and

•

Australian Science Media Centre Incorporated; and

•

Centre for Australian Progress Ltd; and

•

Combatting Antisemitism Fund Limited; and

•

Ethnic Business Awards Foundation Limited; and

•

International Campaign to Abolish Nuclear Weapons, Australia Inc.; and

•

Ourschool Ltd; and

•

Susan McKinnon Charitable Foundation Ltd; and

•

Tasmanian Leaders Inc.; and

•

The Hillview Foundation Australia Limited.

Detailed explanation of new law

5.15 Taxpayers may claim an income tax deduction for gifts made to Australian Democracy Network Ltd (ABN 35 655 372 133) provided the gift complies with the existing requirements of the income tax law. This amendment ensures that Australian Democracy Network Ltd receives public financial support for its activities. [Schedule 5, items 13 and 14, table item 13.2.40 in section 30-105]

5.16 Taxpayers may claim an income tax deduction for gifts made to Australian Science Media Centre Incorporated (ABN 61 630 690 296) provided the gift complies with the existing requirements of the income tax law. This amendment ensures that Australian Science Media Centre Incorporated receives public financial support for its activities. [Schedule 5, items 13 and 14, table item 13.2.41 in section 30-105]

5.17 Taxpayers may claim an income tax deduction for gifts made to Centre for Australian Progress Ltd (ABN 76 158 172 484) provided the gift complies with the existing requirements of the income tax law. This amendment ensures that Centre for Australian Progress Ltd receives public financial support for its activities. [Schedule 5, items 13 and 14, table item 13.2.42 in section 30-105]

5.18 Taxpayers may claim an income tax deduction for gifts made to Combatting Antisemitism Fund Limited (ABN 37 674 413 622) provided the gift complies with the existing requirements of the income tax law. This amendment ensures that Combatting Antisemitism Fund Limited receives public financial support for its activities. [Schedule 5, items 13 and 14, table item 13.2.43 in section 30-105]

5.19 Taxpayers may claim an income tax deduction for gifts made to Ethnic Business Awards Foundation Limited (ABN 13 627 348 976) provided the gift complies with the existing requirements of the income tax law. This amendment ensures that Ethnic Business Awards Foundation Limited receives public financial support for its activities. [Schedule 5, item 2, table item 7.2.6 in section 30-65]

5.20 Taxpayers may claim an income tax deduction for gifts made to International Campaign to Abolish Nuclear Weapons, Australia Inc. (ABN 96 291 421 937) provided the gift complies with the existing requirements of the income tax law. This amendment ensures that International Campaign to Abolish Nuclear Weapons, Australia Inc. receives public financial support for its activities. [Schedule 5, items 13 and 14, table item 13.2.44 in section 30-105]

5.21 Taxpayers may claim an income tax deduction for gifts made to Ourschool Ltd (ABN 47 633 875 288) provided the gift complies with the existing requirements of the income tax law. This amendment ensures that Ourschool Ltd receives public financial support for its activities. [Schedule 5, item 1, table item 2.2.59 in subsection 30-25(2)]

5.22 Taxpayers may claim an income tax deduction for gifts made to Susan McKinnon Charitable Foundation Ltd (ABN 12 653 756 597) provided the gift complies with the existing requirements of the income tax law. This amendment ensures that Susan McKinnon Charitable Foundation Ltd receives public financial support for its activities. [Schedule 5, items 13 and 14, table item 13.2.45 in section 30-105]

5.23 Taxpayers may claim an income tax deduction for gifts made to Tasmanian Leaders Inc. (ABN 65 917 243 507) provided the gift complies with the existing requirements of the income tax law. This amendment ensures that Tasmanian Leaders Inc. receives public financial support for its activities. [Schedule 5, item 1, table item 2.2.60 in subsection 30-25(2)]

5.24 Taxpayers may claim an income tax deduction for gifts made to The Hillview Foundation Australia Limited (ABN 27 675 950 606) provided the gift complies with the existing requirements of the income tax law. This amendment ensures that The Hillview Foundation Australia Limited receives public financial support for its activities. [Schedule 5, items 13 and 14, table item 13.2.46 in section 30-105]

Consequential amendments

5.25 Schedule 5 to the Bill also amends the index (Subdivision 30-315) for Division 30 of the ITAA 1997 to reflect the amendments. [Schedule 5, items 3 to 12, table items 21AAAA, 26AA, 29AA, 34AAAA, 48AB, 57A, 63AAA, 81, 112A, 113A in section 30-315]

Commencement

5.26 Part 1 of Schedule 5 to the Bill commences on the day after the day the Bill receives the Royal Assent.

5.27 Item 13 of Part 2 of Schedule 5 to the Bill commences the later of: the start of the day after the Bill receives the Royal Assent; and immediately after the commencement of item 1 of Part 1 of Schedule 3 to the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023. However, the provision does not commence at all if item 1 of Part 1 of Schedule 3 to the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 commences after the day after the Bill receives the Royal Assent.

5.28 Item 14 of Part 2 of Schedule 5 to the Bill commences on the day after the Bill receives the Royal Assent. However, the provision does not commence at all if item 1 of Part 1 of Schedule 3 to the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 commences on or before the day after the Bill receives the Royal Assent.

5.29 This ensures that the amendments in Schedule 5 to the Bill and those amendments in Schedule 3 of the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Bill 2023 that renumber section 30-105 of the ITAA 1997 apply correctly. [Clause 2]

Application

5.30 In relation to Susan McKinnon Charitable Foundation Ltd the amendments apply to gifts made on or after 1 July 2023 and on or before 30 June 2028.

5.31 In relation to all other entities listed in Schedule 5 the amendments apply to gifts made on or after 1 July 2024 and on or before 30 June 2029.

5.32 Depending on the timing of Royal Assent of the Bill, some or all of these amendments apply retrospectively. This ensures that if gifts were made prior to the commencement of this Schedule but after the application of the amendments, they qualify for a tax deduction for income tax purposes, provided they comply with other requirements of the income tax law.

5.33 Despite the potential retrospective application of deductible gift recipient status, there is no adverse impact on affected parties or the entities as the amendments are wholly beneficial. This is because the amendments assist entities to obtain support from the public and allow parties that provide gifts to obtain an income tax deduction if eligibility requirements are met.

Chapter 6: National skills and workforce development payments

Outline of chapter

6.1 Schedule 6 to the Bill amends the FFR Act to support Commonwealth payments to the States in accordance with the National Skills Agreement and any successor agreements.

Context of amendments

6.2 The NSA is a 5-year joint agreement between the Commonwealth and the States that commenced on 1 January 2024. The NSA replaces the NASWD which was the previous arrangement between the Commonwealth and the States for payments in relation to expenditure on skills and workforce development. As part of the NSA, the States committed to implementing improved funding arrangements, with a view that these would replace the NSPP for skills and workforce development established by the FFR Act.

6.3 Both the NSA and the NASWD operate within the framework of the FFR Act, and both agreements involve funding covered under the intergovernmental agreement on Federal Financial Relations. However, the NSA operates differently to the NASWD as the NSA contains clauses that impose various obligations on States in relation to their use of funding. For example, Clause A47 of the NSA provides a list of obligations that States must meet to access flexible funding up to an initial cap. The NASWD, together with the FFR Act, provided lump sum funding with only a general condition that the financial assistance be spent on skills and workforce development.

6.4 These amendments amend the FFR Act to ensure that financial assistance is spent in accordance with, and is subject to the terms and conditions of, the NSA (or a successor agreement).

Comparison of key features of new law and current law

Table 6.1 Comparison of new law and current law

Detailed explanation of new law

6.5 Schedule 6 to the Bill amends the FFR Act to update the funding arrangements under which the Commonwealth provides financial assistance to the States in relation to skills and workforce development. The new funding arrangements ensure that financial assistance is spent in accordance with, and is subject to the terms and conditions of, the skills and workforce development agreement (currently the NSA).

Current funding arrangements

6.6 The amendments repeal the NSPP for skills and workforce development which currently provide for lump sum funding that is indexed each financial year and shared amongst the States. The only condition placed on this funding is that it is spent on skills and workforce development. [Schedule 6, item 4, section 12 of the FFR Act]

6.7 While the current funding arrangements were suitable to support payments under the NASWD, they are not fit for purpose to support payments under the NSA. The NSA employs a flexible funding model. It includes terms and conditions relating to the types of expenditure that the Commonwealth will co-fund, Commonwealth contribution rates that can vary by State or by funding type, and funding caps for different categories of expenditure. This cannot be appropriately provided for under the NSPP for skills and workforce development.

New funding arrangements

6.8 The amendments introduce new funding arrangements to support payments from the Commonwealth to the States relating to skills and workforce development. The new funding arrangements apply to the 2024-25 financial year and later financial years, provided the State is a party to a skills and workforce development agreement. [Schedule 6, item 3, subsection 12A(1) of the FFR Act]

Definition of skills and workforce development agreement

6.9 A 'skills and workforce development agreement' is the NSA or a successor agreement that is entered into between the Commonwealth and one or more States that relates to skills and/or workforce development. It must also be expressed to be a skills and workforce development agreement for the purposes of the FFR Act. [Schedule 6, item 2, the definition of 'skills and workforce development agreement' in section 4 of the FFR Act]

6.10 Given that the NSA is intended to operate for a 5-year period from 1 January 2024, the amendments allow for the payment arrangements to continue under a successor agreement, provided the successor agreement meets the definition of a 'skills and workforce development agreement'.

Conditions of payments

6.11 Under the new funding arrangements, financial assistance is payable to the States on the condition that the financial assistance is spent in accordance with the skills and workforce development agreement. The financial assistance is also subject to any additional terms and conditions set out in the skills and workforce agreement. [Schedule 6, item 3, subsections 12A(4) and (5) of the FFR Act]

6.12 These conditions are not provided for under the current funding arrangements and have been included in the amendments to ensure that funding is spent consistently with States' obligations under the NSA and any successor agreements.

6.13 The conditions of the NSA have not been replicated in the FFR Act to provide flexibility in ensuring the amendments can support successor agreements that may impose different or additional conditions on financial assistance payable.

Payment determinations

6.14 For the 2024-25 financial year and later financial years, the Minister may determine an amount to be paid to a State for that financial year for the purpose of making a grant of financial assistance that the State is to spend in accordance with the skills and workforce development agreement. [Schedule 6, item 3, subsection 12A(2) of the FFR Act]

6.15 In accordance with subsection 44(1) of the Legislation Act 2003, the Minister's determination is a legislative instrument but is not subject to disallowance. This is because the determinations facilitate the operation of an intergovernmental scheme involving the Commonwealth and a State and are made for the purpose of that scheme. In this instance, the scheme is the skills and workforce development agreement, and payments made by the Commonwealth are for the purpose of that scheme. [Schedule 6, item 3, subsection 12A(3) of the FFR Act]

6.16 The exemption from disallowance is consistent with other funding arrangements provided for under the FFR Act, such as national health reform payments, where there is an obligation on the Commonwealth to make payments in a prescribed manner as part of an intergovernmental body or scheme involving the Commonwealth and the States.

Consequential amendments

6.17 Schedule 6 to the Bill makes a number of technical amendments to ensure national skills and workforce development payments receive equivalent treatment to other payments provided for under the FFR Act, such as national health reform payments. [Schedule 6, items 1 and 5 to 7, paragraphs 3(1)(aa), 17(b), 18(1)(b), 18(2)(b) and 21(a) and section 22 of the FFR Act]

Commencement, application, and transitional provisions

6.18 Schedule 6 to the Bill commences the day after Royal Assent.

6.19 The new funding arrangements apply in relation to the 2024-25 financial year and later financial years. The current funding arrangements continue to apply in relation to the 2024-25 financial year and earlier financial years.

6.20 Both the new and current funding arrangements apply in relation to the 2024-25 financial year to provide transitional arrangements as the amendments are likely to commence part way through the 2024-25 financial year. The current funding arrangements have been modified in relation to the 2024-25 financial year to ensure that the Minister can determine an amount that is payable to a State only in relation to the period that the current funding arrangements were in place for. [Schedule 6, item 9]

6.21 The Minister can also make a determination for the 2024-25 financial year of an amount payable to a State for the portion of that financial year that the new funding arrangements are in place. The total amount payable to the State for the 2024-25 financial year will be the sum of the amounts determined under the current funding arrangements and new funding arrangements. [Schedule 6, item 3, subsection 12A(2) of the FFR Act]

6.22 Consistent with the Minister's determinations under both the new and current funding arrangements, the Minister's determination made under the transitional arrangements is a legislative instrument but is not subject to disallowance. This is because the determinations facilitate the operation of an intergovernmental scheme involving the Commonwealth and a State and are made for the purpose of that scheme. [Schedule 6, subitem 9(5)]

6.23 Determinations made by the Minister under the current funding arrangements continue in to be in force despite the amendments. As a result, financial assistance is still payable for those past years. The FFR Act, including the Minister's powers and obligations under that Act, continues to apply in relation to those earlier determinations and payments of financial assistance. [Schedule 6, item 10]

6.24 To assist with the administration of the transition period, the amendments provide that any overpayments or underpayments made under the current funding arrangements in relation to both the 2023-24 and 2024-25 financial years can be reconciled under the new funding arrangements. This is appropriate to ensure States receive funding amounts that reflect their entitlements under the NSA. [Schedule 6, item 11]

6.25 Schedule 6 defines Act for the purpose of the application and savings provisions in Part 2 of Schedule 6 as the FFR Act. [Schedule 6, item 8]

Chapter 7: $20,000 instant asset write-off for small business entities

Outline of chapter

7.1 Schedule 7 to the Bill amends the IT(TP) Act to extend the $20,000 instant asset write-off by 12 months until 30 June 2025. This will allow small businesses (with an aggregated annual turnover of less than $10 million) to immediately deduct the full cost of eligible depreciating assets costing less than $20,000 that are first used or installed ready for use for a taxable purpose on or before 30 June 2025. The extension will improve cash flow and reduce compliance costs for small businesses.

Context of amendments

Small business entities

7.2 Division 328 of the ITAA 1997 provides a range of income tax concessions for small business entities, including access to the simplified depreciation rules (see Subdivision 328-D). Under section 328-110, an entity is a small business entity for an income year if the entity carries on a business in that year and either:

•

the entity carried on a business in the prior income year and its aggregated turnover was less than a threshold amount; or

•

the aggregated turnover of the entity in the current income year is likely to be less than that threshold.

7.3 The threshold for 2016-17 and later income years is $10 million.

$20,000 instant asset write-off for small business entities

7.4 The instant asset write-off supports small businesses by allowing eligible depreciating assets each costing less than a threshold amount to be immediately deducted. Immediate deductibility reduces the compliance costs associated with business investment as the depreciation of eligible assets does not need to be tracked over time. It also improves cash flow by bringing forward deductions from future years. Small businesses tend to be more vulnerable to cash flow problems than larger businesses as their profitability tends to be more volatile.

7.5 The ongoing legislated threshold below which eligible amounts can be immediately deducted is $1,000 (see section 328-180 of the ITAA 1997). However, the threshold has been temporarily increased over recent years.

7.6 The Government announced in the 2023-24 Budget that it will support small businesses by temporarily increasing the instant asset write-off threshold to $20,000, from 1 July 2023 until 30 June 2024.

7.7 The Government announced in the 2024-25 Budget that it will support small businesses by extending the $20,000 instant asset write-off by 12 months until 30 June 2025.

Summary of new law

7.8 Schedule 7 to the Bill amends the IT(TP) Act to extend the $20,000 instant asset write-off by 12 months until 30 June 2025. The $20,000 asset threshold applies to the cost of eligible depreciating assets, eligible amounts included in the second element of the cost of a depreciating asset, and general small business pools, until 30 June 2025.

7.9 Schedule 7 to the Bill also extends the deferral of the 'lock-out' rule for small businesses that previously opted out of the simplified depreciation rules to 30 June 2025.

7.10 Without the amendments, the asset threshold would revert to the ongoing legislated threshold of $1,000 from 1 July 2024.

Detailed explanation of new law

7.11 The $20,000 threshold that applies to the cost of depreciating assets, amounts included in the second element of a depreciating asset's cost, and the low pool value deduction under the simplified depreciation rules applies until 30 June 2025. Deductions for depreciating assets

7.12 A small business entity that has elected to use the simplified depreciation rules in Subdivision 328-D of the ITAA 1997 for an income year may immediately deduct or 'write off' the taxable purpose proportion of the cost of an asset acquired for less than a threshold amount.

7.13 The 'taxable purpose proportion' of a depreciating asset is defined in subsection 328-205(3) of the ITAA 1997 and in general terms represents the proportion of an asset's use in an income year that is for the purposes of producing assessable income. The deduction for assets that cost less than the threshold is claimed in the income year in which the asset is first used or installed ready for use for a taxable purpose.

7.14 The ongoing legislated threshold is $1,000. The amendments in Schedule 7 to the Bill build on the 2023-24 Budget announcement. That announcement was to increase the instant asset write-off threshold to $20,000 from 1 July 2023 until 30 June 2024.

7.15 The amendments implement the 2024-25 Budget announcement by extending the $20,000 threshold by 12 months until 30 June 2025. That means the $20,000 threshold applies to depreciating assets first used or installed ready for use for a taxable purpose on or before 30 June 2025. [Schedule 7, item 3, paragraph 328-180(4)(d) of the IT(TP) Act]

7.16 A consequential change is made to the heading to section 328-180 of the IT(TP) Act to reflect the increased threshold end date of 30 June 2025. [Schedule 7, item 1, the heading to section 328-180 of the IT(TP) Act]

Deductions for amounts included in the second element of the cost of depreciating assets

7.17 A small business entity can also immediately deduct an amount included in the second element of a depreciating asset's cost (for example, an amount spent on improving or transporting a depreciating asset), provided the amount is:

•

less than the threshold;

•

the first such amount to be deducted in respect of the asset; and

•

the asset was written off (its cost was fully deducted) in a previous income year.

7.18 The ongoing legislated threshold is $1,000. The amendments extend the $20,000 threshold for 12 months until 30 June 2025. That means an amount included in the second element of cost must be less than $20,000 and included in the second element of cost on or before 30 June 2025. [Schedule 7, item 4, subparagraph 328-180(5)(e)(ii) of the IT(TP) Act]

Example 7.1

Thomas, a bricklayer, is a small business entity and has elected to use the simplified depreciation rules.

Assets below the threshold

On 1 September 2024, Thomas purchases a tablet for $4,000 to be used 100 per cent for business purposes. Thomas can use the instant asset write-off to immediately deduct the full cost of the tablet as it is below the asset threshold of $20,000.

Assets exceeding the threshold

On 1 December 2024, Thomas purchases a ute for $50,000. He estimates he will use the ute 50 per cent of the time for his business, and 50 per cent for private purposes.

Thomas cannot use the instant asset write-off as the total cost of the ute ($50,000) exceeds the asset threshold of $20,000.

Instead, the $25,000 taxable purpose proportion of the cost of the ute ($50,000 multiplied by 50 per cent) is allocated to Thomas' general small business pool. Thomas can claim a deduction of $3,750 (15 per cent multiplied by $25,000) in his 2024-25 income tax return. Deductions for later income years will be calculated as 30 per cent of the opening pool balance of Thomas' general small business pool.

Amounts included in the second element of cost of an asset

Thomas used the instant asset write-off to immediately deduct the cost of a cement mixer that is used 100 per cent for business purposes in a prior income year. On 1 March 2025, Thomas incurs a cost of $400 to improve the asset. This is the first amount included in the second element of the cost of the asset.

Thomas can claim an immediate deduction for the full amount included in the second element of the asset's cost ($400 improvement) under the instant asset write-off.

However, if Thomas subsequently includes another amount in the second element of the cost of the asset, that expenditure will instead be allocated to Thomas' general small business pool.

Deductions for low pool values

7.19 A small business entity can also deduct the balance of its general small business pool at the end of an income year if the balance of the pool at the end of the year is less than a threshold amount. For this purpose, the balance of the pool is determined prior to calculating any deductions in respect of the pool for the income year.

7.20 The ongoing legislated threshold is $1,000. The amendments extend the $20,000 threshold until 30 June 2025. That means if the balance of a small business entity's general small business pool is less than $20,000 at the end of an income year that ends in the relevant period on or before 30 June 2025, the entity can claim a deduction for the entire balance of the pool in that income year. [Schedule 7, item 4, subparagraph 328-180(6)(e)(ii) of the IT(TP) Act]

Deferral of five year 'lock-out' rule

7.21 A small business entity that elects to apply the simplified depreciation rules in an income year, and then does not choose to apply the rules for a later income year in which the entity satisfies the conditions to make this choice (that is, the entity 'opted out'), is not able to apply the simplified depreciation rules for a period of five income years. This restriction commences from the first of the later years for which the entity could have made the choice to apply the rules. This rule is commonly referred to as the 'lock-out' rule.

7.22 The operation of the lock-out rule has been modified over recent years so that small business entities did not need to apply the lock-out rule to income years if any day in the year occurs on or after 12 May 2015 and on or before 30 June 2024 (referred to as the 'increased access years').

7.23 The amendments suspend the operation of the lock-out rule for a further 12 months to 30 June 2025. As a result of this suspension, small businesses that had opted out can choose to apply the small business simplified depreciation rules and take advantage of the $20,000 threshold. [Schedule 7, item 2, paragraph (b) of the definition of 'increased access year' in subsection 328-180(1) of the IT(TP) Act]

Commencement, application, and transitional provisions

7.24 Schedule 7 to the Bill commences on the later of:

•

the first 1 January, 1 April, 1 July or 1 October to occur after the day the Bill receives the Royal Assent; and

•

immediately after the commencement of Schedule 1 to the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2024.

7.25 However, Schedule 7 to the Bill does not commence at all if Schedule 1 to the Treasury Laws Amendment (Support for Small Business and Charities and Other Measures) Act 2024 does not commence.

7.26 Subject to the timing of the passage of the Bill, the amendments may apply retrospectively. The changes are wholly beneficial to entities affected by the amendments.

Chapter 8: Statement of Compatibility with Human Rights

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

Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024

Capital Works (Build to Rent Misuse Tax) Bill 2024

Schedule 1 - Build to rent developments

Overview

8.1 Schedule 1 to the Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024 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.

8.2 Build to rent (BTR) developments are multi-unit buildings where the units, instead of being sold, are rented out.

8.3 The object of the Bill is to increase the supply of rental housing, including affordable tenancies, by improving incentives for institutional investors to support the construction of new BTR developments.

8.4 The Bill amends the Income Tax Assessment Act 1936 (ITAA 1936), Income Tax Assessment Act 1997 (ITAA 1997) and Taxation Administration Act 1953 (TAA 1953), in order to:

•

increase the capital works deduction rate from 2.5 per cent to 4 per cent per year for eligible new BTR developments; and

•

reduce the final withholding tax rate on eligible fund payments from managed investment trust (MIT) investments for eligible new BTR developments from 30 per cent to 15 per cent.

