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House of Assembly - Fifty-Second Parliament, First Session (52-1)
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STATUTES AMENDMENT (LAND HOLDING ENTITIES AND TAX AVOIDANCE SCHEMES) BILL

Committee Stage

In committee.

(Continued from 17 May 2011.)

Clause 7.

The Hon. I.F. EVANS: Dealing with clause 7 and moving on in the bill to new section 92, which deals with land assets, I want to clarify the wind farm issue that the Australian Law Council raised in relation to whether the wind farm asset, which is an electricity asset under section 36A of the Electricity Act 1996, becomes an improvement that could be included in the land assets of a fee simple company.

The example that the Law Council gives is that a farm has a company that owns a portion of the farming land used by the farmer. The company leases the land to the wind farmer, which is also a company (so the two companies have a relationship). The farmer derives rent that is not overly significant in terms of the total income of the farmer and his controlled entities in farming in a good year. The value of the wind farm equipment erected on the land is many millions. So the value of the asset is a lot higher than the income earned, necessarily, by the farmer through other means. At the end of the lease the wind farmer has the right to remove the wind farm improvements, so they are not the farmer's assets as such. Section 36A of the Electricity Act provides:

Subject to any agreement in writing to the contrary, the ownership of electricity infrastructure constructed or installed for operation by an electricity entity is not affected by its affixation or annexation to land.

So, the wind farm is an electricity entity under the act. In these circumstances, under these provisions—which is under provisions 92, the land asset provision in the bill—the value of the wind farm improvements could be included in the land assets of the fee simple company, as a fixture or fixed in addition to their being an asset of the wind farmer company. In both situations the item is used in connection with the land, though in substance it is used by the wind farmer in connection with a wind farm business of generating electricity. The parties should know with certainty what their position is. They should not have to go to the commissioner to exercise a discretion and possibly to resort to courts if he or she for some reason is not satisfied sufficiently to exercise the discretion.

The reason they raised that is that, under 92 and land assets, a land asset relative entity's interest in land will be taken to include an interest in anything fixed to the land. So, as a lessee or lessor, do they have an interest in that infrastructure that is fixed to the land? In the definitions earlier in the bill, an interest is defined as having an interest in a lease or a licence. This says:

...a relevant entity's interest in the land will be taken to include an interest in anything fixed to the land, including anything separately owned from the land—

which clearly a wind farm is—

or fixed to the land but notionally severed or considered to be legally separate to the land by operation of another act or law...

and it goes on. So, the Law Council of Australia asks that question about wind farms, and I would also ask the question what about other income generating assets: water pipes from SA Water that might run across your property, that have an easement, etc., those sort of things; what is the legal position of those under this particular provision?

The Hon. J.J. SNELLING: After much discussion, I am advised that under the provisions, yes, they would get caught up and, under a strict interpretation of the legislation, the turbines would be considered a fixture and would be taken into account when determining the value of the land. However, I am advised that in that circumstance the commissioner will use his discretion to not include the value of the turbines in determining the value of the land.

The Hon. I.F. EVANS: Minister, it is good of you to advise the house that the commissioner has already made up his mind to use his discretion in that circumstance to exempt. It may be a surprise to the commissioner that he has already made that decision because, ultimately, the commissioner has the discretion, and not the minister. If it is the government's intention that the commissioner always use his discretion to exempt them, why not simply write the legislation to exempt them and save the business the heartache of the commissioner possibly not exempting the provision?

What you have just told us, minister—and you were 14 minutes getting briefed on this question, for a submission that your department has had for months—is that the commissioner will use his discretion. There is no guarantee of that but, clearly, that is your intention as the government because you have just told the committee that the commissioner in those circumstances will use his discretion. Why do the companies have to go through this bureaucratic rot of writing to the commissioner, saying, 'Before I do this, will you give me an exemption? And, by the way, I will quote the minister in the Hansard. He said that you will.' Why do they have to go through that?

Why cannot the legislation be drafted to exempt them, because you have wind farms and the member for Stuart reminds me quite rightly that there are all the solar farms that are about to roll out, and there are other electricity assets that the member for Bragg raised. There are going to be a lot of these examples, and I cannot understand why the legislation simply cannot be drafted to give it an absolute rather than make them go through this discretion.

The Hon. J.J. SNELLING: It is simply because there are so many different possibilities and different permutations and combinations. My advice is that it is impossible to draft legislation in an all-encompassing way that would pick up every possible circumstance, and that is why we need to rely on the discretion of the commissioner to use common sense. I do not think it is that unreasonable to expect the commissioner to show common sense but, in this area, it is extraordinarily difficult to draft in such a way as to catch up every possible situation that may arise and every possible situation in which, unintentionally, people may get caught up by these provisions.

