Contributed by Andrew O’Bryan, Partner, Frank Hinoporos, Special Counsel and Jacinta Bolzonello, Lawyer, Hall & Wilcox Lawyers
In the 2015/16 Federal Budget, the government announced that it will provide the Commissioner with a Statutory Remedial Power (Remedial Power), to provide more certainty and better outcomes for entities and reduce the regulatory burden on individuals, business and the community.
Exposure draft legislation was released in early December 2015 and we have considered some of the main issues below.
Example: when could this apply?
The explanatory memorandum to the draft legislation provides an example of a modification to a taxation law that the Commissioner might make — in this case, a CGT roll-over where there is a natural disaster.
Roll-over relief would generally be available if an asset has been lost or destroyed as a result of a natural disaster. However, sometimes this does not work in reality, such as in the 2011 Queensland floods. The Lockyer Valley Regional Council gave the flood-devastated residents of Grantham the option to move to higher ground as part of a voluntary land swap initiative, however, the residents were not able to satisfy the conditions of ITAA 1997 s 124-70 as their land was not compulsorily acquired, or lost or destroyed, and the replacement land was not compensation for an event listed in the subsection.
In this case, the Commissioner might make a modification to the tax laws to allow taxpayers to participate in the land swap initiative. This is just one example; we can think of many situations where this would be very useful.
How will it work?
Currently, the Commissioner applies purposive principles under s 15AA of the Acts Interpretation Act 1901 (Interpretation Act), to give effect to the purpose or object of the law. However, sometimes this approach is unable to remedy unintended consequences in the application of the taxation laws. Therefore, the new Remedial Power allows the Commissioner to make a legislative instrument (called a “disallowable instrument”) to modify the operation of a taxation law to ensure the law can be administered to achieve its purpose or object.
There will be an administrative framework around this process to ensure that the Remedial Power operates transparently and efficiently. It will be subject to monitoring and ongoing review, and stakeholders will have the opportunity to provide input on the process. The main aim is to cut red tape; it will be quicker and easier to make changes to the tax law, and ensure consistency in a transparent method.
The ATO will be involved from the outset through the “Consultation Hub” (Hub) and “Tax Issues Entry System” (TIES). The Hub coordinates all consultation between the ATO and the public, which enables the ATO to capture and consider tax matters raised by the community. It is proposed that tax issues that might be appropriate for the Remedial Power are raised by taxation practitioners, general public and other sources through the Consultation Hub.
The ATO will then consider the implications of the issue, and consult externally if appropriate. If it is decided that the Remedial Power is appropriate to resolve the issue, the ATO would refer the issue to a technical advisory group established to advise on the operation of the power. The technical advisory group will consist of private sector experts, Treasury and the ATO.
If the consultation process determines that a legislative instrument is appropriate, the Commissioner will draft this.
The draft legislation
The disallowable legislative instrument would be made by the Commissioner to modify the operation of taxation and superannuation law to ensure that there are no unforeseen or unintended outcomes for taxpayers when applying the law.
The instrument does not modify the text, object or purpose of a law but, rather, allows the Commissioner to modify the operation of a provision in particular circumstances. For example, it may apply in relation to all entities, or if specified in the determination, to a particular class or circumstance. It may also contain more than one modification to the law.
The power is discretionary, and the Commissioner may choose whether or not to exercise to the power.
Limitations on the power
The Remedial Power can only be validly exercised where:
(1) The modification is not inconsistent with the purpose or object of the provision. This means that if a modification is inconsistent with the purpose or object of the provision, then the modification would be invalid because it would be outside the Remedial Power. This is tested objectively, therefore, if a taxpayer believes that the Commissioner’s exercise of the Remedial Power extends beyond the powers provided in a particular provision, then they could seek review by the courts.To identify the purpose or object of the provision proposed to be modified, the Commissioner would consider any material that would assist in ascertaining the purpose or object of the provision. The Commissioner should also consider extrinsic materials, as permitted by s 15AB of the Interpretation Act.
(2) The Commissioner considers the modification to be reasonable, having regard to both the purpose or object of the relevant provision and whether the costs of complying with the provision are disproportionate to achieving the purpose or object. As the Remedial Power is discretionary, the Commissioner may choose to take into account other matters when determining whether it is appropriate to exercise the power, such as the extent to which the modification is favourable to entities, the extent to which the modification has any adverse direct impact on the tax liability of a third party and the impacts on any current judicial interpretation of the relevant law. The Commissioner may also decide whether the instrument would operate prospectively or retrospectively, and this is at the Commissioner’s discretion.
(3) The Treasury or the Department of Finance advises the Commissioner that any impact on the Commonwealth Budget would be negligible. The explanatory memorandum or exposure draft legislation does not provide any information on what would be considered “negligible”.
Before exercising the power, the Commissioner must be satisfied that an appropriate and reasonably practicable consultation has been undertaken. All implications to ensure the exercise of the power would need to be considered, and that the exercise of the power is appropriate in the circumstances.
It is a power of last resort and therefore all other options available to the Commissioner must be considered and found not to provider a suitable solution. Other options to be exercised first would include applying purposive principles to the interpretation of legislation, using general administration powers, or even amending the primary legislation.
Legislation: what is a disallowable instrument?
An act of parliament may delegate to the executive government the power to make delegated legislation. Delegated legislation consists of detailed rules and regulations which supplement primary legislation — for example, the Income Tax Assessment Acts or the Taxation Administration Act, and have the same legal force as primary acts.
Delegated legislation is not passed directly by parliament, but may however be “disallowed” by either House of Parliament. Parliament’s power to “disallow” delegated legislation comes from the Legislative Instruments Act 2003 (LIA).
Disallowable instruments must be tabled in parliament within six sitting days after registration, and are open to parliament to veto for a period of up to 15 sitting days. If parliament disagrees with the instrument, then it must be disallowed. A motion to disallow must be resolved within 15 sitting days after notice is given otherwise the instrument is deemed to have been disallowed. This ensures that once a notice of disallowance motion has been given, it must be dealt with, and the instrument cannot continue to be in force just because the motion has not been resolved. This strengthens the Senate’s oversight of delegated legislation.
What does this mean for taxpayers?
The Remedial Power will provide a useful way for the Commissioner to deal with unforeseen or unintended outcomes of a taxation or superannuation law. It will do this by reducing uncertainty where there are small technical issues, and will assist in the administration of the law, ensuring that it achieves its intended purpose and not an anomalous outcome.
Overall, the changes aim to reduce the regulatory burden that currently exists for individual and business taxpayers.
One important point is that to ensure particular entities are not adversely impacted by a modification, there would be no application of an exercise of the Remedial Power, if it results in a less favourable outcome than what would have been the result if the relevant provision in the law had not been modified. The particular modification would be treated to have no effect to the entity. This is done by an entity self-assessing whether the modification is less favourable to it, and whether it must treat the modification as not applying.
Finally, the explanatory memorandum also considers neutral circumstances, such as where a taxpayer’s tax liability for the relevant year does not change, but its compliance costs are reduced. The Commissioner may still exercise the Remedial Power and make a legislative instrument, and this would apply to the taxpayer as it is considered favourable because it has reduced compliance costs.