8.5 These tax concessions are only intended to apply to BTR developments that remain continuously active BTR developments throughout a 15-year compliance period.

Human rights implications

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

8.7 The Bill engages the following rights:

•

Article 11(1) of the International Covenant on Economic, Social and Cultural Rights (ICESCR) – the right to an adequate standard of living; and

•

Article 12(1) of the ICESCR – the right to health.

Right to an adequate standard of living, including food, water and housing

8.8 The Bill engages the right to an adequate standard of living, including food, water and housing under Article 11 of the ICESCR.

8.9 The right to an adequate standard of living provides that Australia must take appropriate steps towards the realisation of this right in its jurisdiction, and that the relevant standard must be continuously improving.

8.10 The United Nations Committee on Economic, Social and Cultural Rights (the Committee) has stated that the 'right to adequate housing, which is thus derived from the right to an adequate standard of living, is of central importance for the enjoyment of all economic, social and cultural rights'.^[1] The Committee has highlighted the importance of housing affordability as part of this right:

'Personal or household financial costs associated with housing should be at such a level that the attainment and satisfaction of other basic needs are not threatened or compromised ... States parties should establish housing subsidies for those unable to obtain affordable housing, as well as forms and levels of housing finance which adequately reflect housing needs.'^[2]

8.11 The Bill seeks to improve housing outcomes for Australians. The new tax concessions for eligible BTR developments (increased capital works deduction rate and reduced withholding rate on MIT payments) incentivise entities who construct or own building developments to construct new BTR developments and to hold and maintain these assets in Australia under single ownership. As part of the eligibility requirements for a BTR development, a minimum number of dwellings made available for tenancy or must be tenanted as affordable dwellings (dwellings that are made available for rent, and rented, at 74.9 per cent or less of comparable market rents and that satisfy any additional requirements). As such, the Bill is designed to incentivise construction of new BTR developments and in turn increase the supply of rental housing, including affordable tenancies.

8.12 Thus, the Bill allows Australians to meet an adequate standard of housing and supports the attainment and satisfaction of their other needs. The Bill therefore promotes the right to an adequate standard of living, including food, water and housing. Right to health

8.13 The Bill engages the right to health under Article 12 of the ICESCR.

8.14 Article 12 of the ICESCR protects the right of all individuals to enjoy the highest attainable standards of physical and mental health. The Committee has stated that the right to health embraces a wide range of socio-economic factors that promote conditions in which people can lead a healthy life, which includes housing.

8.15 By incentivising greater investment in rental housing stock (including affordable tenancies), the Bill supports access to housing through increased availability of rental housing stock, including affordable tenancies. The Bill therefore improves the right to health.

Conclusion

8.16 The Bill is compatible with human rights as they support the right to an adequate standard of living, and the right to health.

8.17 The Bill does not raise any other human rights issues.

Capital Works (Build to Rent Misuse Tax) Bill 2024

Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024

Overview

8.18 The Capital Works (Build to Rent Misuse Tax) Bill 2024 (the Imposition Bill) ensures the integrity of the tax concessions made available in the Bill by providing for the levy of a misuse tax in the event that an entity improperly claims one or both of the tax concessions.

Human rights implications

8.19 The Imposition Bill does not engage any of the applicable rights or freedoms.

8.20 The Imposition Bill imposes the BTR development misuse tax, which is a key integrity feature of the BTR scheme. The BTR misuse tax approximately claw backs tax benefits claimed by entities where the BTR development ceases to be an active BTR development during the 15-year BTR compliance period. The Imposition Bill does not directly advance or limit a relevant human right or freedom.

Conclusion

8.21 The Imposition Bill is compatible with human rights as it does not raise any human rights issues.

Schedule 2 – Buy Now, Pay Later

Overview

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

8.23 Schedule 2 to the Bill extends the application of the Credit Code to Buy Now, Pay Later (BNPL) contracts and establishes low cost credit contracts (LCCCs) as a new category of regulated credit. LCCCs are continuing or non-continuing credit contracts for providing credit to consumers on a low cost basis. Most BNPL contracts will be regulated as LCCCs. Schedule 2 to the Bill amends the Credit Act to establish an optional modified RLO framework available to LCCCs. Schedule 2 to the Bill also creates new regulation-making powers in respect of LCCCs. The overarching aim of this measure is to provide appropriate and proportionate protections to consumers who enter LCCCs, while maintaining the benefits of consumer access to these kinds of credit products.

8.24 Schedule 2 to the Bill seeks to achieve this outcome by:

•

requiring providers of LCCCs to hold and maintain an Australian credit licence and comply with the relevant licensing requirements and licensee obligations, with some modifications to ensure regulation is proportionate to the relatively low risk posed by LCCCs;

•

modifying the existing RLO framework to create an alternative, opt-in framework that scales better with the risks posed to consumers and requires each LCCC provider to develop and review a written policy on assessing whether an LCCC would be unsuitable for the consumer;

•

allowing LCCC providers and consumers to exchange information via mobile applications (apps) and other technologies; and

•

engaging existing anti-avoidance prohibitions to prevent LCCC providers from structuring their business models to avoid regulation.

Human rights implications

8.25 Schedule 2 to the Bill engages the following rights:

•

the right to a fair trial and fair hearing rights under Articles 14 and 15 of the International Covenant on Civil and Political Rights (ICCPR); and

•

the right to protection from arbitrary or unlawful interference with privacy under Article 17 of the ICCPR.

Right to a fair trial and fair hearing rights

Assessment of civil penalties

8.26 Civil penalty provisions may engage criminal process rights under Articles 14 and 15 of the ICCPR regardless of the distinction between criminal and civil penalties in domestic law. This is because the word 'criminal' has an autonomous meaning in international human rights law. When a provision imposes a civil penalty, an assessment is therefore required as to whether it amounts to a 'criminal' penalty for the purposes of Articles 14 and 15 of the ICCPR.

8.27 Schedule 2 to the Bill extends certain civil penalty and criminal penalty provisions in the Credit Act and Credit Code to LCCCs. The civil penalty provisions in the Credit Act and Credit Code are intended to deter people from non-compliance with their obligations under the Credit Act and Credit Code. None of the civil penalty provisions carry a penalty of imprisonment and there is no sanction of imprisonment for non-payment of any penalty.

8.28 Further, the provisions do not apply to the general public, but to a sector or class of people – namely, providers of LCCCs and their representatives (if any), who should reasonably be aware of their obligations under the Credit Act and Credit Code. Imposing these civil penalties enables an effective disciplinary response to non-compliance.

8.29 The maximum civil penalty amounts that can be imposed under Schedule 2 to the Bill are intentionally significant and are in line with the penalties for other provisions in the Credit Act and Credit Code. The Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers outlines that larger penalties are more appropriate for bigger companies, as they provide an adequate deterrent.

8.30 The judiciary will continue to have discretion to consider the seriousness of the contravention and impose a penalty that is appropriate in the circumstances. The civil courts are experienced in making civil penalty orders at appropriate levels having regard to the maximum penalty amount, taking into account a range of factors including the nature of the contravening conduct and the size of the organisation involved. Therefore, a relevant consideration in setting a civil penalty amount is the maximum penalty that should apply in the most egregious instances of non-compliance with the Credit Act and Credit Code.

8.31 The extension of civil penalty provisions in the Credit Act and Credit Code to LCCCs, via Schedule 2 to the Bill, should not be considered 'criminal' for the purposes of Articles 14 and 15 of the ICCPR. These provisions are regulatory and disciplinary, and they aim to encourage compliance with the Credit Act and Credit Code.

Presumption of avoidance for certain schemes in civil cases

8.32 Schedule 2 to the Bill engages the right to a fair trial as well as the presumption of innocence in Articles 14 and 15 of the ICCPR as it extends certain civil penalty and criminal penalty provisions in the Credit Act and Credit Code to LCCCs. Article 14(2) of the ICCPR recognises that all people have the right to be presumed innocent until proven guilty according to the law. Articles 14 and 15 apply only in relation to the rights of natural persons, not legal persons, such as companies.

8.33 Schedule 2 to the Bill amends sections 323, 323A and 323B of the Credit Act to extend the application of the anti-avoidance provisions to LCCCs. As such, conduct relating to LCCCs are subject to the presumption that a person entered into or carried out a scheme for an avoidance purpose if the scheme is a scheme prescribed by the regulations or determined by ASIC in a legislative instrument, as per section 323C of the Credit Act.

8.34 However, the presumption does not apply if the person proves that it would not be reasonable to conclude that there was a relevant avoidance purpose, having regard to the avoidance matters specified in subsection 323B(1) of the Credit Act.

8.35 Placing the legal burden of proof on the person is appropriate as it is considerably easier for the person to establish that it would not be reasonable to conclude that there was a relevant avoidance purpose, compared with requiring ASIC to disprove that matter. For example, if the scheme in question does have a legitimate (non-avoidance) purpose, that matter would be peculiarly within the knowledge of the person.

8.36 Further, the presumption applies only in civil cases, not in criminal proceedings, and any regulations or legislative instruments made to prescribe or determine schemes that are presumed to have the relevant avoidance purpose are subject to parliament scrutiny and disallowance.

Privacy

8.37 Article 17(1) of the ICCPR provides for the right to not be subjected to arbitrary or unlawful interference with an individual's privacy. In order for the interference with privacy not to be 'arbitrary', any interference must be reasonable in the particular circumstances. Reasonableness, in this context, incorporates notions of proportionality to the end sought and necessity in the circumstances.

8.38 Schedule 2 to the Bill may engage the right to privacy by allowing for the collection, use and disclosure of personal information of consumers who enter into LCCCs by LCCC providers.

8.39 For example, Part 3-2BA of the Bill provides for additional rules relating to licensees under LCCCs, including to modify the obligations that the licensee has under Part 3-2 of the Credit Act to both assess whether an LCCC is unsuitable for a consumer before doing particular things in relation to the contract; and not to enter into, or increase the credit limit of, an LCCC that is unsuitable for a consumer.

8.40 These sections may engage consumers' right to privacy as they require an LCCC provider to assess unsuitability of a consumer to enter into a contract, which in turn requires an LCCC provider to make reasonable inquiries about the consumer, including with respect to the consumer's financial situation.

8.41 However, the amendments make it clear that any personal information of consumers may only be collected and used for particular purposes, that is, to facilitate assessments of unsuitability to enter into LCCCs. Existing privacy safeguards continue to apply, that is, the Privacy Act 1988 applies to the handling of personal information and information relating to credit reporting.

Conclusion

8.42 Schedule 2 to the Bill is compatible with human rights because, to the extent that it may limit human rights, those limitations are reasonable, necessary and proportionate.

Schedule 3 - Medicare levy exemption for lump sum payments

Overview

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

8.44 Schedule 3 to the Bill amends the Medicare Levy Act to exempt eligible lump sum payments in arrears from the Medicare levy.

Human rights implications

8.45 Schedule 3 to the Bill does not engage any of the applicable rights or freedoms.

8.46 The amendments provide concessional tax treatment for individuals in receipt of eligible lump sum payments in arrears. The concessional tax treatment puts individuals into a similar position they would have been, had they been paid correctly in the earlier income years. The amendments are intended to ensure that individuals are not disadvantaged by having to pay a higher amount of Medicare levy amount resulting from the receipt of the lump sum payment in arrears.

Conclusion

8.47 Schedule 3 to the Bill is compatible with human rights as it does not engage any human rights issues.

Schedule 4 — Multinational tax transparency – country by country reporting

Overview

8.48 Schedule 4 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

8.49 Schedule 4 to the Bill amends the Taxation Administration Act 1953 to require certain large multinational enterprises (defined as country by country reporting parents) to publish selected tax information on a country by country basis for specified jurisdictions and on an aggregated basis for the rest of the world. The information is to be published on an Australian government website, with publication facilitated by the Commissioner. The objective of these amendments is to improve information flows to help the public, including investors, to compare entity tax disclosures, to better assess whether an entity's economic presence in a jurisdiction aligns with the amount of tax they pay in that jurisdiction.

Human rights implications

8.50 Schedule 4 to the Bill does not engage any of the applicable rights or freedoms, as it applies to multinational entities not individuals.

Conclusion

8.51 Schedule 4 to the Bill is compatible with human rights as it does not raise any human rights issues.

Schedule 5 – Deductible gift recipients

Overview

8.52 Schedule 5 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

8.53 Schedule 5 to the Bill amends the ITAA 1997 to list as deductible gift recipients:

•

Australian Democracy Network Ltd; and

•

Australian Science Media Centre Incorporated; and

•

Centre for Australian Progress Ltd; and

•

Combatting Antisemitism Fund Limited; and

•

Ethnic Business Awards Foundation Limited; and

•

International Campaign to Abolish Nuclear Weapons, Australia Inc.; and

•

Ourschool Ltd; and

•

Susan McKinnon Charitable Foundation Ltd; and

•

Tasmanian Leaders Inc.; and

•

The Hillview Foundation Australia Limited.

Human rights implications

8.54 Schedule 5 to the Bill does not engage any of the applicable rights or freedoms.

Conclusion

8.55 Schedule 5 to the Bill is compatible with human rights as it does not raise any human rights issues.

Schedule 6 - National skills and workforce development payments

Overview

8.56 Schedule 6 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

8.57 Schedule 6 to the Bill makes amendments to the Federal Financial Relations Act 2009 to support Commonwealth payments to the States in accordance with the National Skills Agreement and any successor agreements.

Human rights implications

Right to education

8.58 These amendments engage the right to education, as referred to in Article 13 of the International Covenant on Economic, Social and Cultural Rights, Articles 28 and 29 of the Convention on the Rights of the Child, and Article 24 of the Convention on the Rights of Persons with Disabilities.

8.59 The amendments promote the right to education as they support the National Skills Agreement which provides States and Territories with access to funding that relates to strengthening the vocational education and training sector.

Right to work

8.60 The amendments engage the right to work under Article 6 of the International Covenant on Economic, Social and Cultural Rights and Article 27 of the Convention on the Rights of Persons with Disabilities.

8.61 The right to work is a right of all people to have the opportunity to gain their living by work they freely choose, allowing them to live in dignity. The amendments promote the right to work as they support funding to States and Territories for skills and workforce development. The funding will be used to deliver programs, services, and reforms to better improve and support Australians in obtaining skills and capabilities, broadening the opportunity for the right to work.

Conclusion

8.62 Schedule 6 to the Bill is compatible with human rights as it promotes the right to education, the right to work by supporting funding to the States and Territories to deliver programs, services and reforms with respect to skills and workforce development.

Schedule 7 - $20,000 instant asset write-off for small business entities

Overview

8.63 Schedule 7 to the Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

8.64 Schedule 7 to the Bill amends the IT(TP) Act to extend the $20,000 instant asset write-off by 12 months until 30 June 2025. This will allow small businesses (with an aggregated annual turnover of less than $10 million) to immediately deduct the full cost of eligible depreciating assets costing less than $20,000 that are first used or installed ready for use for a taxable purpose on or before 30 June 2025. The extension will improve cash flow and reduce compliance costs for small businesses.

Human rights implications

8.65 Schedule 7 to the Bill does not engage any of the applicable rights or freedoms.

Conclusion

8.66 Schedule 7 to the Bill is compatible with human rights as it does not raise any human rights issues.

Attachment 1: Impact Analysis - Build to rent developments

Executive Summary

Australia is facing housing supply pressures which have pushed up house prices and market rents and created affordability issues for households. Housing supply challenges need to be addressed to ensure Australians have access to better housing choices that are safe, stable and affordable.

There are a range of policy approaches that could help ease housing pressures but there is no single solution. The Government is implementing a number of measures to address Australia's housing challenges, including to support additional housing supply, and a focus on helping those most in need.

The policy outlined in this Impact Analysis focuses on the use of taxation levers to support an increase in the supply of residential housing, including affordable housing, in good locations in the rental sector – by attracting more institutional investment.

Given the relative undersupply of Build-to-Rent (BTR) housing in Australia compared to other countries, the Government announced, in the 2023 –24 Budget, that it would introduce tax incentives to encourage foreign investment and construction in the sector to help improve rental housing supply. BTR properties will typically be located close to jobs, transport and other amenities. Reflecting the particular concerns about the shortage of affordable housing, the Government indicated it would consult on the inclusion of a minimum affordable housing requirement in these measures.

The announcement included two elements: 1) accelerating tax deductions for the depreciation of BTR assets; and 2) reducing the managed investment trust (MIT) withholding tax rate on income derived from newly constructed BTR assets. Appendix 1 outlines the status of this Impact Analysis at each major decision point.

MITs are a type of investment vehicle that is widely used by foreign investors to invest in passive income-generating assets in Australia. Reducing the MIT withholding tax rate has been used by governments in the past to attract foreign investment in other property-related sectors including energy-efficient commercial buildings and affordable housing.

The Office of Impact Analysis has assessed that accelerating tax deductions for depreciation of BTR assets will likely to have a minor regulatory impact. Therefore, this Impact Analysis will only consider the impacts on reducing the MIT withholding tax rate.

This policy would support an increase in residential housing supply, with an emphasis on rental stock and affordable housing, in good locations by providing tax concessions to attract more foreign institutional investment to the Australian BTR sector.

The Impact Analysis assesses three options including the status quo. A summary of options, merits and risks is summarised below.

Options 2 and 3 will reduce the withholding tax for foreign investors that invest in the BTR sector. It is expected that Options 2 and 3 would provide an increase in housing supply with a net benefit compared to the status quo. Both options would help to establish a BTR sector in Australia, which can be expected to deliver housing supply beyond the level directly supported by the policy by attracting additional investors into BTR, such as domestic institutional investors. Attracting institutional investment will support the housing market to provide more diverse private housing, reducing the demand for further direct government investment in housing through programs like the Housing Australia Future Fund (HAFF). This will help to meet Australia's housing needs at a lower fiscal cost.

Option 2 is expected to impose a smaller regulatory burden compared to Option 3 as no allocation requirements are imposed on the BTR development owners in relation to the discounted dwellings. However, the impact of the affordable housing supply provided by Option 2 is unclear as there is no guarantee that the discounted dwellings would benefit an appropriate cohort of tenants.

Option 3 would ensure the benefit flows through to key workers to help fulfill their need for affordable housing in good locations. For example, it would assist nurses in being able to live closer to the hospitals they work in. Increasing housing supply and affordability in well-located areas can positively affect productivity. Therefore, the increased regulatory burden in Option 3 to limit eligibility for the discounted dwellings to ensure appropriate targeting of the affordable housing would help guarantee additional benefits.

Considering the costs and benefits, Option 3 has been identified as the preferred option with the highest net benefit for Australia. Option 3 is the preferred option to achieve an increase in rental housing supply combined with an increase in affordable rental housing for more moderate income earners.

Background

On 28 April 2023, National Cabinet agreed to a comprehensive package of reforms that recognise the housing challenges faced by all levels of government to support a national approach to the growth of Australia's cities, towns and suburbs.

As part of this package, the Government announced it would increase the supply of housing by offering incentives to eligible new BTR projects. Further detail on that commitment was provided in the 2023-24 Budget through the measure 'Housing (Build-To-Rent Developments) – accelerating tax deductions and reducing managed investment trust withholding tax rate', which is intended to encourage investment and construction in the BTR sector and expand Australia's housing supply. The measure noted that consultation will be undertaken on implementation details, including a requirement to have a minimum affordable housing component.

Build-to-Rent (BTR)

BTR housing refers to large scale, multi-unit developments where residential dwellings are retained by one owner/entity and rented out to tenants as a long-term revenue generating asset. Developments are typically purpose built, institutionally owned and professionally managed. This contrasts with build-to-sell developments where the decision on whether the dwelling is available for rent or is occupied by the owner is a decision for the owner of that individual dwelling.

BTR, being higher density constructions, are also typically located close to jobs, transport and other amenities. Having homes in good locations improves liveability, productivity and better utilises infrastructure; having affordable housing in those same locations will allow essential workers to live in the communities in which they work and provide essential services.

BTR housing also provides tenants with a number of benefits that are not widely available for tenants of properties owned by individual landlords.

•

The long-term investment period provides tenants with access to long and stable leases, allowing them to build long-term connections to the local community. This will benefit more Australians who are now renting longer before entering homeownership or renting on a more long-term, permanent basis.

•

BTR property managers are responsible for the entire development, which can streamline building maintenance and repairs to a higher standard. Additionally, since BTR developments have long investment horizons, building owners have a financial incentive to construct better quality housing and carry out ongoing maintenance.

•

Single ownership of the entire building allows for high quality amenities and services for tenants (such as on-site concierge, communal spaces and social events).

Australia's BTR sector is currently very small, with only around 11 developments in operation as at February 2023.^[3]

Managed Investment Trust (MIT)

A MIT is a widely-held collective investment vehicle in which members of the public and/or institutional investors invest to derive passive income, such as dividends, rent or interest. MITs must meet certain requirements to be eligible for concessional tax treatment.

Trustees, custodians, and other entities are required to withhold amounts of withholding tax from certain fund payments made to non-resident investors and remit that tax to the Australian Taxation Office (ATO). A fund payment is a payment made by a MIT trustee to investors out of the Australian sourced net income, including capital gains, derived by the trust and the withholding tax represents a final tax on those earnings for the non-resident.

The rate of tax to 134 withheld will vary according to whether the investor is a resident of a country that has an exchange of information agreement with Australia, and the type of income the fund payment is attributable to. For fund payments that do not include dividends, interest or royalties, the relevant withholding tax rates applicable to an investor from an information exchange country are:

•

the 'non-concessional' withholding tax rate of 30 per cent, applied to agricultural property, trading income, cross-staple income and most residential income, since 2019;

•

a 'concessional' rate of 15 per cent which has applied to eligible commercial property since 2012, and affordable housing since 2019; and

•

a 'concessional' rate of 10 per cent, which has applied to a limited range of newly constructed 'clean' (energy efficient) commercial buildings since 2012.

The withholding tax rate for investors from non-information exchange countries is 30 per cent.

Payments of dividends, interest or royalties to foreign residents are subject to different withholding tax arrangements.

The table below outlines the applicable withholding tax rate for income derived from BTR and other comparable assets for investors from information exchange countries.

The 30 per cent withholding tax rate for distributions of income, including capital gains, derived from BTR assets is higher than for other comparable assets such as hotels, offices and affordable housing, but is broadly consistent with the corporate tax rate of 30 per cent. There is, however, also a range of other factors considered in an investment decision between property classes, such as relative risks and investor mandates around environmental, social and governance (ESG) considerations.

Additionally, differences in the Australian and overseas tax treatments can make Australian investments less competitive for foreign pension funds, a significant source of global investment in BTR. Countries such as the United States (US) and Canada do not tax investment returns derived by foreign pension funds: instead, their members are taxed when they withdraw their pension. In contrast, foreign pension funds that invest in Australian MITs (whether they invest in BTR or otherwise) are subject to double taxation at both the fund and member level. For example, a Canadian pension fund does not pay any tax on income from a BTR project in the US but would be subject to Australia's 30 per cent withholding tax on income from an Australian BTR investment through a MIT, and its members would be subject to Canadian taxes on withdrawal of their pensions.