There are many other examples at both state and federal level where tax commissioners have to use their discretion and essentially apply rules of common sense in determining how the tax people pay is calculated. There is nothing particularly unusual in this. The area of taxation is incredibly complex, and we rely on the tax commissioner to use common sense and to use discretion.

Mr PEDERICK: I raise a concern that I have and the Farmers Federation also has. I refer to section 91(8), and I know we have just gone back a little way on the same clause. It is about the associations of people. Under section 91(8) various people will be associated which other if certain conditions are met; for example, if one is the trustee of a trust and the other is a beneficiary of the trust. There are other situations in which people will be associated with each other.

The circumstances in which a person might be associated with another person and, therefore, be part of the group is very wide. For example, typically in the context of a family trust the potential beneficiaries of the trust will be a large group of individuals, and for the purpose of the definition of 'associated' a person may be a part of a group by merely being the beneficiary of a trust. Even though that person is not a party to a dutiable transaction, they may be liable for duty simply because they are part of a group of associates.

I think we certainly need some more clarity around this clause because it says in one case that you are not dutiable, but then just being a beneficiary you may become dutiable. I guess the question is about how we protect beneficiaries who, first, may not have any idea that a commercial transaction has taken place. They could be family members, grandchildren, children or shareholders. It is a very broad clause and I am trying to work out how we make sure that people are aware of what is going on. I think it needs to be reworded a bit so that we are sure about who will not be caught up in this. I guess that is what I am asking.

The Hon. J.J. SNELLING: Essentially, the purpose of this clause is to prevent people splitting their interests in order to evade paying the tax that they should pay. The last clause provides:

...a person is not to be regarded as an associate of another if the Commissioner is satisfied that the association has not arisen as a result of a common commercial interest or purpose and they will act entirely independently of each other).

Just the fact that one might be a beneficiary and one might be a trustee, if they are acting independently they will not get caught under this provision. The other thing to point out is that, in order to be caught under this provision, the trustee and the beneficiary would both have to have an interest in the entity that has been taxed. They would only get caught in this provision if the trustee and the beneficiary both had an interest in the entity; so they would have to do that. Secondly, if the commissioner was satisfied that they were acting independently and that it was not just a tax avoidance measure, essentially, they would not get caught up by this provision.

Mr PEDERICK: In regard to that clause, Treasurer, I seek some further clarification. Are you saying that, if two directors of the company held under a trust and an interest in land have beneficiaries and one of those beneficiaries is a five-year-old child but may not be a listed director on the company acting for the family trust, the five year old would not be charged stamp duty on a transaction?

The Hon. J.J. SNELLING: If you have a trust that owns a land rich entity, that trust has trustees and beneficiaries. The beneficiaries are not caught under this provision just by virtue of being a beneficiary. They would have to have an interest in the land rich entity in their own right in order to be caught up under this provision. That is what this provision is providing for.

So, just by virtue of being a beneficiary of the trust that owns the entity, does not mean they get caught up under this provision. This provision is only for when the beneficiary of a trust has their own interest directly to the entity. So, for the five-year-old kid who is a beneficiary of the trust, that alone does not give them an interest in the land-rich entity. Only the trustee would have an interest in the land-rich entity.

To get to the other point of what this is trying to stop from happening, it does not matter what your age is, you still get caught up by conveyancing duties. There is no age limit on paying conveyancing duties. If you own an asset, the ownership of which is transferred, regardless of whether you are 12 months, five, 17 or 60, you still have to pay conveyancing duties and you cannot evade conveyancing duties by devolving your ownership of an asset to your children.

I do not think that is the point the member for Hammond is getting at. I think he is under the misunderstanding that this clause means that, simply being a beneficiary to a trust gives you an interest, for the tax purposes, in the asset, but it does not. Only the trustees have the interest in the asset. The beneficiaries do not have an interest in the asset.

Mr PEDERICK: In light of that answer then, Treasurer, why do we have written in new section 91(8)(f):

A person is an associate of, or associated with, another if—

(f) they are both trustees of a trust or one is a trustee of a trust—

and I am happy with that, but then—

and the other is a beneficiary of the trust.

I am sorry if I am confused, but it plainly says, 'and the other is a beneficiary of the trust'. That goes out to wide legal interpretation, if someone has a problem in the future.

The Hon. J.J. SNELLING: You have got to go back to the original intention. The original intention is to stop people splitting up their interests and devolving their interests in order to evade paying tax.

Mr Pederick: Yes, I am happy with that.