State and territory BTR initiatives

Several states and territories have already introduced concessions to support investment in BTR housing. New South Wales, Victoria, South Australia, Western Australia and Queensland have all introduced a 50 per cent concession on land tax for BTR projects. Some states have also introduced concessions on foreign investor duties and surcharges. Queensland and the Australian Capital Territory's BTR concessions require a portion of dwellings of the BTR project to be affordable housing.

States and territories have different approaches to defining the term 'affordable housing', for their BTR tax concessions or for planning regulation purposes. Generally, they define affordable housing as housing appropriate for households on very low, low or moderate incomes. These household types are further defined by reference to average or median earnings as reported by the Australian Bureau of Statistics, as well as by household composition. For example, households with more than one adult and with dependents are able to meet the definition of very low, low or moderate income with higher income limits than a single adult.

The problem

Australia is facing a shortage of housing relative to demand, especially in good locations, which is weighing on housing affordability and contributing to rental stress. This proposal addresses one particular facet of this problem: the lack of institutional investment in Australian BTR and the need to attract foreign institutional investors who are familiar with BTR as an asset class. Once established as an asset class this well help to build scale and liquidity in the sector and thus attract domestic investors. However, foreign investors are not currently investing in BTR due the current tax settings being uncompetitive relative to other property investments in Australia and the treatment of BTR investments in other jurisdictions.

Australia is experiencing significant housing challenges, with housing supply not keeping pace with the growth in demand. The National Housing Supply and Affordability Council (NHSAC) reported in 2024 that Australia is experiencing insufficient supply, with rental vacancies at an all-time low of 1.6 per cent (well below a rate associated with a balanced market of 3-4 per cent).^[4]

New housing supply is weakening as higher interest rates and increased material and labour costs dampen construction. Treasury analysis suggests dwelling investment contracted by 3.8 per cent in 2022-23 as elevated construction costs and labour and material constraints weighed on activity. Dwelling investment is expected to contract further in 2023-24, reflecting the current weak level of building approvals, before picking up moderately in 2024-25.

Low completions and approvals partly reflect challenges in achieving investment returns in new housing projects. There also continues to be a backlog of new homes under construction, with 222,000 private residential dwelling units incomplete as at the December quarter 2023 (around 30 per cent above the pre-2020 average).^[5]

Compounding this weak supply is the increase in population following the re-opening of borders in 2022 after the pandemic which adds to housing demand.^[6]

The shortage of housing is a key factor leading to prices and rents growing faster than wages. Rents have increased by around 35 per cent since the start of the decade.^[7] The number of households that lack access to appropriate housing at rents that do not lead to financial stress is growing.

A deterioration of housing affordability also increases demand for non-market housing, such as affordable housing. Within the overall housing market, there is a particular lack of affordable, safe, secure and well-located housing for many Australians on low and more moderate incomes. The Australian Housing and Urban Research Institute estimated in 2023 that to satisfy current unmet and projected future demand for social and affordable housing, an additional 942,000 social and affordable dwellings will need to be constructed by 2041.^[8]

NHSAC research shows workers are also living an increasingly further distance from their place of work, associating this with a lack of affordable housing in cities.^[9] As discussed in Statement 4 (Meeting Australia's Housing Challenge) in Budget Paper No. 1, Budget 2024-25, increasing housing supply and affordability in well-located areas can positively affect wages and productivity. It can also assist with essential workers living in the community in which they work and support.

Currently, the vast majority of rental housing in Australia is provided by individual landlords, with institutional investors having a limited role. In September 2023, NHSAC released its report Barriers to Institutional Investment, Finance and Innovation in Housing, which identified a role for institutional investment in increasing rental housing supply through BTR developments. The Report found such investment would improve affordability and ease rental shortages.^[10] Similar findings were made in Housing Australia's State of the Nations Report.^[11]

The report also identified several barriers relevant to investing in BTR that should be addressed at the federal level:

•

inadequate risk-adjusted returns;

•

lack of an existing market, scale and performance history; and

•

policy and regulatory uncertainty and complexity.

The 2023 Senate inquiry into the 'The worsening rental crises in Australia' heard that larger scale investment by institutional investors in the BTR sector would expand the supply of rental housing, including affordable housing. This would also help in mitigating the impact on rental prices of short-term interest rate increases, which can potentially be better borne by large scale institutions compared to individual investors. In addition, some submissions noted that a larger BTR sector could increase tenure security.^[12] Other benefits that are not widely available for tenants of properties which are owned by individual landlords, include proximity to central business districts (and hence employment opportunities), standardised repair and maintenance, and better communal facilities.

Australia has a very small BTR sector compared to countries such as the US and United Kingdom (UK). In those jurisdictions, BTR investments are popular among large institutional investors with long time horizons, such as pension funds. Australia is not seen as an attractive option for foreign investment due to our high rates of taxation on BTR compared with other jurisdictions and other property investment classes, such as commercial property.

Foreign investors currently have the greatest familiarity with this sector and so the best capacity to build at scale and induce participation of domestic institutional investors or to partner with domestic institutional investors. Australian superannuation funds – the largest cohort of domestic institutional investors – are hesitant to invest in BTR despite facing a 15 per cent tax rate due to insufficient scale and relative inexperience in this emerging sector.^[13] The net benefit of incentivising foreign investment would likely exceed the number of dwellings directly built as a result of that investment. In the longer term it could attract a broader range of investors, including domestic institutions, into the sector by helping to demonstrate the viability of a mature BTR market in Australia.

The need for well-located affordable rental supply

BTR housing brings the economic benefit of increasing housing supply in a cost-effective and efficient manner. BTR housing is generally developed in places with the most unmet excess demand. The NSW Productivity Commission found that where infrastructure costs were the lowest was where people most wanted to live.^[14] In the Sydney context this included areas such as the central business district and parts of the lower north shore, eastern suburbs and the inner west.

The UNSW City Futures Research Centre finds that while land prices in inner city areas are higher, there is less of a need to develop infrastructure. Construction costs in infill areas are lower than greenfield areas, as is the cost of provision of electrical, water and sewage, telecommunication and gas. The cost of social infrastructure such as fire, ambulance, police and education is also lower. Affordable units, in higher densities, would be therefore associated with lower construction costs and per unit land values.^[15]

Furthermore, the cost of servicing new housing with infrastructure varies between inner and outer suburbs. Inner suburbs have lower costs due to short commutes, more active and public transport options, more water related infrastructure, greater economies of scale as well as school capacity.^[16] For example, Sydney infrastructure generally costs around $39,000 per property less than in greenfield areas.^[17]

Similarly, the Centre for Independent Studies referred to research by AECOM that found in Canberra, it costs $68,600 per new dwelling to provide infrastructure in the most costly locations (the greenfield suburb of Whitlam), but $9,000 or less in inner suburbs where existing infrastructure had excess capacity.^[18]

An additional economic benefit of BTR housing, being built in inner-city areas is that it has a broader positive impact on housing affordability. Increasing supply in high value, in demand areas improves affordability for households who cannot live there. This is because as higher income households move into newer, well-located housing it frees up space in nearby suburbs that they previously resided in. This process (known as 'filtering') flows through the income distribution so that lower-to middle income families have increased opportunities to move closer to inner urban areas.

In Australian cities, higher paying jobs in knowledge and service industries have historically been located in central areas, which are close to public transport. Housing located in these areas is more expensive, and lower paid workers employed in central city areas will face affordability burdens and long commutes^[19]. This can lead to reduced participation in the labour market. AHURI reports that long commuting impacts productivity, including through absenteeism as well as employee performance.^[20] Households may also be unable to sustain housing stress in the long term, leading to greater staff turnover and recruitment challenges and reduced labour market participation, also lowering urban productivity. Therefore, increased availability of affordable accommodation from BTR housing promotes workers and employers' access to the labour market, increasing productivity.^[21]

Research published by Australian Housing and Urban Research Institute (AHURI) finds that 20 per cent of key workers across Sydney and 17 per cent across Melbourne are struggling to find appropriate and affordable housings, with much higher rates in inner subregions. Further, key workers are more likely than the labour force generally to reside in outer suburbs and satellite cities and to commute more than 30 kms to work.^[22]

Research from EY, commissioned by Aware Super, suggests essential worker housing affordability crisis is costing Australia around $64 billion. Their modelling found providing affordable housing for essential workers such as nurses, teachers and police officers generates an additional $45,500 per tenant per annum in benefits shared across the economy.^[23]

Case for government action/objective of reform

This proposal addresses the lack of investment in Australian BTR due to current tax settings for foreign institutional investors being uncompetitive relative to other property investments in Australia and BTR investments in other jurisdictions. Providing targeted tax concessions to help grow Australia's BTR sector would support the Government's objectives of expanding the housing supply, including affordable housing supply in good locations for those in genuine need, including essential workers. It would also help improve the diversity of Australia's rental accommodation; and make dwellings available with improved features such as security of tenancy, more efficient maintenance, better amenities, and proximity to transport, services and employment. Success would be demonstrated by an increase in the number of BTR dwellings, including affordable dwellings, and the number of investors in the sector, including, over time, domestic institutional investors.

While land tax concessions have been offered at the state and territory level, high withholding taxes at the Commonwealth level continue to impede investment in the BTR sector by lowering the after-tax return for foreign investors. Only the Commonwealth Government can reduce these applicable withholding tax rates to improve rates of return and induce more investment.

With a Government target of building an additional 1.2 million new well-located homes over 5 years from July 2024, this policy will complement other housing policies addressing Australia's housing supply and affordability challenges. Increases in BTR dwellings, the number of institutional investors active in the industry and development activity will be indicators of a growing asset class supported by the incentive.

Whilst some investment in the Australian BTR sector has occurred, it has been limited compared to other property classes. Moreover, a lack of action will lead to worsening affordability, more households in rental and financial stress and the associated economic and social costs such as homelessness, housing insecurity, lack of employment opportunities and impacts on wellbeing.^[24]

Leveraging private capital to support investment in affordable housing can and is increasingly being used by governments operating in a fiscally constrained environment to meet the upfront costs of new affordable housing stock.^[25]

Reducing the final withholding tax on BTR projects will make BTR more attractive to foreign institutional investors, helping the Government achieve its target of 1.2 million new homes over 5 years from mid-2024. Furthermore, government intervention can help address the inadequate supply of well-located affordable housing by mandating a portion of BTR dwellings to be offered at a discounted rent for middle-income earners.

NHSAC found that the defining characteristic of institutional investment overseas has been demonstrated commercial viability – including attractive returns and moderate risks. Good quality data on revenues and costs associated with managing properties are also important. Countries with well-established markets also have dedicated and transparent regulatory, legal and tax arrangements for the sector resulting from the development of case law and regulation over time. In addition, overseas markets generally have some form of subsidy that fosters investment, generally in the form of a tax concession targeted at affordable housing or the rental market more broadly. There is no such concession currently legislated for the BTR sector in Australia. Another feature is a well-supplied pipeline of assets suited to institutional investment.^[26] As the sector in Australia is in a nascent state, it will need support to become well established.

Whilst public policy could seek to encourage an organic growth of the sector without intervention, it should also consider accelerating the development of the market to generate activity and sustainable growth. This can particularly be achieved through supporting first movers. In fact, NHSAC found that the industry itself has a 'first mover problem', where firms are reluctant to enter the market due to perceived disadvantage of early entry. Government action can generally help address the costs of being first movers.^[27]

Treasury consulted relevant industry stakeholders on the potential limits, risks and suggestions to improve this policy as part of the policy development procedure. These included continuing inconsistency in regulatory requirements between jurisdictions, as well as the sufficiency of the concession to attract more investment. Industry comments, feedback and suggestions were carefully considered and the proposed legislation was revised to reflect stakeholders' views where appropriate. The Consultation Plan below outlines the risk, barriers and limits identified by the industry and reasonings on Treasury's action.

Identification of viable alternative policy options

The NHSAC's State of the Housing System 2024 report states that market supply of housing is inadequate and that this in part reflects the challenges associated with achieving adequate investment returns.^[28] As such, the responsiveness of supply to demand is influenced by the broader economic environment, including the cash rate, mortgage rates, the cost of building materials and consumer inflation, and levels of disposable income. The ability of the market to respond to demand by providing additional stock is influenced by a number of factors including taxes, lending regulations, land prices, land availability, housing market regulations and grants.^[29]. It is unreasonable to expect that in the absence of Government action the industry will find ways to achieve target returns and supply more housing. As such, Government action is necessary to support the industry.

Whilst Government can choose to target a number of these factors, EY reports that for BTR housing, the 30 per cent MIT withholding tax rate causes lower after-tax returns which do not support investment hurdles and that a 15 per cent rate would be comparable to the rates charged in the US and UK markets on their Real Estate Investment Trust Regime. Furthermore, 80 per cent of the investment in Australian BTR thus far has been foreign capital by institutional investors^[30]. It is therefore appropriate to consider MIT tax settings as the key mechanism by which the Government can impact investor returns and encourage further investment.

The Commonwealth is working with state and territory governments to reform planning laws and improve the delivery of housing. Nonetheless, adjusting tax settings for BTR can directly incentivise the asset class while other reforms are progressed.

Reducing the MIT withholding tax rate on BTR will not, by itself, achieve the policy objective of increasing the supply of affordable housing. The majority of current BTR dwellings attract premium rents and are unlikely to be categorised as affordable.

Policy options

The Government has an extensive range of policies to address the housing challenges outlined earlier. These have been comprehensively set out in Budget Paper No. 1 (Statement 4: Meeting Australia's Housing Challenge) in Budget 2024-25. State and Territory governments are also taking action to improve housing supply, including reducing costs of building homes.

Acknowledging all the measures governments at all levels are undertaking, this policy looks at how the Australian Government can use targeted tax concessions to reduce entry costs for institutional investors, to encourage growth in BTR as a new housing asset class and increase the participation (and capital) of such investors in the housing market, whilst ensuring that essential workers are better able access BTR tenancies. More BTR properties can also increase housing security for tenants, complementing other government actions to improve the rights of tenants discussed in Statement 4 in Budget Paper No. 1, Budget 2024-25.

The targeted tax concession announced in the 2023-24 Budget is a reduction in the withholding tax rate (from 30 per cent to 15 per cent) that applies to MIT distributions made to foreign institutional investors. Typically, such distributions would comprise both rental income and capital gains attributable to BTR activities.

Noting the long-term nature of BTR, eligibility for the concession will require the continuous operation of a development as a BTR development for minimum period. The Government initially indicated it would consult on a minimum period of at least 10 years. Targeted consultation with industry participants suggested a period of at least 15 years would be appropriate. This acknowledges the long-term nature of such projects and is consistent with rules that apply in NSW, Victoria and Western Australia in relation to eligibility for state government BTR tax concessions.

Protecting the integrity of the tax concession

Integrity rules are common in tax law, particularly in relation to tax concessions, to discourage and penalise non-compliance. This is necessary to ensure the tax concessions achieve their objectives.

The exposure draft legislation contained a BTR misuse tax designed to neutralise the tax concessions provided to a BTR development that became non-compliant during the 15-year BTR compliance period. The misuse tax aims to compensate the Government for the tax benefit incorrectly enjoyed by taxpayers during the entire compliance period. This reduces any incentive for BTR operators to stop complying with the rules part way through the 15-year period, such as by selling off apartments to individual owners or ceasing to provide affordable housing. Without the misuse tax, the profits from such activity could outweigh the loss of future MIT WHT concessions on complying BTR income. This approach is consistent with that taken by NSW and Victoria in relation to state BTR land tax concessions.

'Safe harbour' rules were inserted into the final legislation to provide the Commissioner of Taxation with the discretion to disregard temporary periods of ineligibility that were outside the control of the owner of the BTR project. This should ensure that the BTR misuse tax will only be applied to more egregious breaches.

The BTR misuse tax would be a feature of both Option 2 and Option 3.

Policy options deemed non-viable

Providing tax concessions to domestic investors has not been considered as an option within the scope of this policy. Domestic investments in BTR and other residential houses (such as build-to-sell) are subject to the same tax treatment. While introducing tax concessions for domestic investments in BTR could improve returns for these investors, there is a risk that domestic investors would just refocus from constructing build-to-sell houses to BTR, which would not increase the total rental housing supply while forgoing government tax revenue. Additionally, superannuation funds – one of the largest domestic sources of long-term institutional investment – are already subject to considerable tax concessions.

Lowering the MIT withholding tax rate for BTR investments below 15 per cent was also not pursued as an option. The existing MIT withholding tax rate on foreign investment into affordable housing^[31] is 15 per cent, which is the same as the BTR rate proposed by this policy. Aligning the BTR tax settings with those applying to affordable housing could incentivise foreign investors to refocus their investment from affordable housing to BTR.

Ensuring greater consistency of regulatory requirements between jurisdictions, by pursuing changes in State and Territory laws, has not been considered as an option. While it would reduce compliance and administration costs, in a federated system it is hard to achieve in a timely manner and there is no certainty it could be achieved.

Option 1: Maintain the Status Quo

Under the current tax settings, MIT income attributable to residential properties used for BTR projects, is subject to the default withholding tax rate of 30 per cent – aligned with the top corporate tax rate.

Whilst BTR assets have developed recently and more are in planning stages, the sector remains a nascent industry in Australia and is not a well-established asset class. In April 2023, the Property Council of Australia (PCA) released a report prepared for it by Ernst and Young (EY), which estimated the current size of the BTR sector in Australia to be $16.87 billion. That report also estimated the size of the BTR sector to be 72 projects, comprised of 11 constructed, 23 under construction, and 39 in planning, representing approximately 23,000 additional dwellings.^[32]

However, this equates to only around 0.2 per cent of the total value of the residential housing sector. For comparison, the report noted that in the UK and USA this figure is 5.4 per cent and 12 per cent respectively.^[33] This shows that BTR has struggled to establish itself in Australian in the same manner, despite significant demand for housing. If the industry is not supported, there is no reason to presume it will emerge from a state of nascency.

Option 2: Reduce the MIT withholding tax rate in line with other comparable asset classes and require a portion of dwellings to be offered on a discounted basis.

This option involves reducing the MIT withholding tax rate for eligible BTR projects from 30 per cent to 15 per cent (as announced in the Government's 2023-24 Budget) for both rental income and capital gains (MIT fund payments, which are subject to withholding tax, are comprised of both income and capital gains). The reduction in the withholding tax rate will be for newly constructed projects only (where construction commences after 9 May 2023).

This option will reduce the withholding tax rate for BTR assets in line with other commercial real estate asset classes (such as offices, shopping centres and hotels), as well as investments in 'affordable housing' residential property, which are also subject to a 15 per cent withholding tax rate. Consistent with above asset classes, the reduced withholding tax rate will apply to both rental income and capital gains that are attributable to BTR developments.

This option will establish in federal legislation a common understanding of the BTR asset class that would receive comparable tax treatment. For example it will include the following elements:

•

projects consisting of 50 or more apartments or dwellings to be made available to the general public;

•

dwellings to be retained as BTR housing under single ownership for at least 15 years before being able to be sold;

•

landlords must offer a genuine lease term option of at least 3 years for each dwelling.

Furthermore, the reduced MIT withholding tax rate will be subject to the condition that a minimum proportion of the dwellings are offered at a discounted rate. For example, a minimum 10 per cent of dwellings in the BTR development must be offered at a discount of at least 25 per cent relative to a comparable dwelling in the same development.

This option is silent on how the discounted units will be allocated to tenants. It is expected that BTR operators would allocate the discounted dwellings based on their own internal policies, or in line with any state and territory regulations where they apply.

This option leverages the expectation that states and territories include affordable housing thresholds as part of their planning and zoning rules to access their BTR land tax concessions. As a result, state and territory checks and balances are the key mechanism used to ensure discounted dwellings are rented out to appropriate households.

Currently only Queensland and the Australian Capital Territory (ACT) have affordability requirements attached to their BTR concessions. Queensland requires that tenants meet an income and an assets test to be eligible for affordable dwellings. In the ACT, CHPs must manage the affordable dwellings in BTR developments and offer them to eligible tenants as required by regulation. Furthermore, some state governments have introduced planning regulation incentives for affordable housing. For example, in New South Wales, the Government in some cases offers floor space ratio bonuses to encourage developers to deliver affordable housing.^[34] In addition, from 1 June 2018, the Planning and Environment Act 1987 (Vic) included an objective to facilitate the provision of affordable housing in Victoria and as part of the Victorian Government's housing strategy, planning system initiatives and reforms will be introduced to help address housing challenges, including for affordable housing.^[35]

Option 3: Reduce the MIT withholding tax rate in line with other comparable asset classes and require a portion of dwellings to be offered as affordable tenancies

This option involves reducing the MIT withholding tax rate for eligible BTR projects from 30 per cent to 15 per cent and requiring a portion of dwellings to be offered on a discounted basis (as offered in Option 2). Additionally, conditions are imposed on the allocation of the discounted dwellings. The conditions will ensure the discounted dwellings are offered as affordable dwellings for members of the community who may not otherwise be able to afford to rent a dwelling in a particular BTR development. The conditions could be based on criteria such as:

1.

Household income limits:

1.1 Some states and territories already require household income testing for their affordable housing policies, whether for BTR land tax concessions or planning purposes.

•

Household asset limits;

•

Tenants must be employed in particular 'essential' occupations

•

Involvement of registered CHPs.^[36]

-

CHPs have requirements both under the Australian Charities and Not-for-profits (ACNC) guidelines and at the state regulatory level regarding tenant eligibility and charging of rent. These go beyond a simple discount calculation to rent.

With respect to the setting of income limits, one option is as follows:

•

Single adult: earning 120 per cent of annualised average weekly total earnings^[37].

•

Couple, no dependents: earning 130 per cent off annualised average weekly total earnings.

•

Family, one or more adults and one or more dependents: earning 140 per cent of annualised average weekly total earnings.

The above criteria are broadly similar to the approaches used to define affordable housing in Victoria, Queensland, and NSW for other housing regulations. Therefore, it is likely some industry participants would already be familiar with implementing these conditions.

Under this option, the additional conditions provide checks and balances at the federal level on the allocation of discounted dwellings. While not achieving a common definition of affordable dwellings to across jurisdictions and government programs for BTR developments, it will provide more certainty that housing will be made available to workers needing affordable rental properties closer to their jobs, transport and other necessary amenities.

Cost benefit analysis of each option

Cost benefit analysis will be used to identify the option that provides the highest net benefit. The option providing the highest net benefit should be selected as the preferred method that most effectively address the Government's objective. As BTR is a nascent asset class, and some of the benefits from BTR and affordable housing are qualitative rather than quantitative, some costs and benefits could not be quantified.

Option 1: Maintain the status quo

Maintaining the status quo means income from MIT investments in BTR developments will remain subject to the 30 per cent non-concessional withholding tax rate.

Under this scenario, Australia may still see some growth in BTR, especially as some state and territory governments have implemented their own concessions targeted at encouraging BTR investment. While state and territory land tax concessions target both domestic and foreign investors, concessions on foreign investor surcharges are targeted at foreign investors only. However, notwithstanding the 23 projects under construction and 39 projects in planning, a larger pipeline of suitable projects is needed.^[38]

As noted above, the responsiveness of supply to demand is influenced by the broader economic environment, including the cash rate, mortgage rates, the cost of building materials and consumer inflation, and levels of disposable income. In addition, the ability of the market to respond to demand by providing additional housing stock is influenced by a number of factors including taxes, lending regulations, land prices, land availability, housing market regulations and grants.^[39]. As the NHSAC report into barriers to institutional investment notes, the rental market has been slow to respond to rising demand for rental housing which in part reflects these cyclical factors but also reflects deeper structural constraints on the capacity of the rental market to quickly and efficiently meet the housing needs of those who rely on rental accommodation.^[40]

Given the impact of these factors it cannot be expected that in the absence of Government action the BTR industry will find ways to achieve target returns on investment and supply more housing. As such, Government action is necessary to support increased supply.

As noted above, notwithstanding the pipeline under construction or planning, the number of BTR dwellings in Australia is low in comparison to other countries.^[41] NHSAC reports that institutional investment has sizeable allocations to Australian commercial, retail and industrial property^[42], all of which attract a 15 per cent withholding tax rate, half the rate that currently exists for BTR. Foreign institutions have funded most of Australia's existing BTR developments at around 80 per cent, or 3,909 dwellings.^[43]

NHSAC also reported that office property accounts for 49 per cent of institutional investment in Australian property whilst retail is 35 per cent, industrial 11 per cent and residential (and accommodation) is only 1 per cent.^[44] NHSAC also referred to data from JLL, indicating that whilst annual rental yield for the March quarter 2023 was 4.4. per cent, similar yields for logistics, student accommodation, retail, office and aged care were all higher, ranging from 4.8 to 6.5 per cent.^[45]

The 30 per cent MIT withholding tax rate means other real estate investments (such as office, retail and commercial premises) will likely continue to attract more foreign investment due to lower yield provided by BTR assets.^[46]

While domestic investors do not face higher taxation rates on BTR relative to other asset classes, they lack the experience in developing and managing BTR projects in Australia. Domestic institutional investment allocation data from ISPT, one of the largest fund managers of Australian unlisted property that invests on behalf of superannuation funds, shows most institutional capital is invested in: office (49 per cent), retail (35 per cent) and industrial (11 per cent) properties, while residential (including BTR) only represents 1 per cent of total property investment.^[47] This is unlikely to substantially change until the BTR sector matures and the long-term returns have been proven.^[48]

The status quo – including the 30 per cent MIT WHT rate – will continue to limit the attractiveness of the BTR asset class and the level of investment and growth. Without any government actions to attract foreign investors with experience in BTR, the BTR sector may not be able to achieve sufficient scale and momentum to attract follow-up investment by a broader range of investors. Costs to society from the lack of housing and affordable housing, and the other benefits provided by BTR housing relative to other forms of housing, will remain unchanged.

Additionally, the status quo will do little to increase the supply for affordable housings without any government actions. More than 80 per cent of the current BTR projects in planning stage are located in Victoria and New South Wales^[49], both of which do not have compulsory requirement for owners to include affordable tenancies to access their land tax concessions.

Reducing the MIT withholding tax rate to be in line with other comparable asset classes

Overall, both Options 2 and 3 are expected to provide a net benefit over the status quo. The regulatory burden and government costs associated with providing the tax incentives are expected to be outweighed by the societal benefits that will accrue from increased rental supply and additional government receipts from increased investment.

Impacts on the Government

Options 2 and 3 both provide a reduction in the MIT withholding tax rate from 30 per cent to 15 per cent. Treasury estimates that such treatment under both Options 2 and 3 would provide similar outcomes in terms of government revenue foregone. Government receipts are expected to decrease by $30.0 million with an increase of government payments by $4.3 million over the 5 years from 2022-23.

The decrease in receipts is based on the number of BTR properties in the current development pipeline and assumed growth in the apartment stock over the medium term. Treasury has assumed that due to the concessional rate, a significant portion of these properties will be operated by MITs with significant foreign based equity. Income from rents is assumed to grow based on capital city apartment rent growth and this income will be remitted and withheld at the concessional rate.

While the ATO can leverage its existing infrastructure to administer a 15 per cent MIT withholding tax rate in the short term, additional infrastructure to allow it to effectively monitor the concessions on an ongoing basis and conduct compliance activities would be desirable.

The nascent BTR market is difficult to forecast at this time but any government revenue foregone as a result of these concessions could be partially offset by additional tax receipts generated by new BTR entrants, including by domestic investors encouraged by the successful expansion of the sector. The costing also excludes the revenue impact attributable to additional employment opportunities in the construction and property management industry.

Lastly, encouraging the private sector to increase housing supply and provide discounted housing to essential workers would, over time, reduce demand for direct government investment in housing construction through programs like the HAFF, which could result in overall financial savings for the Government. A tax concession will enable more projects to surpass minimum investment hurdles so they can proceed to development, bridging the funding or profitability gap that is currently a constraint on projects. This should support private capital to fund increased housing supply, absorbing some of the excess demand for housing (including from essential workers) and therefore reducing pressure on the Government to directly fund new dwellings.

Impacts on BTR investors

The reduction in the MIT withholding tax rate will benefit foreign BTR investors by improving their after-tax returns. Improved returns means the sector is able to attract more investment, such that the number of new BTR projects funded by foreign investment is likely to increase, resulting in a boost in housing supply. The change in policy follows significant stakeholder feedback that the residential BTR sector is unable to attract investment under current tax settings for BTR, as they lead to lower returns than comparable assets, thereby directing foreign investment into these other assets. The reaction from the sector to the 2023-24 Budget announcement was positive.

Some new compliance costs will be imposed on developers and investors, who will need to ensure the eligibility requirements for the concessional withholding tax rate are met over the minimum holding period. This may include keeping records of income generated, floor space of BTR dwellings and the lease terms offered. Compliance costs for BTR developers are not expected to differ substantively from the status quo. Many BTR developers and owners already collect similar information as part of their general building operations, as well as to access any relevant state or territory BTR concessions.

Developers and investors may also incur initial transitional costs associated with seeking tax advice. That said, mechanisms exist to apply the existing 30 per cent withholding tax, so minimal adjustments to withhold the lower 15 per cent rate are expected.

While a positive increase in rental housing stock is expected in response to Options 2 and 3 as a result of the increased after-tax returns, it is difficult to provide a detailed estimation as the sector is nascent and market reaction. NHSAC reports that forecasting for housing markets is inherently uncertain^[50]. Baseline projections for housing incorporate demand-side housing policy and migration policy measures enacted by the Government. They do not incorporate the effect of policy initiatives aimed at addressing supply constraints in the housing system that are expected to be implemented by different levels of Government. As such forecasts rely on the existence of past data to establish a trend and project that trend into the future, this is particularly challenging for the BTR sector, which is not yet well established.

However, NHSAC also notes that it expects policy measures to likely result in a greater supply of housing than projected.^[51]. Predicting the increase in supply by any one measure is difficult but changes to BTR tax settings could increase supply significantly over the medium term. The level of response will likely differ according to the additional requirements on the allocation of the discounted dwellings. Requirements that impose a higher regulatory burden will limit investment returns and investment appetite for BTR. These impacts are explored further below.

In the medium to long-term the additional foreign investment into BTR is expected to create an expanded BTR market with sufficient depth and scale to attract new types of investors. As noted above, other countries with well-established markets have good quality data on revenues and costs associated with managing properties and have dedicated and transparent regulatory, legal and tax arrangements for the sector resulting from the development of case law and regulation over time. By deepening investment in the market through improved tax arrangements, these missing conditions for investment in the Australian market can be resolved, which will result in further investment as the sector emerges from its nascent stage^[52].

The NHSAC also states that risks are currently elevated due to the nascent state of the market and that the return-risk characteristics of a well-established and functioning market would be such that it is viable and self-sustaining.^[53] Furthermore, a lack of consistent and sufficient number of large scale institutional housing assets, and a lack of a secondary market, creates investment risks for investors. Price discovery is limited, which adds to risk and complexity for trustees, it creates liquidity risk and reduces data available for investment and credit analysis, which also raises the cost of equity and debt. The lack of a market also raises uncertainty on about government policy.^[54] Deepening the market by encouraging further investment will assist resolve these issues, encouraging further investment and increased supply. It may also address existing barriers for superannuation funds to invest in BTR and attract further investment including domestic institutions into this asset class.

Impacts on society

The increased development of BTR assets will benefit renters and community members through increased supply, variety and choice of long-term rental options and the improved availability of housing in good locations.

Moreover, as noted above, the creation of new affordable dwellings in good locations will provide significant benefits for the wider society through enhanced productivity, such as lower costs of providing infrastructure, reduced commute times, better access to labour markets, and reduced housing stress.

It can also enable essential workers to live in the community in which they work and support, providing better access to essential services for the broader community, generating community benefits worth $45,500 per tenant per annum according to Aware Super. ^[55] It is a common practice for essential services to arrange key workers on call for potential emergency situations. For example, having nurses and firemen living near the hospitals and fire stations they work in will increase essential service productivity and contribute to broader societal benefits.

Options that reduce the MIT withholding tax rate will operate in tandem with existing state and territory BTR incentives to increase BTR investment and maximise social benefit.

Impacts to other property investments

The additional foreign investment in BTR stimulated by the tax concession is expected to comprise additional investment into Australia and some reallocation of existing investments in other Australian asset classes. The tax concession is expected to attract new investment given BTR is a nascent asset class that has not yet been fully explored by foreign and domestic institutional investors. Market activity has shown a growing interest from new-entrant institutional investors in the BTR sector.^[56]

Option 2: Reduce the MIT withholding tax rate in line with other comparable asset classes and require a portion of dwellings to be offered as affordable tenancies

This option requires that a portion of dwellings (for example 10 per cent) be made available at a discount (of at least 25 per cent) compared to an equivalent dwelling in the same BTR development.

An increase in the rental stock compared to the status quo is expected, benefiting the society. However, financial returns may be impacted where federal requirements are more onerous than those required by state or territory tax and planning rules.

The EY report indicated that the inclusion of a 10 per cent 'affordable dwellings' requirement could reduce an investor's internal rate of return from 8.13 to 7.60 per cent (based on the 10-year BTR compliance period announced in the 2023-24 Budget). This reduced rate of return would have a consequential effect on the overall benefits of the reduced withholding tax rate on project profitability.

Queensland is currently the only state with a discounted rent requirement which is also set at a 25 per cent discount to comparable market rent dwellings in the same development.^[57] These rules took effect from 1 July 2023, making it difficult to assess the overall impact of the discounted rent requirement on project numbers..

However, Option 2 does not prescribe conditions on accessing the discounted dwellings. Therefore, it is uncertain whether the discounted dwellings will be allocated to those on low to more moderate incomes who are genuinely in need of affordable housing. As a result, a risk of this approach is that tenants on higher incomes, who are able to afford market rents, may unintentionally be the beneficiaries of the affordable tenancies. Currently only Queensland and the Australian Capital Territory require a component of 'affordable tenancies' with flexibility in allocating the units as a condition to access their respective BTR concessions. Such flexibility permits owners to provide affordable dwellings that differ in relatively minor ways to other dwellings in the same development e.g. with regard to size, layout or the number of windows.

The compliance costs for Option 2 for BTR developers is expected to be low. The information collected is a subset of information that BTR developers and owners must already collect for either general building operations or to receive state and territory concessions or meet planning and zoning requirements. It does not add to these obligations. For example, records of rent charged (both at market rates and at a discount), income generated, floor space of the BTR dwellings and the lease terms offered are records that would need to be kept.

It is likely that BTR development owners would have the necessary expertise and experience for dealing with various regulatory, financial and building (state and federal) requirements from their experience in constructing and operating exiting BTR projects overseas.

Another vital factor is the importance of environmental social and governance (ESG) considerations for both investors and developers. Institutional investors may be inclined to make broader contributions to society through their involvement in providing affordable housing and can be an important auxiliary benefit for investors in supplying BTR.

While Option 2 is expected to provide a net benefit compared to the status quo, it is uncertain whether this option would benefit people who genuinely need the affordable housing, and hence whether it would deliver the productivity benefits that come from providing essential workers with well-located and affordable housing.

Option 3: Reduce the MIT withholding tax rate in line with other comparable asset classes and require a portion of dwellings to be offered as affordable tenancies and restrict eligibility for affordable tenancies

In addition to Option 2, this option includes additional federal requirements to ensure that these dwellings are made available to households on low to more moderate incomes, rather than those on higher incomes who are able to afford BTR dwellings at market rent (since BTR is currently considered as a premium product, a discounted BTR offering will be priced at a level where those on more moderate incomes will be able to afford it, rather than those on very low incomes).

Implementing eligibility criteria to limit who can inhabit affordable BTR dwellings could be achieved through either requiring CHPs to manage the properties or by introducing income limits on the tenants of the affordable BTR dwellings. The approaches will have different costs and benefits for investors, developers and tenants.

If income limits are used, as proposed, the burden of determining eligibility will fall on BTR managers who will collect information from tenants on their income when commencing and renewing leases. Stakeholders expressed during consultation that this is consistent with existing wide-spread practices of collecting information on prospective tenants' income, and likely to be only a small additional regulatory burden. Thus the costs are likely to be similar or slightly higher than Option 2, given there are significant overlaps with existing record-keeping requirements.^[58]

For BTR managers and tenants, the benefit of the income limit approach compared with a CHP requirement is that the single management benefit of BTR is maintained. This potentially allows for a more seamless administration of the BTR property for both the owner and the tenants.

On the other hand, if 'affordable tenancies' are required to be managed by a registered CHP (as is the case to access the current 15 per cent final withholding rate for investments in affordable housing), this could add significant cost and complexity to some BTR projects. Rent charged by CHPs may be at a steeper discount as their target clients are those on very low or low incomes rather than more moderate incomes. Internal communication and management costs may be higher, offsetting some of the efficiencies of a single ownership control structure. These costs would negatively impact on the return on investment for BTR owners, potentially resulting in less investment and less housing supply.

However, some stakeholders indicated the specialist skills provided by CHPs can be beneficial in certain circumstances, and even without any explicit requirement for CHP involvement, some BTR owners may still choose to use them. CHPs are experienced tenant managers and are best placed to manage vulnerable tenants and provide specific support services for low income earners. However, this is less relevant for BTR affordable housing where the below market rent housing is more likely to be provided to less vulnerable clients such as key workers^[59].

CHPs are required to adhere to regulations and ensure, under law, that they offer housing that provides 'relief from poverty' and not unjustified private benefit.^[60] This implies the discount to market rent on affordable dwellings managed by a CHP may need to be lower than 74.9 per cent, causing a further reduction in profitability and feasibility of BTR projects. As a consequence, the decrease in returns from this requirement may outweigh the increase resulting from the concession.

As the BTR sector matures, and a broader range of properties are brought to market, including those that have a market rent targeted more towards middle income earners, CHPs managing affordable tenancies suitable for lower-income tenants may achieve better housing outcomes. It may be that a flexible approach is preferable to minimise regulatory burden.

Like Option 2, developers and investors may also incur initial transitional costs associated with seeking tax advice. There may be changes in the relative merits of different types of real estate investments because of the change in the withholding tax rate. As acknowledged for Option 2, mechanisms exist to apply the existing 30 per cent withholding tax, so minimal adjustments to withhold at 15 per cent are expected. Fund managers for MITs generally would have the necessary expertise and experience for dealing with various regulatory, financial and building (state and federal) requirements.

The ATO could be expected to incur some additional costs to regulate this option. Costs will differ depending on range of checks and balances applied to the BTR MIT withholding tax rate concession. The involvement of CHPs in relation to affordable housing would provide the ATO with an objective test when undertaking client engagement activity. If CHPs are not involved in managing affordable tenancies, then the ATO would need to check taxpayers' compliance with the income limits for affordable tenancies, such as by examining property managers' policy documents and records of assessing tenant eligibility.

This option is expected to generate an increase in rental stock compared to the status quo, benefiting the community, although the additional supply may not be as great as under Options 2 (noting that the supply response is hard to estimate). However, Option 3 is expected to provide the greatest net benefit as it ensures both an increase in affordable rental dwellings and that households genuinely in need of affordable housing most likely benefit from it. This is particularly important as lower-income households continue to face poor housing affordability.^[61]

The requirement to apply income limits in assessing the eligibility of tenants for affordable housing is a necessary integrity measure that ensures those in most need of affordable housing are the beneficiaries. The limits have been set such that those households on around average or lower incomes are eligible. This includes key workers such as police officers, nurses, emergency workers and teachers. Individuals in these professions particularly benefit from residing close to employment. Furthermore, the income eligibility criteria are designed to be a simple test that is easily conducted, regardless of if a developer or CHP is managing affordable dwellings.

Consultation plan

2023-24 Budget announcement

The 2023-24 Budget measure 'Housing (Build-To-Rent Developments) – accelerating tax deductions and reducing managed investment trust withholding tax rate' outlined the eligibility criteria for the measure, including that it would apply to BTR projects consisting of 50 or more apartments or dwellings made available for rent to the general public. The dwellings must also be retained under single ownership for at least 10 years before being able to be sold and landlords must offer a lease term of at least 3 years for each dwelling. Further, the measure noted that "consultation will be undertaken on implementation details, including any minimum proportion of dwellings being offered as affordable tenancies and the length of time dwellings must be retained under single ownership".

Targeted consultations

Treasury undertook targeted consultations in the second half of 2023 to explore alternative policy options and inform the development of the exposure draft legislation. This included participants from industry associations, developers, investors (both domestic and international) and community housing organisations. It also involved discussions with state and territory officials regarding existing support that state and territory governments provide to BTR developments. The input received from stakeholders during targeted consultation informed the development of the exposure draft legislation.

Public consultation on Exposure Draft

Exposure draft legislation was made available for public consultation from 9 April 2024 to 22 April 2024. Treasury received 37 submissions (including 5 confidential submissions) from interested stakeholders. Stakeholders were broadly supportive of the Government's policy objective.

The draft legislation reflected Option 3 which required a minimum 10 per cent of dwellings to be made available as affordable dwellings with at least 25 per cent discount to market rent. Household income will be used to determine if tenants are eligible for occupying the affordable BTR dwellings. Furthermore, the draft legislation included a minimum period of 15 years during which dwellings must be retained under single ownership and comply with the affordable tenancy requirement.

Stakeholder views

The most common, and strongest, concern raised by stakeholders was that the concession applied in the legislation was not sufficient. Most stakeholders argued that it would not make BTR an attractive investment, relative to other property asset classes in Australia. Further, stakeholders were concerned that the benefits of the concession would be offset by the requirements to have 10 per cent of dwellings made available at an affordable rate.

Stakeholders suggested the following changes, to align the application of the MIT withholding concession with the treatment of other property asset classes.

1.2

the concessional 15% MIT withholding tax rate should extend to fund payments that include capital gains attributable to a BTR development (and not be limited to rental income);

1.3

the concessional 15% MIT withholding tax rate should apply beyond the first 15 years of a BTR development if the development remains compliant.

The Government agreed to adjust the draft legislation in line with these suggestions to ensure the final legislation achieved the policy objective of incentivising foreign investment in BTR, including through the supply of affordable housing.

A capital gains tax event can happen when investors sell their investment in a BTR projects when they exit the market, and the net capital gain is treated as a part of income in the tax laws. The adjustment to include capital gains in this concession is consistent with other MIT withholding tax rate concessions, including those applying to commercial buildings and affordable housing.

Stakeholders indicated they would be unable to make initial investment decisions without the clarity of the tax treatment to their 'exit strategy'. The Treasury's costing indicates the change will have negligible impact over the forward estimates. As a result, legislative changes were made to include capital gains in the withholding tax concessions.

Although this policy requires investors to operate the BTR projects for 15 years, stakeholders have indicated that a BTR project could continue operating for longer. To end the withholding tax concessions at the end of 15-year compliance period would force investors to exit the market, and potentially not invest in the first place. Extending t the concession for as long as a BTR project complies with the eligibility criteria will help preserve the benefits of BTR over a longer period, without requiring investors to consider costly and complex decisions on managing or replacing their investments.

Treasury also carefully considered stakeholder comments on the following topics.

Affordable dwellings

Stakeholders noted throughout the targeted consultation and consultation on draft legislation that the commercial viability of BTR developments would be sensitive to the size and nature of the 'affordable housing' requirement.

Current MIT investments in assets used to 'provide affordable housing' require the affordable dwellings to be managed by a registered CHP with specialised expertise in helping low and very low-income households find tenancies. If applied to the BTR context, stakeholders were concerned this could negate the benefits of a single ownership control structure and add complexity and cost to BTR projects, which may be passed onto tenants.

Further, BTR developments are typically targeted at the premium segment of the market, so targeting rents toward people on around average or lower incomes would have a significant impact on project revenues that could outweigh benefits of the MWH concession. A discount to market rent in a premium market will more likely cater to those on more moderate incomes, such as key workers, rather than those on very low or low incomes, and have a smaller impact on project revenues.

BTR developers broadly advocated for additional incentives to provide affordable dwellings, such as a further reduction in the MIT WHT rate. Some stakeholders suggested that an affordability component should be excluded from the eligibility criteria and addressed by a separate measure.

Stakeholders noted that some state and territory governments already require an 'affordable' tenancy element either as part of eligibility for their BTR concessions or for planning and zoning purposes. Some parties were of the view that the presence of state and territory requirements in this space was a compelling reason to exclude affordability elements from this BTR incentive. However, BTR concessions differ across states and do not exist in all states. Others considered this measure as an opportunity to set a national standard. In this regard, Treasury notes that the Housing and Homelessness Ministerial Council agreed on 20 November 2023 to develop an options paper for a nationally consistent approach to affordable housing.^[62]

Other groups in particular community housing associations considered that a specific affordable tenancy requirement will assist the Government in delivering more long-term supply of affordable rental dwellings and support its goals of increasing the supply of safe, stable and affordable rental dwellings.

Acknowledging these concerns raised by stakeholders and the Government's housing policy objectives, the final legislation will retain an affordable housing requirement that will not require the use of CHPs to manage the affordable dwellings and will express the 'affordability' criteria as a discount to market rent, targeted at tenants on more moderate incomes. The dwellings must be offered to the general public, so they can't be operated as, for example, student or own-employee housing. The income limits have been designed to ensure key workers such as emergency workers, police officers and teachers are eligible. The affordability requirement has been expressed to be compatible with existing state and territory legislation on BTR, and further clarification is being provided in the Explanatory Memorandum.

Treasury has also made minor adjustments to how the affordable dwelling requirement is expressed to address industry concerns that the requirement that it be comparable with the non-affordable housing was too rigid, for example, because of variations between units in the same dwelling or the difficulties applying it to every type of dwelling e.g. where there may be a small number of penthouse apartments.

Existing BTR developments

Some stakeholders pressed for existing BTR projects and BTR projects that were in development prior to 9 May 2023 to be eligible for the concessions. They argued that excluding such projects unfairly penalises the operators, who have been at the forefront of BTR in Australia.

Extending the measure to include pre-existing BTR projects will provide a gain to projects that have already been considered commercially viable and are already operating or under development, and therefore would not increase the supply of housing or affordable housing relative to the status quo. It would also impose an additional cost to the Government budget in the form of forgone tax revenue, over the life of the BTR projects – potentially decades.

Single ownership retention period

The exposure draft legislation included a minimum period of 15 years during which dwellings must be retained under single ownership. This contrasts with the 2023-24 Budget which indicated a minimum period of 10 years, and that Treasury would consult on it being a longer duration. 15 years was chosen to balance the need for institutional investors to maintain some liquidity in their capital investment and ensuring that in the BTR developments achieve the objective of providing additional rental housing over the medium-term.

Stakeholders generally agreed that the BTR asset class is a long-term passive investment- and were broadly comfortable with a 15-year period retention period. This period is also consistent with some state and territory concessions.

Misuse tax

The exposure draft legislation contained a BTR misuse tax to neutralise tax concessions provided to a BTR development that became non-compliant during the 15-year BTR compliance period. Stakeholders were concerned the application of the misuse tax can be triggered by any form of non-compliance with the affordability requirements. This means a BTR developer will be liable for the misuse tax upon an inadvertent small or minor breach. The draft legislation did not provide any flexibility or opportunities for the BTR developer to address non-compliance.

In response to stakeholder concerns, the proposed legislation will provide the Commissioner of Taxation with the discretion to treat the BTR development as compliant upon certain conditions.

Option selection and implementation

The table below provides a summary of the cost and benefits of each option.

The recommended option is Option 3 – reduce the MIT withholding tax rate to 15 per cent and require a portion of dwellings to be offered at a discounted rate as affordable tenancies. This option provides the greatest net benefit as it most effectively addresses the objective to increase the supply of rental housing, including affordable housing.

Treasury analysis indicates the impact on an average BTR project's investment returns under the various options. The Internal Rate of Return (IRR) is used to judge the profitability and feasibility of projects. Under the status quo, the IRR remains at 5.1 per cent. Applying the concession without requiring any affordable housing increases this average IRR to 7 per cent. Under options 2 and 3, including affordable housing, the average IRR is 6.3 per cent. This improvement in IRR from the status quo represents a significant net benefit from the measure.

Options 2 and 3 are expected to deliver an increase in BTR housing supply compared to the status quo. Incentivising foreign investment would bring foreign BTR expertise and scaling onshore and attract a broader range of investors, including domestic institutions, to the BTR sector in the long term. This would further increase the housing supply and create jobs for construction and property management industry in Australia. However, the supply response will vary relative to the impact on rates of return and compliance costs imposed by each option. Government receipts are expected to decrease similarly for all options when compared to the status quo. The benefits provided from increases in housing supply to Australian households is expected to outweigh the decreases in government receipts.

Options 2 and 3 improve tenant outcomes by ensuring a portion of the BTR development is provided at more affordable rents. But only option 3 ensures that affordable housing benefits the target cohort. While the IRR is lower for these options, they deliver important societal benefits. Affordable housing is essential infrastructure that has been found to reduce homelessness, poverty, supports economic productivity and labour market participation. It also fosters more cohesive, diverse and sustainable communities.^[63] In addition, despite a lower IRR, requiring affordable housing also complements ESG goals of investors and developers and brings benefits from lower levels of tenant vacancy and turnover in affordable housing.^[64]. Option 2 does not require the discounted dwellings be offered to households genuinely in need of affordable housing. Instead, the BTR operator has discretion to offer affordable tenancies to anyone, including those capable of affording dwellings at market rent. Or they could design their own eligibility criteria – however there is no requirement to do so. State and territory regulations on affordable housing will still apply if the BTR operator chooses to apply any land tax or other concession.

Option 3 maximises society benefits by ensuring the discounted dwellings are only offered to households that may otherwise face challenges in obtaining a suitable rental property. This is expected to increase the supply of affordable housing and at market housing. The impact on after-tax return, including both reductions in rent and compliance costs, will vary depending on the conditions imposed on the allocation of the discounted dwellings.

Overall, Option 3 provides the greatest net benefit as it is most appropriate at addressing Australia's housing supply issue for both rental houses and affordable housing. Option 3 strikes the right balance between providing incentives for rental housing supply, increasing the supply of affordable dwellings and appropriate requirements for the eligibility of the affordable dwellings. The application of income limits will ensure households truly in need of affordable housing will benefit from these dwellings. Eligible tenants could include key workers such as emergency workers, police officers and teachers who particularly benefit from proximity to employment. Income limits have been determined with consideration of the earnings of key workers such as emergency workers, police officers and teachers. Such tenants on more moderate incomes and in need of affordable housing may also reduce turnover for developers. In addition, affordable accommodation promotes workers and employers' access to the labour market, increasing productivity.^[65] It is expected that the majority of BTR developments eligible for the federal concessions will likely also benefit from state and territory incentives, increasing the overall financial return on their projects. Therefore, housing supply including affordable housing is expected to increase.

The measure will be implemented by legislation with the ATO responsible for administration. The implementation plan is as below.

Timing of the passage of legislation can be affected by a range of factors, including parliamentary priorities. Unlike income taxation measures which could possibly be implemented prior to the end of the relevant income year, withholding taxes are withheld from payments of income as it is earned, meaning this measure should be in place before BTR owners commence earning revenue (the commencement date specified in the 2023-24 Budget is 1 July 2024).

Should the risk of delays beyond 1 July 2024 not be able to be mitigated, the Government may need to delay the start date of the legislation.

Evaluation and review

The effectiveness of the preferred option can be monitored and evaluated against the Government's objective as outlined in the table below.

As a general indication, the BTR market in Australia has the potential to grow over the long-term from its current size of less than 0.2 per cent of the residential housing sector (or $$16.87 billion) to 3 per cent ($290 billion).^[66]

Treasury and the ATO will monitor the operation and uptake of BTR developments after implementation to consider whether the policy has been effective in achieving its intended outcome and the cost of achieving such outcomes. This would include monitoring the growth of the BTR market compared to the whole residential sector, together with foreign investment proposals that involve BTR developments. Treasury will also work with the ATO to identify any behavioural responses from BTR owners which may require additional integrity measures.

Treasury will also consider the State of the Housing System report published each year by the NHSAC. It reports on conditions in the housing market, including housing supply and housing affordability and can be expected to report on any trends in BTR market.

Consistent with standard practice, after implementation Treasury and the ATO will continue to review the operation of the law. Treasury does not consider the inclusion of a sunset provision to be necessary for this proposal. BTR projects are long-term investments. A sunset provision may introduce regulatory uncertainty and deter potential investors.

Further, the success of this proposal will be monitored through ongoing consultations, in particular with property industry representatives and community housing groups. This will include continued engagement with stakeholders to better understand whether practical application of the affordable tenancy requirements gave rise to any unintended consequences and/or unnecessary compliance costs. Subject to these considerations, Treasury will assess whether a subsequent technical amendment process and/or review is required.

Appendix 1: Status of the IA at each major decision point

Attachment 2: Impact Analysis - Buy Now, Pay Later

Executive Summary

This Impact Assessment sets out the problems, policy objectives, consultation processes, options for reform, an analysis of those options, and implementation and post-reform evaluation processes, in relation to buy now pay later credit products.

There have been widespread concerns raised by consumer groups, regulators and academics – supported by various studies and surveys – that some BNPL borrowers are experiencing financial stress after being extended credit they cannot afford. Other possible consumer harms include those arising from poor complaint handling processes, cases of disproportionate fees, undesirable marketing practices, financial abuse and poor or inconsistent pre-contractual product disclosures.

BNPL products are currently not regulated under the National Consumer Credit Protection Act 2009 (Credit Act), although some other consumer protection laws apply. Industry self-regulation has been only partially effective due to incomplete coverage of the industry Code of Practice, a lack of rigour in some industry commitments, insufficient compliance with some commitments and a lack of mechanisms to penalise or exclude bad actors.

Following the Government's announcement on 12 July 2022 that it would be examining whether the regulation of BNPL should be reformed, Treasury held targeted bilateral meetings with 28 stakeholders to inform public consultations (including roundtables) on an options paper "Regulating Buy Now, Pay Later in Australia", from 21 November 2022 to 23 December 2022. 77 written submissions were received. Further roundtables and bilateral meetings were held in early 2023 with community groups, industry, regulators and academics.

The options consulted upon included:

•

Option 1: A government-industry co-regulation regime, relying on a stronger BNPL Code of Practice with a legislated bespoke affordability test for BNPL products.

•

Option 2: A modified application of the Credit Act, allowing for more flexibility and technological neutrality, with Responsible Lending Obligations (RLOs) scaling more appropriately to the risks associated with BNPL.

•

Option 3: Full unmodified regulation of BNPL under the Credit Act, including licensing and the wholesale application of the existing RLOs.

Feedback resulted in a proposal to adopt Option 2, with increases in some regulatory settings to more closely resemble Option 3. These included closer alignment of the application of the Credit Act and Credit Code to BNPL and increased rigour in RLOs including setting floors in its scaling.

It has been assessed that:

•

Option 1 would fail to effectively mitigate the existing negative impacts on consumer welfare.

•

Option 2 would deliver significant net benefits to consumers through improved consumer protection, while still enabling efficient and convenient lending practices by BNPL providers. It would maintain the principle based RLO framework to ensure BNPL is not provided to those whom it is unsuitable but ensure that this regulation is proportionate to the risks associated with the product.

•

Any increase in consumer protections from Option 3, over those for Option 2, would be exceeded by reductions in the benefits to merchants, providers and consumers (including financial inclusion) due to the additional regulatory burden and consumer experience impacts.

The regulatory impact of adopting Option 2 has been estimated at:

Legislation is required to bring BNPL providers within the scope of modified Credit Act regulation.

Reforms would be evaluated by Treasury against statistical data on unaffordable lending and other consumer harms, supplemented by anecdotal feedback from consumer and industry representatives. This would occur after a suitable period has passed post commencement to allow for the reforms to become established and for the collection of sufficient data on post-reform outcomes.

Background

What is Buy Now, Pay Later?

Buy Now, Pay Later (BNPL) products are an alternative to more traditional forms of credit. They allow consumers to budget their spending by paying off goods and services in instalments at a comparatively cheaper cost than a credit card or short-term loan.

Buy Now, Pay Later arrangements:

•

involve a third-party financing entity;

•

provide consumers finance to pay for purchases of goods, services and bills;

•

do not provide consumers cash;

•

do not charge interest on the finance used;

•

may charge consumers low fixed fees for using the finance;

•

may charge merchants service fees for accepting BNPL; and

•

pay the merchants the value of the purchase upfront, less any fees, and collect repayments from consumers in instalments.

The BNPL sector has been rapidly growing since its emergence in around 2015, when entities like Afterpay and ZIP began offering services to consumers to purchase discretionary small retail items, such as clothing and fashion items. Since then, BNPL has continued to evolve and expand to new products and service offerings. 15 BNPL providers currently operate in the Australian market, including new startups (such as PayRight), established financial institutions (such as the Commonwealth Bank) and financial technology companies (such as PayPal).

The Australian Finance Industry Association's (AFIA) 2022 industry report found that an average BNPL consumer uses a BNPL product 18.2 times a year and spends an average of $136 per transaction.

What are the benefits of BNPL?

BNPL products have driven positive outcomes for consumers, merchants and the economy, offering an innovative, convenient and relatively low-cost alternative to traditional forms of credit such as credit cards, payday loans and consumer leases.

Benefits to consumers

Consumers have benefitted from greater access to a relatively cheap credit product that is easy to use and which allows consumers to smooth their consumption over time.

Data from the Reserve Bank of Australia's (RBA) Payments System Board shows that consumers continue to take up BNPL products at a high rate. Between 2021-2022, the RBA found there were approximately 7 million active BNPL accounts (which includes persons holding multiple accounts) and $16 billion in transactions, an increase of approximately 37 per cent on the previous financial year. This was equivalent to 2 per cent of credit card purchases in Australia by value that year.

BNPL has also driven some consumers to shift away from expensive, higher risk credit such as payday loans and towards cheaper and lower risk BNPL credit. For example, the National Credit Providers Association (NCPA) found that applications for Small Amount Credit Contract (SACC) loans have declined by over 11 per cent in the past financial year. The NCPA partially attributes this decline to BNPL products taking away market share.

Benefits to merchants

AFIA's January 2023 report, The Economic Impact of Buy Now, Pay Later in Australia – Update, found that BNPL has grown in popularity among merchants, with more than 158,900 businesses accepting BNPL – an increase of 17.4 per cent from the previous financial year.

According to AFIA, in 2022, acceptance of BNPL created an additional $2.7 billion in new revenue for these retailers through new customer acquisition, increased basket sizes and increased customer satisfaction and retention. This represented an increase of 28.6 per cent from the 2021 financial year ($2.1 billion).

AFIA's 2022 Research Report also found that merchants surveyed experienced an average increase of 5.6 percent in their revenue due to BNPL services.

Benefits to the economy

BNPL has also benefitted the broader economy by increasing competitive pressure on traditional credit products, such as credit cards. This has resulted in some large banks offering their own BNPL products, or low-fee, low-limit credit cards as an alternative.

In addition, BNPL has been an Australian fintech success story given the fact that domestic BNPL providers have exported their business models internationally, such as Afterpay.

How is BNPL regulated?

While the National Consumer Credit Protection Act 2009 (Credit Act) is the primary legislation governing consumer credit products, the Credit Act only applies to credit provided under a contract where:

•

there is a deferral of a debt or a payment of a debt;

•

the credit is provided to a natural person or a strata corporation;

•

the credit is predominantly for personal domestic or household use, or for purposes relating to investment properties; and

•

there is, or may be, a charge imposed upon the borrower for providing the credit.

This means that credit products and services, such as invoicing services and BNPL products which do not charge any fees (excluding late or missed payment fees),^[67] fall outside the regulatory scope of the Credit Act.

Other BNPL products typically operate under the Credit Act's exception for interest-free continuing credit contracts^[68] which only charge periodic or other fixed consumers fees for the provision of credit below prescribed fee caps of $200 in the first 12-months and $125 for any subsequent 12-month period thereafter.^[69] Most BNPL products charge small service fees, such as account establishment fees and account keeping fees, in a way that allows them to operate under this exception.

Given BNPL either falls outside the Credit Act's definition of 'credit' or falls within one of its exceptions, BNPL is not subject to Responsible Lending Obligations (RLOs). RLOs require providers to assess whether a credit product or credit limit increase is not unsuitable for a consumer by gathering and considering information about the consumer's financial circumstances, as well as taking reasonable steps to verify that information.^[70]

Under the unsuitability test, a credit product is unsuitable for a person, if it is likely that:

•

the consumer will be unable to comply with their financial obligations; or

•

the consumer will only be able to apply with their financial obligations with substantial hardship; and/or

•

the product will not meet the consumer's requirements or objectives.

Other Credit Act provisions that do not apply to BNPL providers include:

•

holding an Australian Credit Licence (ACL);

•

information and product disclosure obligations;

•

internal and external dispute resolution obligations;

•

hardship arrangement obligations;

•

termination, enforcement and debt collection restrictions;

•

marketing and other miscellaneous restrictions; and

•

some but not all of the Australian Securities and Investment Commission's (ASIC) information gathering powers.

What consumer protections are currently in place for BNPL?

While BNPL products are exempt from certain consumer protections in the Credit Act, such as the RLOs, they do exist within the broader regulatory framework covering financial products.

The regulatory frameworks that apply to BNPL include:

•

The Australian Securities and Investments Commission Act 2001 (ASIC Act) provides general financial services consumer protections (e.g., misleading and deceptive conduct) that apply to all financial products regulated by Australian Securities and Investment Commission (ASIC), including BNPL.

•

Some parts of Chapter 7 of the Corporations Act 2001 (Corporations Act), including the Design and Distribution Obligations (DDO) and the Product Intervention Powers (PIP).

•

Schedule 2 of the Competition and Consumer Act 2010 (Australian Consumer Law), which covers some BNPL provider conduct not covered by the ASIC Act, including provisions around unsolicited supplies, pricing and information standards.

•

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act), includes obligations to conduct customer identification and verification procedures, record keeping, reporting suspicious matters and providing periodic compliance reports. The AML/CTF Act also requires reporting entities to have an AML/CTF framework in place covering money laundering and terrorism financial risk assessments.

Australian Finance Industry Association (AFIA) BNPL Code of Practice

AFIA issued a BNPL Code of Practice as an industry response to a recommendation for industry selfregulation by the Senate Economics Reference Committee's inquiry into Credit and Financial Services Targeted at Australians at Risk of Financial Hardship in February 2019. The Code came into force on 1 March 2021. It is estimated that 90 per cent of BNPL accounts are provided by Code signatories.

The Code aims to increase consumer protections by requiring providers to conduct tiered suitability tests for transactions above $2000, to offer hardship provisions and adhere to warning and communication requirements.

The Code is contractually enforceable against Code members and is enforceable by consumers through the Australian Financial Complaints Authority (AFCA).

1. What is the problem you are trying to solve?

Problem statement: How can the Government address instances of consumer harm arising from the use of BNPL products, predominately due to unaffordable lending, and also maintain the benefits of competition and financial inclusion that BNPL provides?

Surveys, research and stakeholder feedback indicate that there are significant problems in relation to unaffordable lending and BNPL (although this is mostly concentrated among low-income individuals, particularly those with existing debts), plus poor hardship and dispute resolution practices of some BNPL providers. To a lesser degree, there are indications that problems also exist in some cases in relation to BNPL with excessive fees, product disclosure, transparency of indebtedness and competitive neutrality.

Unaffordable lending is generally taken to mean credit extended to consumers that they are unable to pay back or are only able to pay back with substantial hardship. Some signs that unaffordable lending may be occurring are the level of financial stress indicators, the level of consumer hardship requests, the level of arrears or bad debt provisions and the extent to which consumers have to cut back spending on essentials or default on other credit products in order to repay BNPL loans.

Some vulnerable BNPL consumers have been the subject of unaffordable lending practices

Certain consumers of BNPL products have experienced increased levels of financial stress due to entering loans which they cannot afford to repay without undue hardship.

There has been strong and consistent negative feedback from the financial counselling community on the level of unaffordable BNPL lending that they are witnessing in relation to their client groups. The Government's consultation received a series of case studies from consumer groups that highlighted situations where vulnerable consumers were being extended BNPL credit that they could not afford. The consultation found, particularly through qualitative evidence submitted by financial counsellors, that unaffordable lending appeared to be concentrated among vulnerable consumers, who are typically low-income individuals (in particular, those on social security), including those with multiple existing BNPL debts, SACCs, consumer leases or unregulated high-cost loans.

The harm resulting from unaffordable lending is partially mitigated by the common BNPL business model which provides low amounts of credit, caps fees, charges relatively low amounts of maintenance and default fees, deactivates consumers' accounts upon default, does not report defaults to reporting agencies and readily writes off debts which cannot be resolved.

As described by the data below, despite the relatively overall comparable levels of risk of unaffordable lending, maintaining the status quo would likely see more vulnerable cohorts of consumers continuing to be affected by unacceptable levels of unaffordable BNPL lending. In particular, the exception of BNPL providers from compulsory RLO checks means that BNPL providers do not need to be aware of any other existing debts incurred by consumers, including on other BNPL providers' platforms. Consumers can therefore incur relatively large amounts of credit debt in comparison to their available income, in the range of thousands of dollars, with little restrictions.

2022 ASIC consumer monitor (data on 16 May 2022)

ASIC's unpublished consumer monitor survey for Q1 2022 found 19 per cent of BNPL consumers experienced two or more financial stress indicators (using the Household Income and Labour Dynamics financial stress methodology), compared to 11 per cent of the total survey population. This is a similar level of financial stress to car loans (20 per cent) and personal loans above $5,000 (17 per cent). In comparison, 8 per cent of credit card users experienced two or more financial stress indicators. Most BNPL products are functionally similar to credit cards, although with significantly shorter repayment periods. Higher percentages of consumers with a consumer lease or a SACC experienced two or more financial stress indicators, 28 per cent and 34 per cent respectively.

Chart 1 should be read with caution as while it shows that some BNPL consumers experience financial stress, the extent to which BNPL products contributes to this stress is unclear.

Furthermore, while Chart 1 shows that the level of financial stress associated with BNPL use is higher than the use of credit cards, such stress is significantly less prevalent than in other forms of credit such as consumer leases and SACCs, both of which are already heavily regulated. Recognising that the target market of BNPL products are younger people, it may be unreasonable to expect BNPL products to be associated with outcomes similar to credit cards whose customers are generally older.

16 per cent BNPL users surveyed missed a repayment in the previous year, while 43 per cent said they experienced difficulty in meeting BNPL repayment obligations in the previous year. In comparison, only 7 per cent of credit card users and 7 per cent of those with a mortgage missed repayments; and 14 per cent and 35 per cent said they experienced difficulty to make repayments, respectively. It should be noted that both cards and mortgages generally have significantly longer repayment periods (3 years and 20-30 years respectively), compared to many BNPL with 4-to-6-week repayment periods.

Users of multiple BNPL providers appear more likely to experience financial stress:

•

14 per cent of one-provider BNPL users experience 2+ stress indicators;

•

25 per cent of two-provider BNPL users experience 2+ stress indicators; and

•

35 per cent of three-plus-provider BNPL users experience 2+ stress indicators.

2022 AFIA Industry Report: The Economic Impact of Buy Now, Pay Later in Australia

AFIA's report found 4.4 per cent of BNPL customers went without essentials to make payments and 7.3 per cent of customers cut back on essentials (11.7 per cent in total).^[71] In contrast, AFIA's report found 5.1 per cent of credit card users went without essentials and 9.7 per cent cut back on essentials (14.8 per cent in total).

This data contrasts with ASIC's report 672 from 2020 that found that, in the prior 12 months, 20 per cent of BNPL consumer surveyed cut back on, or went without, essentials to make BNPL payments on time.

Consumers who held multiple BNPL accounts were more likely to cut back on, or go without, essentials or take out additional loans to repay BNPL on time. These surveys did not define what was essential and other studies have indicated that consumers may have a broad range of interpretations of the term. Younger respondents appear to interpret it as covering a wider range of expenditure than older respondents.

2020 ASIC Report 672: Buy Now, Pay Later: An Industry Update

ASIC report 672 found that 21 per cent of surveyed BNPL users missed a payment in the prior year. Among these consumers:

•

34 per cent made at least six BNPL purchases in the prior 6 months; and

•

55 per cent has used at least two different BNPL arrangements in prior 6 months.

ASIC report 672 also found that 15 per cent of BNPL consumers surveyed took out additional loans to make BNPL payments. The survey did not gather evidence that would determine whether this may have occurred in a non-problematic way.

One in five consumers surveyed, in the prior year, missed or were late paying other bills to repay BNPL. More than half of these (52 per cent) used at least two different BNPL products; and 29 per cent frequently used BNPL purchases (i.e., more than 6 purchases), in the prior 6 months.

ASIC report 672 also found that, of those surveyed, the percentage of buy now pay later transactions that incurred missed payment fees fluctuated between 9 per cent and 15 per cent each month from June 2016 to June 2019.

The issue of consumers incurring late fees may not be widespread.

Between October 2018 and January 2019, on average, 26 per cent more consumers who use both BNPL and credit cards incurred interest on their credit card balance than credit card users who did not use BNPL.

2018 ASIC report 600: Review of Buy Now, Pay Later Arrangements

ASIC report 600 found that one in six (16 per cent) of BNPL users experienced at least one type of negative impact from using BNPL, including becoming overdrawn, delaying bill payments, and borrowing money from family, friends or another loan provider to make repayments. However, less than 10 per cent of surveyed BNPL users were charged missed payment fees more than once on the same transaction in each quarter.

Of those who missed a payment, common reasons were:

1.

forgot to put money in account (11 per cent);

2.

needed to prioritise paying other bills (9 per cent); and

3.

spent too much (5 per cent).

Bankruptcy and Debt Agreements

In unpublished analysis, the Australian Financial Security Authority found that while 34.2 per cent of all personal insolvencies had at least one BNPL debt, BNPL debts represented only 0.3 per cent of all unsecured debt in personal insolvencies in 2021.^[72]

BNPL consumers can be charged excessive fees and charges

While BNPL providers are subject to a legislative fee cap in the Credit Act ($200 in the first year and $125 each year thereafter), the cap does not include late payment or default fees. It also does not cover merchant fees, which may be indirectly passed onto consumers through higher prices of goods and services.

Some stakeholders have raised that some BNPL providers charge disproportionate late fees compared to the value of the credit provided. However, many of the examples cited would also be permitted in relation to regulated credit and reflect borrowers using products with high fixed account fees for only very small amounts of credit. Some examples however reflect the impact of uncapped late fees.

For example, a consumer may be charged a $10 monthly account keeping fee on very low levels of outstanding BNPL debt, resulting in a high effective interest rate.

The current Code of Practice requires BNPL firms to cap their missed payment fees, but the level of the cap is not specified. As such, practices appear to be highly divergent within the industry, with some providers setting low caps and others higher caps, relative to debt size. Most BNPL accounts are with providers who currently cap their late fees to levels that are lower than other forms of regulated credit, including the legislated cap for SACCs.

Generally, not accounting for indirect impacts on prices of merchant fees, BNPL is a low-cost form of credit. It is difficult to assess its cost if you do account for possible indirect impacts of prices of goods and services arising from merchant fees.

Inadequate dispute resolution and hardship processes

Consumer groups have consistently raised concerns that BNPL providers have ineffective complaints handling processes to address disputes to a satisfactory standard and in a timely manner. This is despite the vast majority of BNPL accounts (approximately 90 per cent) are issued by providers who have committed to meeting ASIC's dispute resolution standards through AFIA's Code of Practice. However, consumer groups consistently and strongly assert that in practice BNPL firms are not meeting these standards. There are also concerns that not all BNPL providers are signatories of the AFIA Code of Practice.

Concerns regarding dispute resolution and hardship assistance appear to relate more to the enforceability and compliance with existing AFIA requirements than problems with the requirements themselves.

Consumer groups state it can be difficult to contact a provider to make a complaint or request hardship assistance as BNPL providers may not provide an option to communicate via telephone and rather direct consumers to a smartphone app or email.

Consumer groups have raised cases of BNPL providers failing to meet ASIC standards in resolving disputes and hardship applications within specified timeframes.

Others felt hardship assistance, where granted, provided inadequate assistance, such as merely delaying a customer's payment. This may however reflect concerns by these stakeholders with the outcomes of hardship processes in general.

Consumer Complaints

The level of consumer complaints against BNPL is low.

ASIC's Consumer Monitor found that the percentage of the surveyed population reporting an 'issue, concern or problem' with different credit products was 3 per cent for BNPL, 3 per cent for credit cards, 10 per cent for payday loans and 11 per cent for personal loans greater than $5,000.

AFIA reported that, between 1 July 2020 to 30 June 2021, AFCA received 767 BNPL complaints. This accounts for 0.01 per cent of 5.9 million BNPL accounts during that time. In comparison, AFCA received 9,902 credit card complaints, which accounts for 0.08 per cent of personal credit card accounts (12.6 million) during the same period.

The rate of complaints to AFCA in FY 2021-22 against BNPL firms per BNPL customers was 0.015 per cent.^[73] However, some consumer groups consider that few consumers understand their rights to access external dispute resolution (EDR) as some BNPL providers fail to provide sufficient information to consumers on how to access AFCA. ASIC's most recent consumer monitor report for Q1 2022 suggests that on average, only 52 per cent of consumers knew they had a right to make a complaint to an EDR agency about a BNPL provider.

Most complaints against BNPL providers were readily conceded and settled. AFCA statistics indicate 68 to 75 per cent of complaints were unilaterally resolved by the firm, with an additional through 5-6 per cent resolved through negotiated settlement. This may reflect the commercial realities arising from the costs associated with firms defending complaints in relation to very small amounts.

Hardship requests

Similar to the level of consumer complaints, the number of hardship arrangements for BNPL products is very low.

AFIA's 2022 report found that as of 30 June 2021, only 0.34 per cent of BNPL customers applied for and were placed in hardship arrangements by BNPL providers. As of February 2022, one major BNPL provider reported that the number of hardship requests received per transacting customers was 0.05 per cent.

Hardship and complaints statistics must be read in light of concerns regarding the level of customer awareness of complaints and hardship processes, difficulties in navigating those processes and that many customers will not engage in such processes due to the average small size of debts and concerns that this may result in them losing access to BNPL.

Non-transparent fees and lack of understanding

BNPL is not subject to Credit Act disclosure obligations, including requirements for credit guides, warning statements and product disclosure statements. Equivalent commitments under the AFIA Code of Practice are less onerous and more principle based.

According to ASIC's most recent consumer monitor report for Q1 2022, nearly one third of BNPL consumer base do not understand the fees and charges for all of their BNPL arrangements.

Consumer groups assert that the varying fees across BNPL contracts are not transparent or easy to understand, and consumers cannot effectively compare fees across different products.

However, there are indications that even for providers with good disclosure practices there can be a lack of understanding of fee structures – indicating that the problem is also driven by consumer behavioural issues and lack of interest by some consumers in informing themselves about fee structures before taking out BNPL credit.

Equivalent data for non-BNPL credit products is also limited, hindering an understanding of the extent to which the lack of understanding is different for BNPL or is driven by BNPL specific factors.

Non-participation in credit reporting

Consumer groups and other lenders have raised issues around the lack of transparency of a person's level of BNPL indebtedness, particularly as many BNPL providers do not participate in credit reporting.

Consumer groups argue this enables vulnerable debtors to access multiple BNPL accounts even if they are currently in default, while some other lenders argue it impacts their ability to conduct affordability assessments.

Only the four largest banks are subject to mandatory credit reporting, with other credit providers reporting on a voluntary basis (although generally incentivised to do so under reciprocity principles set by credit reporting bodies). Other forms of regulated credit also appear to have low levels of credit reporting – such as SACCs and consumer leases.

Only a few BNPL providers voluntarily report to credit reporting agencies.

Some others conduct credit checks, which may leave a record visible through credit checks that applications for BNPL had been made by a consumer (but not the outcome of those applications).

Some stakeholders indicated that access to banking transaction data (through the consumer data right or digital data capture) enables BNPL and other credit providers to detect the presence of other BNPL accounts, albeit with an imperfect understanding of the use and credit limits for those accounts.

Inappropriate advertising

BNPL is not subject to some restrictions on misleading advertising (although some ASIC Act consumer provisions and the Australian consumer laws do apply) or to restrictions on harassing marketing.

Inappropriate advertising has been raised as encouraging consumers to use BNPL for essentials, such as utility firms prominently displaying BNPL as a method for paying bills.

It is unclear how much this causes harm when it does not induce unaffordable lending. For example, it is extremely common for households to purchase groceries using credit cards and yet similar concerns are not being actively raised regarding these practices.

Consumer groups also argued advertising BNPL products for essentials, such as utility bills, steers struggling consumers away from hardship support that utility companies are legally required to offer.

Competitive neutrality

A number of regulated credit providers and consumer groups have raised concerns that BNPL firms are engaging in regulatory arbitrage, arguing principles of competitive neutrality support equal regulations.

While some BNPL products are similar to regulated products (e.g., credit cards including cards with repayments with similar instalment plans), others have no equivalents. Some BNPL products have emerged that are even closer to credit cards from a user perspective than most BNPL products (e.g., open system BNPL utilising card payment systems).

Stakeholders have also raised issues with BNPL regulation as a payments system – in particular how it is not subject to surcharging regulation in contrast to credit cards. These issues are better addressed by the response to the Payments System Review which is currently being considered by the Government.

2. Why is Government action needed?

Vulnerable consumers need effective consumer protection

Stakeholder consultations, surveys and other quantitative data and analysis indicate that some consumers are experiencing harm from taking on too much debt that they cannot repay, as well as other issues such as a lack of appropriate dispute resolution mechanisms, hardship assistance and non-transparent fees. Harms from unaffordable lending are particularly concentrated among lowincome borrowers, social security recipients, and other vulnerable cohorts, as well as those also utilising multiple BNPL accounts or SACCs and consumer leases.

Attempts by industry to self-regulate have been only partially effective in addressing these concerns due to incomplete coverage of the Code of Practice, a lack of rigour in some industry commitments, insufficient compliance by some providers with those commitments and a lack of mechanisms to penalise or exclude bad actors.

Industry self-regulation has also resulted in an uneven playing field between BNPL and functionally equivalent regulated credit products, such as credit cards.

This supports a case for implementing credit regulation upon BNPL, albeit in a manner that is flexible and technologically neutral and in a way that imposes key requirements in a proportionate way that scales with the risks of consumer harm associated with the product.

Demonstrate that government has the capacity to intervene successfully.

The proposed reforms would implement existing credit regulation (albeit in a modified form), to be administered by ASIC, which currently regulates consumer credit.

The proposed regulated population is small. There are currently only 15 BNPL providers, and this is expected to decrease as industry consolidates naturally, even without regulatory intervention, given the commercial pressures BNPL providers are experiencing, including from the rising cost of capital.

Identify alternatives to government action.

Currently, BNPL products are not regulated under the Credit Act. The alternative to government action in this instance is to either maintain the status quo or seek to enhance the AFIA BNPL Code of Practice.

•

Maintaining the Status Quo: This would involve acceptance of current levels of consumer harm and a lack of competitive neutrality between some credit products. As discussed above, the Government's consultation has determined that unaffordable lending is leading to significant financial stress among some vulnerable consumers, which would persist under the status quo.

•

Enhancing the BNPL Code of Practice: Encouraging the industry to improve its Code of Practice may, depending on the commitments made, marginally improve consumer protection for BNPL consumers. However, the Code of Practice would continue to not have full coverage of the industry with more problematic providers not willing to voluntarily

become Code signatories. Compliance concerns may be partially alleviated through more rigorous action by Code compliance mechanisms, however there would be no ability to impose civil penalties or exclude bad actors from the industry (as opposed to expelling them from the voluntary industry body).

These are set out in further detail below under Options for Reform.

Clearly identify what objectives or outcomes you are aiming for

Our objective is to address risks of unacceptable levels of consumer harm, such as unaffordable lending, that may arise from the use of BNPL. The harms being targeted are outlined above in the problem identification. These risks should be addressed in a proportionate way that, as far as is possible, targets the industry practices that give rise to these risks.

The reforms also seek to address the harms that may indirectly flow to persons who are not decision makers in BNPL transactions. These negative externalities include the negative financial and social impacts upon the families of BNPL borrowers.

Australian consumers, merchants and the economy have benefited from the rise of the BNPL industry, and it is important to ensure that any frameworks aimed at addressing risks of consumer harms do not unduly come at the expense of these benefits.

Reforms should target levels of risk to consumers that are lower than those that are optimum for maximising profitability of firms (which may result from reliance on market forces and would be expected not to take into account negative externalities, such as impacts of unaffordable lending upon borrowers' families). Reforms are not aiming to reduce risks to nil, given that this is likely to unacceptably harm financial inclusion benefits of BNPL and other benefits to consumers, merchants and the economy.

Treasury has used the consultation process to develop the following guiding principles to inform the options outlined below for a new regulatory framework for BNPL. These principles have been publicly consulted upon with stakeholders:

-

improve consumer protections by addressing the main instances of consumer harm arising from BNPL products while continuing to ensure BNPL products are accessible to consumers.

-

be flexible enough to allow new BNPL providers into the market and for new and existing BNPL providers to bring new financial products onto the market.

-

respect the competitive nature of the market and the roles and interests of consumers, merchants, and providers in the BNPL sector.

-

consider the existing regulatory arrangements for comparable regulated credit products, such as credit cards, SACCs, consumer leases, and other types of personal loans.

-

be practicably enforceable by a regulator such as ASIC in a cost effective and efficient way that minimises the risk of avoidance behaviour.

Identify the constraints or barriers to achieving your goal.

Uncertainty in the extent and nature of the problem

There is a lack of granular data on who is suffering harm, the extent and nature of the harms, and the causes of those harms. There are inconsistencies in available quantitative data and between that data and anecdotal observations made by stakeholders. This can create challenges in ensuring laws appropriately target actual harms, in a proportionate manner, without imposing unnecessary regulatory burdens on non-problematic activities.

A lack of data may also pose challenges to post implementation assessment of the effectiveness of reforms.

Tensions between targeted and consistent regulation

A key challenge in ensuring that any response is tailored and focussed on identified harms associated with BNPL, without creating excessive inconsistency and complexity within credit product regulation. This is particularly a challenge in relation to tailoring RLOs so that they scale with risk.

Tensions between flexibility and certainty in regulation

A key challenge is ensuring that BNPL regulation allows the industry to continue to innovate in relation to product and business model design, while still providing sufficient certainty for industry, enforceability by ASIC and not creating opportunities for avoidance activity.

One aspect of this is ensuring clarity to providers and regulators as to what is proportionate and reasonable risk mitigation in relation to affordability assessments.

Ensuring regulation is effective but also efficient

A key challenge, in relation to regulation that scales with risk, is to ensure frameworks minimise regulatory burdens upon providers while remaining effective to mitigate risks.

Minimising negative impacts upon consumer experiences and timeliness of processes is especially important to avoid undue negative impacts on BNPL business models. That said, some positive frictions in consumer experiences may help minimise consumer harms.

Minimising negative unintended consequences

Another challenge is to ensure that BNPL is made safer without imposing undue inconveniences and costs on consumers that may then drive them to less safe or more expensive credit products. The Government's consultation heard feedback from some vulnerable consumers, such as pensioners, suggesting that excessive regulation may reduce their access to lower cost BNPL products, which would harm financial inclusion.

Legislation

Legislation will be required to implement the preferred option.

Uncertainty as to scope

Reforms will need to clearly set out an appropriate scope for their application. For example, a key challenge is defining what should be considered to be BNPL for regulatory purposes. There are arguments for and against this scope being consistent with the scope of other BNPL related reforms (such as payment regulation or the application of the Consumer Data Right to non-bank lenders).

What is BNPL is still not settled. BNPL is a relatively new and innovative product. There is a still changing range of products with varying features that may be considered to be BNPL.

Adopting an overly broad definition will have higher risks of other products for which there is not an established case for regulatory intervention, such as invoice financing, being unintentionally captured.

Ensure your objectives are: specific, measurable, accountable, realistic, and timely.

The Government has announced that it is proposing that legislative reforms will be introduced into parliament in late 2023.

Implementation details have yet to be settled, however it is likely that laws would commence after a reasonable delay after passage of legislation and making of supporting regulations.

The success of the reforms could be measured primarily through:

•

observing changes in statistics on financial stress measures, complaints, changed spending behaviours on essentials, late payment rates and published bad debt provisions by firms.

-

For example, a reduction in the percentage of 2+ HILDA financial stress indicators from their current level of 19% and a reduction in number of BNPL consumers who had missed a repayment in the last year from 16% is expected.

-

Observations would be compared against those for other credit products that are either functionally similar (e.g. credit cards), fulfil similar needs or are accessed by similar customer cohorts (e.g. small amount credit contracts). However, recognising that the target market of BNPL products are younger people (who are, as a whole, a higher-risk cohort), it may be unreasonable to expect BNPL products to be associated with outcomes similar to credit cards whose customers are generally older.

•

seeking feedback from financial counsellors on the incidents of consumer harm that they are observing; and

•

analysis of enhanced complaint handling statistics (that would be gathered once BNPL providers are licenced and subject to reporting obligations).

3. What policy options are you considering?

The following options were consulted upon as part of the Treasury options paper Regulating Buy Now, Pay Later in Australia (November 2022).

3.1 — Maintain the status quo

The status quo is described in the section on 'Background' above. In summary, while BNPL products are exempt from certain consumer protections in the Credit Act, such as the RLOs, they do exist within the broader regulatory framework covering financial products. This includes the ASIC Act's general financial services consumer protections, the Design and Distribution Obligations and Product Intervention Powers provisions, the Australian Consumer Law, and the Anti-money Laundering and Counter-Terrorism Financing Act. The AFIA Code of Practice further provides protections to consumers who contract with a BNPL firm that has signed up to the Code. This includes commitments around dispute resolution and hardship, conducting tiered suitability tests, chargeback and refund requirements, financial abuse, advertising and marketing, and adhering to consumer communication requirements.

Maintaining the status quo would not address the level of unaffordable lending that is currently occurring and would not address the variety of other concerns with BNPL providers such as those relating to internal dispute resolution, hardship provisions, disclosure and marketing rules, among others.

3.2 Option 1 – Stronger BNPL Code of Practice with affordability test

Option 1 proposed a government-industry co-regulation regime, where the current AFIA BNPL Code of Practice is strengthened to address current gaps in coverage, supplemented with a bespoke affordability test legislated under the Credit Act.

The Credit Act would be amended to impose BNPL specific requirements on providers to check that a BNPL product is not unaffordable for a person before offering it to them. This requirement would seek to address the primary issue of unaffordable lending in a tailored manner. The affordability test would be a bespoke regime, with a different framework to the RLOs. The bespoke provisions would provide for the scalable and efficient checking of a consumer's ability to afford the BNPL credit related to the overall value of the credit being provided.

There would be no requirement for BNPL providers to obtain and maintain an ACL.

The BNPL industry would work in consultation with government to strengthen various provisions in the Code of Practice to ensure higher standards for BNPL providers. The strengthening of the Code would seek to address any further concerns (in addition to existing commitments) relating to:

-

product disclosure and warning disclosure requirements;

-

access and standards of dispute resolution and hardship practices;

-

excessive consumer fees and charges, including default fees;

-

refund and chargeback processes;

-

advertising and marketing;

-

mitigating risks associated with scams, domestic violence, coercive control, and financial abuse; and

-

ensuring its compliance of these requirements are adequate.

Certain provisions in the improved Code of Practice could be enforceable by ASIC, subject to the industry body's application and ASIC's approval. The Code could also be mandated for all BNPL providers, however participation in the credit reporting framework would continue to be voluntary. This may not adequately address issues regarding enforceability and coverage of the industry, as the more problematic providers would likely continue not to sign up to the Code.

The revised Code would supplement but not override the bespoke affordability checks that would be specified in the Credit Act.

ASIC would be able to issue regulatory guidance on the interpretation of the statutory obligations.

3.3 Option 2 – Regulation under the Credit Act with scalable unsuitability tests

This option proposes to bring BNPL within the Credit Act's application to apply a tailored version of the RLOs to BNPL products. This option seeks to address the key issue of unaffordable lending by applying the RLO framework which ensures that providers do not provide consumers with loans that are unsuitable for them, but in a way that allows for the RLO assessment to be scaled-down according to the risk of the product.

Key features of the proposal include amending the Credit Act to require BNPL providers to hold an ACL, or be a representative of a licensee, with a requirement to comply with most general obligations of a licensee, including:

-

Internal and external dispute resolution, hardship provisions, compensation arrangements, fee caps and marketing rules.

-

The provisions could be calibrated to the level of risk of BNPL products and services. This could include exemptions from reference checking, and other obligations that do not relate to issues identified in the BNPL business practices.

This option would not require merchants who offer BNPL products to consumers to be an authorised credit representative of the BNPL provider.

As a licensee, BNPL providers will be able to engage more meaningfully with the existing credit reporting regime under the Privacy Act 1988 (Privacy Act), including repayment history information and hardship information in accordance with the Principles of Reciprocity and Data Exchange. Participation in the comprehensive credit reporting framework would continue to be voluntary unless the provider is a big bank.

BNPL providers would be required to assess that a BNPL credit is not unsuitable for a person, similar to the existing RLO framework, scaled to the level of risk of the BNPL product or service. This may include removing some prescriptive requirements, such as verifying a person's financial documentation and checking that the BNPL credit aligns with the person's needs and objectives. BNPL providers would be required, at a minimum, to collect financial information and use that information and any other statistical data (such as credit scores) to ensure that BNPL is not unsuitable for a person.

BNPL providers would be prohibited from increasing a consumer's spending limit without explicit instructions from the consumer.

Fee caps for charges relating to missed or late payments would be required, combined with additional warning and disclosure requirements.

These legislative amendments could be supplemented by the strengthened Code of Practice similar to that as described in Option 1 for those issues not dealt with by the legislation.

The options would still exist for AFIA to apply to have parts of the Code enforceable by ASIC.

Under this option amendments would be required to ensure credit regulatory frameworks apply to BNPL business models in a sufficiently flexible and technologically neutral way, and that aspects of credit licencing with little to no relevance to the direct-to-consumer online business channels of most BNPL did not apply.

This option would not require merchants who offer BNPL products to consumers to be an authorised credit representative of the BNPL provider.

3.4 Option 3 – Regulation of BNPL under the Credit Act

This option would treat BNPL products identically to other credit products regulated under the Credit Act and require BNPL providers to comply with regulations in an unmodified form, such as the RLOs. This would seek to address the key issue of unaffordable lending by requiring providers to conduct the same kind of unsuitability assessment as all other regulated credit providers.

Accordingly, BNPL providers would be required to hold an ACL or be an authorised representative of one. BNPL providers would be required to check and satisfy themselves that a BNPL is not unsuitable for a person in accordance with RLOs.

As a licensee, BNPL providers would need to comply with all licensee obligations, including the reportable situations regime, internal and external dispute resolution, compensation arrangements, ASIC reporting obligations, as well as Credit Act requirements including information sharing, warnings, and hardship provisions. This option is not expected to require merchants who offer BNPL products to be an authorised credit representative.

It is proposed that there be an additional requirement that BNPL providers would need to allow consumers to set their own spending limits and prohibited from increasing a consumer's spending limit without their permission. A more restrictive requirement of this kind applies existing continuing credit contracts.

Fee caps for charges relating to missed or late payments would be applied, combined with disclosure requirements.

BNPL providers would be better able to engage with the credit reporting regime to share and receive all credit information, including repayment history information and hardship information because they would be licensees. BNPL providers would not be captured under the mandatory CCR regime unless the BNPL provider is a big bank.

A revised AFIA Code of Practice could include provisions to address issues not appropriately considered within the scope of the Credit Act, including setting industry standards, refund and chargeback processes, and providing guidance to BNPL providers on identifying situations of domestic violence, coercive control and financial abuse. The industry could also choose to further strengthen its Code to ASIC's approved standard and set a higher industry standard than required by law.

4. What is the likely net benefit of each option?

4.1 Status quo

The status quo, including statistics on its harms and benefits, is described in the section on 'Background' above. In summary, BNPL has produced benefits to consumers, in the form of accessible and relatively low-cost credit, merchants, in the form of increased sales and customer acquisition, and the economy at large, through increasing competition against regulated credit products such as credit cards and small amount credit contracts.

Nevertheless, the Government's consultation found that, under the current regulatory environment (status quo) for BNPL, there are problems in relation to unaffordable lending, as well as poor hardship and dispute resolution practices of some BNPL providers. To a lesser degree, there are indications that problems also exist in some cases in relation to BNPL with excessive fees, product disclosure, transparency of indebtedness and competitive neutrality. This is described further in Section 1 'What is the problem you are trying to solve?'.

As such, while the rise of BNPL has created significant benefits to consumers, merchants and the economy, it has also led to some vulnerable consumers (such as social security recipients with low incomes) experiencing significant financial stress from being extended credit they cannot afford, as well as lacking avenues to raises disputes and hardship requests with providers.

The status quo would therefore provide the most benefit to providers and merchants and the most harm to consumers.

4.2 Option 1 – Stronger BNPL Code of Practice with affordability test

Option 1 retains the existing piecemeal regulatory framework for BNPL arrangements, where BNPL providers are not required to comply with the responsible lending obligations under the Credit Act or hold an Australian Credit Licence. Key consumer protections would not be subject to enforcement by a regulator, likely perpetuating current concerns regarding compliance and the ability to penalise or exclude bad actors.

Option 1 would likely deliver a slight net benefit over the status quo. However, much of the existing levels of consumer harm would persist. Introducing a bespoke affordability test would raise the level of creditworthiness assessment that providers must undertake when looking to extend credit to a consumer. For example, depending on the kind of BNPL that is being provided (including the value, term and target market of the BNPL product), providers may need to check the person's credit score and assess their level of income. Given that this proposal does not leverage the existing RLO regime, there is uncertainty as to how any bespoke regime might work and how effective it might be.

On balance, this would deliver a minor level of benefit over the status quo because it would only marginally reduce the level of unaffordable lending while raising annual regulatory costs by an estimated $7.95 million for consumers, BNPL providers and merchants (described below).

Given the bespoke affordability test falls short of the more stringent RLO regime, the test will likely prove to be only marginally effective in prohibiting unaffordable lending of BNPL products to vulnerable consumers. Moreover, a specialised regime outside of the RLO framework would also add further complexity to laws and would not alleviate competitive neutrality concerns because similar credit products would continue to be regulated under different regulatory frameworks.

Option 1 also proposes that industry would be given the opportunity to strengthen its Code of Practice with regard to product disclosure and warning requirements, access and standards of dispute resolution and hardship, the charging of default fees, refund and chargeback processes, advertising and marketing, and mitigating risks associated with scams, domestic violence, coercive control, and financial abuse. The current Code of Practice addresses all these issues, with some commitments not being sufficiently strong but others apparently failing to deliver sufficiently good outcomes due to compliance and enforcement deficiencies (some of which may arise from the inherent limitations of industry codes). Because the changes would be industry-led, rather than being designed by government and enforced by government regulators, it is not possible at this stage to quantify the marginal cost to industry and benefit to consumers. Nevertheless, allowing industry to strengthen the Code (rather than addressing concerns through legislating under the Credit Act) is anticipated to lead to a negligible increase in compliance costs. It would also lead to a limited and marginal improvement in consumer protection above the status quo, as providers would be strengthening the provisions in a voluntary industry Code of Practice that not all BNPL providers are a signatory to.

This option would therefore have the most benefit (of the options for reform) to providers and merchants and the most harms to consumers.

Regulatory burden estimate (RBE) table

BNPL providers: Under Option 1, BNPL providers can be expected to incur relatively minor compliance costs of around $3.3 million a year comprising of predominantly administrative costs associated with carrying out additional suitability assessments. Under Option 1, it is expected that BNPL providers would largely continue to use their existing systems and would not have to build significant new Information Technology to comply. This costing does not incorporate an estimate of a loss of profits due to loss of clients as it is unclear whether any firms are currently profitable and when (and to what extent) profitability is expected to occur.

A new, bespoke suitability assessment may include, for example, conducting negative credit checks, which are expected to cost around $1 per check conducted, on average. It may also lead to a reduction in lending as the bespoke suitability test would exclude certain consumers who cannot afford the credit.

For certain consumers who have poor credit scores, providers may need to conduct additional assessments on top of this, such as requiring a BNPL provider to consider additional financial information (such as their income).

Merchants: Merchants accepting BNPL can be expected to incur costs from lost profits of around $278,000 per annum from lost new customers as a result of regulation. It is also expected that BNPL providers will pass a proportion of its regulatory cost onto merchants through higher merchant fees charged by BNPL providers.

Individuals: Individual BNPL users can expect to incur a cost of around $396,000 a year arising from the additional time users are likely to take to satisfy any additional regulatory checks when applying for BNPL.

Community organisation: Nil, the proposed regulation under Option 1 does not impact community organisations.

4.3 Option 2 – Regulation under the Credit Act with scalable unsuitability tests

Option 2 requires BNPL providers to hold an Australian Credit Licence, comply with licensing obligations, and ensure a BNPL product is not unsuitable for the person under a modified RLO framework that scales down according to the risk of the product. Licensing also enables ASIC to better monitor and regulate BNPL providers in full.

Option 2 is anticipated to deliver a significant net benefit to consumers.

Compared to the status quo, consumers will benefit through improved consumer protection that reduces the instances of unaffordable lending. It is anticipated that the modified RLO regime will reduce the level of 2+ HILDA financial stress indicators from their current level of 19 per cent to be more closely

(but not exactly) in line with other regulated credit products such as credit cards. Similarly, it is anticipated that the level of consumers who miss a BNPL repayment per year will reduce from the current level of 16 per cent to be closer to that of credit card consumers (only 7 per cent of credit card users missed repayments in the previous year). It should be noted that credit cards have longer repayment periods (typically 3 years), compared to many BNPL products with 4-to-6-week repayment periods. Moreover, the typical BNPL consumer is younger than a typical credit card holder, which may indicate a higher risk cohort. As such, it is not expected that the level of financial stress and missed repayments for BNPL consumers would be the same as credit card consumers.

The modified RLO regime may also lead to some consumers who currently have access to BNPL losing that access, either because the increase in regulation makes it uneconomical for BNPL providers to provide credit to them or because the modified RLO regime obligations will determine that they cannot afford the credit. This may reduce the financial inclusion benefits of BNPL as well as its competitive effect upon other traditional credit products such as credit cards and small amount credit contracts. A case study is provided below of how the modified RLO regime may restrict access to BNPL credit for consumes who cannot afford it.

Compared to the status quo, BNPL providers will suffer a detriment through the cost of holding an Australian Credit Licence and being subject to other Credit Act requirements. Out of the 15 BNPL providers that currently exist in the market, eight of them hold an Australian Credit Licence. It is anticipated that seven BNPL providers will have to acquire and maintain a licence, while the other eight providers will need to vary their existing licences. ASIC's licence application fees for credit providers are $4,624, whereas application fees for varying a licence is $2,826. This creates a one-off total cost of $54,976. Costings also incorporates estimates of the legal and administrative costs with applying for or varying licences.

Further, compared to the status quo, a modified RLO regime will increase the level of administrative compliance costs (discussed further below). However, the proposed modified RLO regime is more flexible and less costly to comply with than the current RLO regime under the Credit Act. Option 2 maintains the principle based RLO framework to ensure BNPL is not provided to those whom it is unsuitable, but ensures that the RLO assessment that providers must undertake scales down according to the risk of the product. The kind of assessment that a provider will be required to undertake will depend on many factors such as the size of the loan, its fee and repayment structure, the product's target market, any risk management features of the provider (such as whether a customer's account is frozen after a missed payment), and whether or not providers enforce the collection of debts. An example of how a scalable RLO may work for a $800 pay-in-four product is provided below.

Case Study

Nigel is a full-time student receiving fortnightly youth allowance. Nigel is a renter and does not hold any other credit product. Over the last few months, he has missed paying his rent and paying a number of utility bills.

Nigel applies for an $800 pay-in-four BNPL account with 'PayInstall' using his mobile device. Following the implementation of the reforms, PayInstall must ensure that the BNPL account is not unsuitable for Nigel. That said, because PayInstall is a low-cost credit contract, PayInstall would only be required to check summaries of Nigel's financial situation and any statistical data (such as a credit score) when assessing suitability.

Nigel is asked to provide some information about his financial situation to PayInstall, including consenting to PayInstall conducting a negative check on Nigel's credit file. PayInstall must use the information provided to decide whether the BNPL is suitable for Nigel.

While Nigel has some level of income (Youth Allowance), he is rejected for the BNPL because he has missed, or was late, paying rent and utility bills.

Under the proposed reform, BNPL providers cannot lend to those who the BNPL product is unsuitable. BNPL providers are required to consider the risk profile of its product (including the value of the BNPL account, length of the term, size of the fees, the target market of the product, and any harm mitigation measures), to determine the level of assessment it must do under the modified RLO regime.

Under a new modified RLOs and credit licence obligations BNPL providers may be required to in the first instance check the person's suitability for BNPL against a statistical data (such as a credit score), and where further assessment is required, collect, and consider a person's financial circumstances to ensure they do not extend credit to those who the credit is unsuitable. Option 2 also requires BNPL providers to have appropriate information technology systems in place to achieve this and ensure personal information is collected and stored in a secure way. Additionally, under Option 2 BNPL providers would incur compliance costs associated with either applying for an Australian Credit Licence or modifying their authority under an existing licence, and to appropriately train their staff.

This option would therefore have moderate negative impacts upon providers and merchants and the most benefits to consumers (taking into account both harm reduction and maintaining consumer benefits from access to BNPL).

Regulatory burden estimate (RBE) table

BNPL providers: Under Option 2, BNPL providers can be expected to incur compliance costs of around $9.5 million a year comprising of substantive compliance costs associated with developing or purchasing appropriate information technology system, training staff, legal matters, administrative costs associated with carrying out additional suitability assessments, and, for some BNPL providers, costs associated with obtaining a credit licence (and for others the costs of varying existing licences) and becoming a member of AFCA. This costing does not incorporate an estimate of a loss of profits due to loss of clients as it is unclear whether any firms are currently profitable and when (and to what extent) profitability is expected to occur.

Merchants: Merchants accepting BNPL can be expected to incur costs from lost profits of around $1.4 million from lost new customers as a result of regulation. No significant increase in administrative burden is expected to impact merchants. It is also expected that BNPL providers will pass a proportion of its regulatory cost onto merchants through higher merchant fees charged by BNPL providers (increasing the net impact upon merchants and reducing the net impact upon BNPL providers).

Individuals: Individual BNPL users can expect to incur a cost of around $4.09 million a year arising from the additional time users are likely to take to satisfy additional regulatory checks when applying for BNPL.

Community organisation: Nil. The proposed regulation under Option 2 does not directly impact community organisations.

4.4 Option 3 – Regulation of BNPL under the Credit Act

Option 3 would apply the existing Credit Act regulations in full to BNPL arrangements. This includes requiring BNPL providers to obtain an Australian Credit Licence and comply with the RLO framework, without any modifications.

Under the existing RLO framework and credit licence obligations BNPL providers are required to collect and consider a person's financial information, verify the financial information, and check against the person's requirements and objectives to ensure they do not extend credit to those who the credit is unsuitable. The kind of financial information that may need to be collected and verified under RLOs is potentially extensive – including conducting a credit check, obtaining verified financial statements, assessing the kind and source of income and whether it is seasonal or otherwise irregular, as well as considering a person's expenses and determining what are discretionary and non-discretionary. Option 3 also requires BNPL providers to have appropriate Information Technology systems in place to achieve this and ensure personal information is collected and stored in a secure way. Additionally, under Option 3 BNPL providers would incur compliance costs associated with either applying for an Australian Credit Licence or modifying their authority under an existing licence, and to appropriately train their staff. As mentioned above, of the 15 BNPL providers that currently exist in the market, eight of them hold an Australian Credit Licence. Recently, three BNPL providers (OpenPay, Affirm and Latitude) have left or are leaving the Australian market, or become subject to formal reorganisation processes. Seven BNPL providers will have to acquire and maintain a licence, while the other eight providers will need to vary their existing licences. ASIC's licence application fees for credit providers are $4,624, whereas application fees for varying a licence is $2,826. This creates a one-off total cost of $54,976. Costings also incorporates estimates of the legal and administrative costs with applying for or varying licences.

Compared to the status quo, the cost of regulation would reduce innovation in the financial system and the growth of the sector. It may also lead to providers exiting the market or merging with other providers due to their business model being made uneconomical. Wholesale RLO assessments may prove to be too expensive and time consuming to conduct for small-value, low-cost credit. Currently, many BNPL product offerings include automated decision making, with decisions on whether to extend credit to consumer made very quickly. The Government heard through its consultation with industry that, compared to this status quo, Option 3 would slow down the decision-making time substantially, requiring providers to collect and verify information and potentially ask further questions of applicants. It would also raise the cost of extending credit, which may lead to some lower-value BNPL products (with low margins) being made uneconomical.

Compared to the status quo, consumers will marginally benefit from a wholesale application of existing Credit Act regulation, whereas BNPL providers and merchants will see significant detriment to their businesses. It is anticipated that applying the existing RLOs wholesale to all BNPL arrangements would prevent BNPL providers from extending credit to those who it is unsuitable. This will benefit consumers through improved consumer protection that reduces the instances of unaffordable lending. It is anticipated that the modified RLO regime will reduce the level of 2+ HILDA financial stress indicators from their current level of 19 per cent to be more closely in line with other regulated credit products such as credit cards (where only 8 per cent of consumers experience 2+ HILDA financial stress indicators).

However, Option 3 would also cause significant detriment to the user experience of a great majority of consumers who enjoys the benefits of BNPL, as a result of undue information gathering and delays in accessing BNPL. One of the benefits of BNPL products is the ease of user experience and its broad availability. Option 3 is anticipated to significantly slow down the provision of BNPL products and restrict access to many BNPL consumers due to small-value low-cost BNPL products being made uneconomical. This would harm consumers due to a loss of financial access. Excessive barriers to accessing generally low cost BNPL may also result in some consumers accessing higher cost alternatives.

This option would therefore have the greatest negative impacts upon providers and merchants and less benefits to consumers that option 2. While harm reduction to consumers would be maximised under this option, this would come at the expense of decreased consumer benefits from access to BNPL.

Regulatory burden estimate (RBE) table

BNPL providers: Under Option 3, BNPL providers can be expected to incur compliance costs of around $22.1 million a year comprising of substantive compliance costs associated with developing or purchasing appropriate information technology system, training staff, legal matters, administrative costs associated with carrying out additional suitability assessments, and, for some BNPL providers, costs associated with obtaining a credit licence (and for others the costs of varying existing licences) and becoming a member of AFCA. Compliance cost under Option 3 is expected to be significantly greater than under Option 2, as all new BNPL applications would need to undergo detailed suitability assessment, including assessing a person's income and expenses and verifying those information. It is expected that BNPL providers, under Option 3, will take twice as long to manually assess all new applications, whereas Option 2 can rely on a higher degree of automation. This costing does not incorporate an estimate of a loss of profits due to loss of clients as it is unclear whether any firms are currently profitable and when (and to what extent) profitability is expected to occur.

Merchants: Merchants accepting BNPL can be expected to incur costs from lost profit of around $1.4 million from lost new customers as a result of regulation. No significant increase in administrative burden is expected to impact merchants. It is also expected that BNPL providers will pass a proportion of its regulatory cost onto merchants through higher merchant fees charged by BNPL providers.

Individuals: Individual BNPL users can expect to incur a cost of around $9.9 million a year arising from the additional time users are likely to take to gather personal financial information and satisfy any other regulatory checks when applying for BNPL.

Community organisation: Nil, the proposed regulation under Option 3 does not impact community organisations.

5. Who did you consult and how did you incorporate their feedback?

Consultation Process

The proposed legislative reforms of BNPL products are the result of extensive consultation with consumer groups, industry, academia, regulators and foreign governments.

In 2018 and 2020, ASIC released two research reports, respectively, on the BNPL market. These reports together identified the rapid growth of the sector, the wide variety of BNPL products on the market, and that some consumers were experiencing financial harm from unaffordable lending, such as cutting back on essentials or being late on paying other bills to make BNPL repayments.

Following the Government's announcement of its intention to regulate BNPL in July 2022, Treasury held bilateral meetings with 28 stakeholders to identify, and understand the extent of, the issues with BNPL products.

The 28 bilateral consultations informed the development of three options of varying degrees of regulatory intervention. The Options Paper, titled "Regulating Buy Now, Pay Later in Australia", summarised the issues with BNPL products and regulation and asked for public feedback on three options for regulatory intervention. The consultation ran from 21 November 2022 to 23 December 2022. The Government received 77 written submissions, 62 of which were non-confidential. Appendix A provides a list of stakeholders who provided a non-confidential submission.

Treasury held three roundtable sessions during the public consultation period with consumer groups, BNPL providers and the large banks to discuss the Options Paper and the three proposed regulatory options.

Following the close of the public consultation, Treasury has further held numerous bilateral meetings with consumer groups, BNPL providers and academics. Treasury has met with ASIC on a semi-regular basis since July to discuss an appropriate regulatory solution.

Common Issues Raised by Stakeholders

Unaffordable or Inappropriate BNPL Lending

The most commonly raised concern in submissions was unaffordable or inappropriate lending practices. Many of the submissions supported the paper's observation that some consumers are provided BNPL which they cannot afford or that is otherwise inappropriate for them.

Treasury also received a number of submissions, many of which from individual BNPL users, calling for the Government to not impose rules that would exclude social security recipients, such as carers and age pensioners, from BNPL. These submissions argued that social security recipients are often automatically excluded from traditional forms of credit, and that BNPL helps them pay for unexpected expenses. They often highlighted the low-cost nature of BNPL if used responsibly and that there are social security recipients (including aged pensioners) who are frugal and careful with their spendings and using credit. Some consumer groups' submissions also noted that any regulation for BNPL should not adversely diminish the financial inclusion benefits of BNPL.

Submissions and additional stakeholder feedback identified that almost all cases cited of inappropriate lending of BNPL were experienced by social security recipients. Viewed in light of available data, it appears the unaffordable lending problem is highly concentrated in this segment of the community.

A very high portion of cases cited also involved multiple BNPL debts, credit cards, SACCs or unregulated payday loans (such as Cigno loans). Consultations heard from some financial counsellors that their clients rarely present with a 'BNPL problem' but problems with other debts, such as credit cards and payday loans, and that BNPL debts are only uncovered when going into the details of their financial records.

The proposed reform will address the issue of unaffordable lending through the modified RLO regime.

Poor Complaints Handling Processes

Many consumer groups' submissions supported Treasury's observation that dispute resolution processes of some BNPL providers failed to resolve complaints to a satisfactory standard in a timely manner. These submissions called for a requirement for BNPL providers to have appropriate internal and external dispute resolution and hardship processes to be prescribed in law and enforced by ASIC.

Given that the BNPL Code of Practice commitments mirror the requirements for credit licensees, the problem appears to be one of enforcement.

The proposed reform will address the issue of poor complaints handling through applying the Credit Act's internal dispute resolution and hardship provisions.

Excessive and disproportionate consumer fees and charges

The joint consumer group submission supported a proposal to cap the amount of late payment fees a person can be charged by a BNPL provider – e.g., late payments capped at $10 per month – subject to indexation. However, there were diverging views on whether the cap should be required under law or the Code of Practice. Treasury also received a recommendation to require these late payment fees to be proportionate to the size of the debt.

Many of the scenarios cited default fees that would also be permitted under existing credit regulation. However, heightened lending to social security recipients who cannot afford the loans may result in a higher incidence of default fees. As such, the modified RLO requirements should help to address this issue. Additionally, a lack of a cap on default fees can result in BNPL not being a low-cost form of credit relative to the small size of some debts as is marketed in some cases.

The proposed reform will address consumer fees and charges through seeking to capture late payment and default fees under the current Credit Code exemption fee caps.

Non-participation in the credit reporting regime

Some consumer groups' submissions and submissions from credit reporting bodies called for mandating BNPL providers to provide information to the credit reporting system to improve visibility by other lenders of BNPL debt and to help responsible BNPL users build up their credit scores.

A subset of the consumer group and credit reporting body submissions also recognised the upcoming statutory independent reviews of Australia's voluntary CCR framework in the Privacy Act and the mandatory framework under the Credit Act, due to report to relevant ministers by October 2024. These submissions have suggested Treasury consider the outcome of the reviews before implementing any changes to the credit reporting framework.

As a credit licensee, BNPL providers will be able to engage in the credit reporting system under the proposed reform. However, currently, only the largest banks are required to report comprehensive credit information. It would be disproportionate to require BNPL providers to do so when no other nonbank lender or bank (other than the Big 4, with Macquarie doing so voluntarily) are required to do so.

Further consideration of how BNPL interacts with the credit reporting regime should be considered as part of the proposed reviews of that regime.

Product disclosure obligations

There is broad support to improve the information disclosure practices of BNPL providers, which currently vary significantly in quality. However, there were diverging views on how disclosure obligations should be implemented. Many BNPL industry submissions argued that disclosure obligations should be improved through a strengthened Code of Practice, noting that a Code can be more flexible to reflect the business models of BNPL providers. Consumer groups' submissions argued that BNPL providers should be required to provide consumers with disclosure documents in line with other regulated credit products under the Credit Act.

Some submissions pointed out how some existing product disclosure obligations may not work well for BNPL providers due to their prescriptive nature, their lack of technological neutrality not aligning with smartphone applications, and not being suited to some BNPL business models which issue separate contracts for each transaction.

The proposed reform would apply the Credit Act's disclosure requirements, but with slight modifications made to ensure they are suited to application-based distribution channels.

Unsolicited selling and advertising practices

There was support among consumer groups to improve the marketing practices of BNPL providers, with submissions sometimes extending beyond credit regulation to suggestions for regulation of the marketing of underlying goods and services. Specifically, many consumer groups raised concerns of pressure selling of goods using BNPL or advertising BNPL products to pay for essentials, including groceries and utilities.

The Credit Act's marketing and advertising rules will apply under the proposed reform. However, many of the practices complained of are permitted in regulated credit markets – for example, credit cards are commonly used to pay for essentials and merchants can advertise credit cards (such as Coles branded cards).

Some concerns raised by stakeholders are the subject of parallel sector specific reforms, such as steps being taken to improve clean energy sector sales practices under the implementation of a 'New Energy Technology Consumer Code' commencing in February 2023.

Financial Abuse

Some submissions noted that the RLOs under the Credit Act provides a mechanism that requires lenders to identify and take into account indicators of financial abuse.

A consumer group submission recommended that the BNPL Code of Practice include financial abuse and family violence guidance, similar to the Australian Banking Association's financial abuse and family and domestic violence guidelines.

Given the success of the ABA guidelines (backed by the Banking Code of Practice), together with the need for detail and nuance in dealing with these matters, the voluntary adoption by the BNPL industry of an equivalent regime is preferred.

Regulatory burden and impact on business models

BNPL providers raised strong concerns regarding the costs and disruption to their business models of imposing credit regulation without adjustments.

Concerns were raised at the inability to automate responsible lending obligations – with consequential impacts upon the timeliness and user friendliness of onboarding processes. Concerns were also raised that information gathering and information validating requirements were disproportionate to the risks being sought to be mitigated.

Concerns were raised regarding the appropriateness of existing credit law prescriptive and standardised warnings and product disclosure obligations.

Concerns were raised regarding the lack of technological neutrality in some credit laws and the impacts this would have for the largely online business models adopted by BNPL providers.

Concerns were raised whether some credit laws would work appropriately with BNPL given that each transaction may technically occur under a separate credit contract – in particular, whether this would trigger disclosure and responsible lending obligations for each transaction.

Under Option 2, it is proposed that credit laws would be adjusted to reflect these concerns. Some aspects of these proposed adjustments may be applied to credit contracts generally and not just to BNPL.

Other stakeholder concerns

Treasury received submissions that called for the prohibition of the 'no-surcharge rule' in BNPL contracts, whereby BNPL providers prevent merchants from passing on the cost of the BNPL transaction to its customers.

The Government has separately consulted on a Strategic Plan for the Payments System, which explicitly considered the application of surcharging rules to BNPL. The consultation closed 6 February 2023.

The Government is still considering it response to this consultation and changes to surcharging are dealt with as part of this reform proposal.

Options favoured by Stakeholders

Option 3 was the most supported regulatory option, with 40 submissions favouring it. Thirteen submissions supported Option 1 and nine submissions supported Option 2. Fifteen submissions did not support a proposed option, nor provide an alternative regulatory option. In regard to the common views in these submissions, generally (with some exceptions):

•

Consumer groups supported Option 3.

•

BNPL providers tended to support Option 1 (if they did not already hold a credit licence for other parts of their businesses), or Option 2 (if they already held credit licences).

•

Regulated credit providers tended to support Option 3, subject to the comments below regarding the scalability of RLOs.

•

The views of individual users were mixed, with some citing their use of BNPL to smooth the cost of large infrequent expenses and to address issues of financial exclusion from regulated credit products.

While the majority of submissions supported Option 3, which includes applying the RLOs in full to BNPL products, there were diverging views as to what is currently required of lenders under RLOs.

RLOs are a principles-based test which can be 'scaled' to the type of credit and the circumstances of the consumer, but many submissions disagreed as to how much RLOs can currently be scaled down to reflect the low-risk nature of BNPL.

Many submissions supporting Option 3 were of the view that the RLOs are sufficiently scalable, whereas many submissions supporting Option 2 noted that changes are required to improve scalability of the RLOs. Additionally, some submissions stated support for Option 3, but only subject to possible changes in ASIC guidance or regulations to clarify its scalability. Differences in some submissions' support for Option 2 or Option 3 may therefore reflect differences in the interpretation of current laws.

The Government's view is RLOs are necessary to ensure that unsuitable credit is not extended to consumers. Segments of the community, particularly those on lower income, on social security, and who are already highly indebted with a poor credit history, can experience significant harm where they gain access to (multiple) BNPL products without regulated suitability checks.

For these reasons, Option 1 (primarily relying upon an industry code) is not a suitable regulatory solution. A discrete, light-touch suitability test will not provide sufficient protection for vulnerable consumers. However, the overall financial stress associated with BNPL use is comparable to other regulated credit products. BNPL products are generally smaller sized, lower cost and lower risk than many existing credit products. These features necessitate a proportionate regulatory approach to protect consumers while maintaining financial inclusion.

For these reasons, Option 3 is not a suitable regulatory solution. The current RLO regime imposes potentially extensive requirements on the amount and type of information lenders must obtain and verify from a consumer. Such requirements are prohibitively expensive for low-value credit such as BNPL and would unduly impede financial inclusion, competition and innovation without commensurate benefits to consumer protection. If reforms result in consumers shifting back to greater use of more costly small amount credit contracts this will result in greater overall consumer harm. It is anticipated that any additional reduction in consumer harm from pursuing Option 3 would be significantly outweighed by a reduction in the benefits to consumers of BNPL.

6. What is the best option from those you have considered?

The preferred regulatory option closely aligns with Option 2 of the Government's options paper, Regulation Buy Now, Pay Later in Australia (with near full licensing obligations). The proposed proportionate approach to regulating BNPL products strikes an appropriate balance between consumer protection, supporting financial inclusion and enabling innovation to drive better outcomes through increased competition in consumer credit markets.

While a majority of stakeholders preferred Option 3, to apply the Credit Act to BNPL without modification is not suitable. The current RLO regime (and ASIC guidance) imposes potentially extensive requirements on the amount and type of information lenders must obtain and verify from a consumer. Such requirements are prohibitively expensive for low-value credit such as BNPL, which may make some business models unviable. Overregulation risks some consumers to lose access to lower cost credit, driving other consumers to switch to more expensive and riskier, fringe credit products (such as payday loans) and reducing competitive pressure on traditional credit products (such as credit cards).

Furthermore, many submissions supporting Option 3 were of the view that RLOs are already sufficiently scalable or should be scalable for BNPL purposes. There appears to be a level of uncertainty as to the breadth of scalability of the existing RLO regime, in particular with respect to low-cost, low value and low risk products. The Government should address this uncertainty by making it explicit in law how RLOs may scale up and down with respect to the risk of the product.

While many BNPL providers and the industry body preferred Option 1, to rely primarily upon an improved Code of Practice is also not suitable. Option 1 would also establish a discrete, light-touch lending suitability test in the Credit Act that is less stringent than the RLO regime. Furthermore, without an effective licensing regime, ASIC would have restricted ability to monitor and enforce regulations upon BNPL providers. Consumer groups, the AFIA Code Compliance Committee and ASIC also raised significant concerns with the effectiveness of any processes for establishing a sufficient Code and its subsequent enforcement.

Further Reasoning for Recommendation

BNPL should be regulated as credit in a proportionate, flexible and technology-neutral way

General consumer credit regulation (or its equivalent) should apply to BNPL providers, including: RLOs; credit licensing requirements; information and product disclosure obligations; internal and external dispute resolution obligations; hardship arrangement obligations; termination, enforcement and debt collection restrictions; marketing and other miscellaneous restrictions; and ASIC information gathering powers.

However, consumer credit regulation should not be applied in an unmodified form. RLO should apply in a manner that is more scalable to the risk of consumer harm. Regulation should be adapted to be more flexible and technology neutral to be fit for purpose for the BNPL business model, including its appbased electronic distribution channels. For example, the Credit Code requirements for product disclosure statements should be amended to ensure these disclosures are fit for purpose, are more flexible and can be delivered in a technologically neutral manner. They should also be adapted to reflect that some aspects of credit regulation are of no or limited relevance to the direct-to-consumer electronic distribution channels models employed by BNPL.

A modified RLO regime would ensure that the suitability assessment a provider must conduct is proportionate to the relatively low risk of BNPL products. The extent of the information gathering and verification that providers must undertake would be scaled down according to the features of BNPL that generally make the products lower risk. This would include, for example, the profile of the product's target market, the low-dollar, no-interest and low-fee nature of the products terms, the provider's risk management features (such as restricting further credit to customers who have missed payments), and extent of the consequence of default (including whether the provider engages in debt recovery).

Requiring BNPL providers to hold an ACL will ensure lenders are effectively monitored and regulated by ASIC and have in place appropriate safeguards and operate efficiently, honestly and fairly, consistent with other regulated credit providers in Australia.

BNPL can cause or exacerbate existing financial harms

The primary concerns identified for BNPL are concerning levels of unaffordable lending (although this is concentrated among low income, mainly social security recipient, users) and poor complaint handling processes. Secondary issues include inconsistent and deficient product disclosure, poor hardship arrangement practices, predatory marketing and instances of excessive default fees.

These issues can be partially rectified by bringing BNPL products within the parameters of the Credit Act which will place obligations on BNPL companies which other lenders are subject to. These obligations include mandatory credit licensing, suitability assessment for the credit and hardship assistance and quality complaints handling processes. To merely improve and tighten the Code of Practice – as proposed in Option 1 – would not fill the current regulatory gaps which affects vulnerable consumers. This is largely because ASIC cannot enforce the Code's provisions.

Risks

Increased regulatory burden may accelerate industry consolidation

Consolidation in the BNPL market is already underway, with many providers struggling to transition to profitability, and at least three BNPL providers having recently exited the market as of March 2023. Low customer fee caps on BNPL products result in them being particularly sensitive to increasing costs and volatility in wholesale funding markets.

The proposed legislative regime will increase the regulatory burden on BNPL providers, which may be cited by struggling providers as the cause of further market consolidation.

This risk may be partially mitigated by providing sufficient time for the industry to develop and implement systems and a focus on enabling efficient RLO processes, including the use of Open Banking, when developing regulations and guidance.

Overregulation may harm competition and financial inclusion

Placing too much regulatory burden on BNPL providers – which Option 3 risks doing – may significantly undermine the unique BNPL business model and therefore may undermine the convenience and revenue which consumers, merchants and the economy currently benefit from.

The costs of regulation, including any impacts on quick and convenience onboarding processes, may reduce consumer choice, lower the competitive pressure on traditional credit products and lead consumers to take out more expensive credit, such as payday loans.

Overregulation may further hamper financial inclusion. BNPL providers commonly service certain segments of society that struggle to access useful and affordable credit products, such as pensioners or young people with little credit history.

This risk may be partially mitigated by ensuring regulation is proportionate by scaling down for lower risk products.

7. How will you implement and evaluate your chosen option?

Implementation process

The Government has publicly indicated its preference for any possible reforms to be introduced in the Spring 2023 sittings of Parliament. However, this would be subject to other Government reform priorities and the need to ensure sufficient consultation to resolve the various complexities of any proposed reforms.

Any proposed legislation could bring BNPL within the scope of consumer credit regulation, but under a new category of credit for low-risk cost credit contracts, with current credit law requirements being adjusted to be more flexible, technologically neutral and scalable to the risk of the credit product.

Further targeted consultations on key issues would need to take place, such as the determination of what responsible lending assessments would be acceptable in different circumstances. This would be used to guide the drafting of the laws and the explanatory memorandum.

Subject to the above, legislation might pass in early to mid-2024.

Sufficient time would be provided following royal assent before commencement to enable:

•

updating of the ASIC regulatory guides, particularly in relation to responsible lending and credit licensing;

•

complementary changes to the AFIA BNPL Code of Practice and any other changes which arise from the AFIA independent review of the Code;

•

providers to apply for and obtain credit licences (or applying for variations to the conditions on existing credit licences);

•

information technology builds and testing by providers, including potentially establishing real time access to machine readable banking data to support streamlined affordability assessments (through the consumer data right or other means);

•

providers to establish arrangements for engaging with the credit reporting system;

•

provider (and for some business models, merchant) staff training; and

•

providers to establish compliant processes and procedures.

Implementation risks

The implementation risks of the proposed reform are low. This proposal would be implemented through legislative amendment to the Credit Act, Corporations Act 2001, Australian Securities and Investments Commission Act 2001 and related legislation, with an appropriate period for implementation following passage of the reforms.

ASIC would be required to implement the reforms, including adjusting existing compliance and supervision systems, and revising regulatory guidance for credit providers. ASIC currently administers and enforces the Credit Act, Corporations Act 2001, and Australian Securities and Investments Commission Act 2001, which includes supervision of Australian Credit Licence (ACL) holders and Australian Financial Services Licences (AFSL) holders. ASIC is therefore well equipped to regulate BNPL providers under the broader regulatory framework for credit.

ASIC has recently implemented reforms bringing debt management firms into the ACL regime, demonstrating a strong capacity to do so in an efficient and timely manner.

ASIC will recover funding for the regulation of BNPL providers under the Industry Funding Model (IFM). As ACL holders, BNPL providers will become part of the IFM, and therefore ASIC will be able to recover the costs of regulation from the industry themselves. No new funding is provided, so the net increase in regulatory burden on ACL holders is Nil.

Targeted consultations are expected in mid-2023 to settle the detail of key aspects of the reforms, followed by consultations on draft legislation in the second half of the year, prior to a planned introduction of legislation. Treasury will absorb the costs of developing the legislation.

Data on consumer outcomes in relation to BNPL is already being collected through various studies and reporting by industry, ASIC and academics. Interest in BNPL has been increasing and available sources of data are expected to also increase.

Evaluating success of the reform

The performance of the policy may be measured through the collection of statistics of the kinds set out in the problem identification chapter of this document, such as financial stress measures, complaints, changed spending behaviours on essentials, late payment rates and published bad debt provisions by firms. For example, this may include measuring whether there has been a reduction in the level of 2+ HILDA financial stress indicators from the current 19 per cent, a reduction in the number of BNPL consumers missing a repayment in the last year from 16 per cent, or a reduction in the arrears and bad debt provision numbers of individual BNPL providers^[74]. It should also include consideration of qualitative feedback from consumer groups, such as financial counsellors, and whether the instances of harm they are seeing from BNPL products has materially reduced as a result of the reforms.

These metrics may be collected by ASIC (subject to resourcing and priorities) and AFCA, supplemented with data published by AFIA and individual BNPL providers. Reviewing the impacts of the reforms will form part of Treasury's existing responsibilities to monitor consumer credit outcomes and to advise Government on possible changes to credit laws. It is also the practice of ASIC to monitor consumer outcomes in relation to its areas of responsibility and to provide advice to government, however, the depth of data collection and analysis undertaken by ASIC may be dependent on funding or internal prioritisations.

Other consumer harms, such as those arising from obstacles to accessing or poor internal and external compliant dispute resolution processes and hardship processes, will be subject to measurement and reporting to ASIC as part of its ALC licensing reporting frameworks.

The Government will continue monitor the health of the BNPL sector, and the broader financial services sector, to ensure the Australian credit market remains competitive and strong, and that consumers who can afford the BNPL credit can continue to enjoy the benefits of BNPL.

At present, a review date for the reform measure has not been set.

A revision of the Impact Analysis (IA) will occur following further consultations in mid-2023 to refine the detail of the proposed reforms, in particular in relation to how RLOs will scale with risk – which will provide greater clarity as to the intensity of credit assessment. This revision will occur prior to the finalising of legislation and supporting regulations.

Appendix A - List of Submissions

The following is a list of submissions to the BNPL options paper issued in November 2022. Confidential submissions are not included.

1.

Australian Financial Complaints Authority

2.

Australian Finance Industry Association

3.

Afterpay

4.

ANZ

5.

ASIC

6.

Australian Banking Association

7.

Australian Communications Consumer Action Network

8.

Australian Institute of Credit Management

9.

Australian Retail Credit Association

10.

Australian Retailers Association

11.

Australian Small Business and Family Enterprise Ombudsman

12.

Banking Code Compliance Committee

13.

BNPL Code Compliance Committee

14.

Brighte

15.

Centrix

16.

Commonwealth Bank of Australia

17.

Customer Owned Banking Association

18.

Community Industry Group

19.

Consumer Policy Research Centre

20.

Council of Small Business Organisations Australia

21.

CPA Australia

22.

Deferit

23.

Ebay

24.

Economic Abuse Reference Group

25.

Equifax

26.

Finance Industry Delegation

27.

FinTech Australia

28.

Good Shepherd

29.

Grant Halverson

30.

Harjinder Singh – Curtin University

31.

Illion

32.

John Watkins et al – University of Sydney Business School

33.

Julia Cook – University of Newcastle

34.

Kadre

35.

Kevin Davis – University of Melbourne

36.

Kimberly Community Legal Services

37.

Law Council of Australia

38.

Law Society of NSW

39.

LayBuy

40.

Lien Duong – Curtin University

41.

Mortgage & Finance Association of Australia

42.

Min-It Software

43.

NAB

44.

National Credit Providers Association

45.

National Legal Aid

46.

Nudge

47.

PayPal

48.

Peter Sutherland – Australian National University

49.

Public Interest Advocacy Centre

50.

Queensland Consumers Association

51.

Responsible Leasing Australia

52.

Rural & Small Business Financial Counselling Services – Southern

53.

Salvation Army

54.

Stephanie McCann

55.

Tech Council of Australia

56.

Uniting Care

57.

WayForward

58.

Wesley Mission

59.

Western Australian Government

60.

Westpac

61.

ZIP

62.

Joint consumer group submission – Anglicare Australia, Bravery Trust, Brotherhood of St. Laurence, CHOICE, Consumer Action Law Centre, Consumer Action Koori Help, Consumer Credit Legal Service WA, Consumers' Federation of Australia, Financial Counselling Australia, Financial Counsellors' Association of NSW, Financial Counsellors' Association of Western Australia, Financial Rights Legal Centre, Good Shepherd Australia and New Zealand, Indigenous Consumer Assistance Network, Law Right, Mob Strong Debt Help, Redfern Legal Centre, South Australian Financial Counsellors Association, Shelter Housing Action Cairns, St Vincent de Paul Society National Council of Australia, Uniting Communities Consumer Credit Law Centre SA, West Justice

Attachment 3: Impact Analysis - Multinational tax transparency - country by country reporting

Introduction

On 22 June 2023, the Government introduced into Parliament the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023. The Impact Analysis accompanying the Bill addressed the three tax transparency elements of the Government's election commitments (as announced in the October 2022-23 Budget), including considerations which informed the public CBC measure, even though only one transparency measure was included in the Bill. This reflected the Government's commitment to transparency on the policy development process.

This is an addendum to the original Impact Analysis. It includes updated information on the public CBC measure, reflecting the key developments of the revised policy settings in line with the Government's announcement to defer the introduction of the measure to allow for further industry consultation on elements of the policy (the Assistant Minister's media release of 22 June 2023 refers).

Timeline of events

Public consultation – summary

Treasury consulted publicly on the revised exposure draft legislation from 12 February to 5 March 2024. 42 written submissions were received (including 5 confidential) – the public submissions are available on the Treasury website. Treasury held in-person meetings with individual entities, industry representatives (domestic and foreign), and foreign government officials.

In general, civil society stakeholders continued to support the policy intent to improve corporate tax transparency. The business community broadly welcomed the revised draft and acknowledged the closer alignment with the EU regime – while they continued to claim the EU regime should be adopted (on the basis this would reduce compliance costs for large multinationals), there was a recognition the revised draft largely addressed previous claims the initial measure was too broad and would give rise to unintended consequences (excessive compliance costs and taxpayer confidentiality concerns). However, some stakeholders continue to claim the cost of complying with public CBC outweighs any public benefit, noting that the ATO already has access to a lot of this information and that without additional context the public would have limited ability to interpret the data.

There were three broad themes emerging from the consultation: clarity on the exemptions provision, clarity on the specified jurisdictions list (disaggregated public CBC reporting), and preferences for the EU regime. The Government responded to this feedback principally via further guidance in the explanatory materials. Legislative changes were relatively minor, limited to technical drafting changes to provide additional clarity on interpretation.

Exemptions provision

The draft legislation provides a provision allowing entities to request an exemption from publishing particular kinds of information. Corporate stakeholders requested further clarity on how this would apply, particularly regarding commercially sensitive information.

The Government responded to this feedback by augmenting the explanatory memorandum to include specific examples which the Commissioner (ATO) would have regard for in considering exemption requests. The legislation maintains a coherent principles approach.

Specified jurisdictions – disaggregated CBC reporting

The draft legislation was revised to narrow the scope of jurisdictions in which MNEs would need to disclose tax information. The legislation was also revised to allow entities the option to voluntarily publish disaggregated reporting for all jurisdictions in which they operate in, or otherwise report on an aggregated 'rest of the world' basis. The original policy settings required entities to report on all jurisdictions in which they operate.

Civil society stakeholders suggested broadening the draft list to include Ireland, the Netherlands, Luxembourg, the UAE, Puerto Rico and Trinidad and Tobago (as examples). Corporate stakeholders sought further details on the criteria underpinning the list, asserting that the list should be narrowed in line with the EU approach.

Ultimately, the specified CBC jurisdiction list is a Ministerial determination. The draft list of jurisdictions is informed by the ATO's specified country list (per the international dealings schedule for international transactions). It reflects an Australian perspective having regard for our tax settings and multinational entities' observed arrangements, and it is acknowledged that the proposed CBC list is broader than the EU. For public CBC purposes, a number of factors would be considered in finalising the list, including: trade and investment flows relative to contracted international related party transactions, employee numbers in the offshore jurisdiction (relative to the related party expenditure/income flows) and the type of assets subject to the related party transaction (e.g. royalty/intangible or interest payments). Jurisdictions in scope of the EU public CBC rules were not included in the list, reflecting a complementary approach to global public CBC rules.

The Government intends to respond to stakeholder feedback via the explanatory statement supporting the Ministerial determination (expected to be signed after legislation is in place).

EU regime v Australian regime

Corporate stakeholders suggested the Government should adopt the EU regime, claiming the EU regime is an adequate model for public CBC reporting. This would include aligning with the EU data labels, exemption process, reporting process, and specified jurisdiction list. Stakeholders claimed this would minimise compliance costs, noting Australia's proposed approach would be duplicative.

The Government responded to this feedback via minor amendments to the legislation, and a number of text amendments to the explanatory memorandum to provide further clarity on the context of the Government's policy and the rationale for adopting the GRI's model as the base.

Proposed policy revisions – summary

Impacts associated with revised approach

The revised policy settings (above) seek to balance the policy intent of delivering a meaningful enhancement to corporate tax transparency with reducing compliance cost imposts for taxpayers. The policy revisions align more closely with the EU regime which is expected to lower compliance and transition costs for taxpayers (in practice they reduce the disclosure obligations on multinationals) while the augmented guidance in the explanatory materials is expected to address taxpayers' concerns on disclosing commercially sensitive information.