The Hon. J.J. SNELLING: So, the purpose of this is to stop you from doing that by providing a beneficiary from a trust a direct interest in the land-rich entity. Unless the beneficiary has a direct interest in the land-rich entity—and just by virtue of being a beneficiary that doesn't happen; that is not the case just by virtue of being a beneficiary, but if you are a beneficiary who has a direct interest in the land-rich entity, so not via the trust, a beneficiary straight to the land-rich entity, then you get caught. But you do not get caught just by virtue of being a beneficiary. So, you have to go back to what this is about. It is about associates, determining associates, and stopping people, essentially, splitting up their assets.

You could be a trustee in an entity and you could hive off a percentage of the ownership of that entity to a beneficiary of the trust. If you were to do that, then you would get caught under this provision, and that is what it is for. But you do not have an interest in the entity just by virtue of being a beneficiary.

Mr PEDERICK: Just to close on that point, and thank you for the explanation, Treasurer, I guess we just have to trust the wisdom of the commissioner at the time to invoke that final paragraph in brackets that 'the Commissioner is satisfied that the association has not arisen as a result of a common commercial interest', which, I guess, is what you just explained. I will make a couple of comments, and this is where I think the problem is with the legislation, that is, how it is written, because it is open to interpretation. You have gone through a lot of explanation about beneficiaries of trusts and whether or not they will be caught.

In paragraph (f) I can understand the first bit—one is a trustee of a trust—but then we have 'and the other is a beneficiary of the trust'. I do not know whether that section can be reworded to make it work legally, because I am not an expert, but I think there is potential for a lot of confusion in the future. Then we have the paragraph at the bottom:

(but a person is not to be regarded as an associate of another if the Commissioner is satisfied that the association has not arisen as a result of a common commercial interest or purpose and they will act entirely independently of each other.)

The Hon. J.J. SNELLING: It is really quite simple. You have a trust. The trust owns the land rich entity. Imagine a line between the trust and the entity. You have a beneficiary. The beneficiary is connected to the entity but only through the trust. The purpose of this clause is not in that circumstance to catch the beneficiary. The purpose of the clause is only to catch the beneficiary if they have a direct interest in the entity.

Unfortunately, displays are prohibited under standing orders but, if you can imagine, you have the trust and you have the entity: imagine a direct line coming between the trust and the entity. You have the beneficiary: there is a direct line between the trust and the beneficiary. The purpose of this clause in those circumstances is not to catch the beneficiary. The beneficiary has no interest in the entity: the beneficiary is simply a beneficiary of the trust. They are not caught under this provision and that is not the purpose of this provision. The purpose of this provision is only to catch them if the beneficiary has a direct interest in the entity. That is what this provision is for.

We are not trying to catch beneficiaries simply by virtue of them being beneficiaries. It is catching beneficiaries who have a direct interest in the entity. Only then would they come under this provision because they would be considered associates, unless, of course, the commissioner determined that they were acting completely independently of each other, in which case that opt-out clause would apply.

Mr PEDERICK: Thank you, Treasurer, for that explanation. I have not drafted an amendment but would it be better to have paragraph (f) reworded to say 'and the other is a beneficiary with a direct interest in land held under a trust'? I am just throwing that out as a suggestion to clear it up. I am no expert in trust law. I am off the land and rely on accountants and lawyers to give me advice, but I wonder whether there could be an amendment drafted. People here may think it is not necessary but I am sure it might cause a lot of debate in the future.

The Hon. J.J. SNELLING: It is not considered necessary because it is quite clear—I say, with tongue firmly in cheek—that what you are trying to do is determine what an associate is, and so there is no ambiguity, for those who understand tax law anyway.

The Hon. I.F. EVANS: Under new section 91(5) there is the issue of loan capital being ill-defined, or not defined, which I raised in my second reading contribution. Is it the government's intention to define loan capital, given it has been the subject of court cases overseas, and if not, why not?

The Hon. J.J. SNELLING: There is no intention to attempt to define it. I am advised that, if you attempt to define it, people will simply find a way around the definition that you offer. You are better off leaving it undefined, and if there is a controversy over what constitutes loan capital that will have to be resolved in the courts. If you try to define it, you will simply provide an opportunity for people to find ways around the provision.

The Hon. I.F. EVANS: The Treasurer will be pleased to know we are nearly there. Under new section 91(10), the industry groups have raised a concern that this provision appears to impose a liability upon group members and does not appear to be restricted only to members engaged in the transaction. It would appear that it can be applied to anyone who is a member of the group at the time and thus possibly used to recover from persons not involved in the transaction. New section 91(10) reads:

An obligation or liability imposed under this Part on a group attaches to the members of the group jointly and severally.

Is it the government's intention to have the duty apply to members of the group not involved in the transaction?

The Hon. J.J. SNELLING: I am advised this is the same as the current provision. Yes, it is the intention that if the money was not able to be recovered from the group, then the individual members of the group would become liable.

The Hon. I.F. EVANS: I am on to new section 98 now, still under clause 7. Unfortunately, clause 7 is one of these clauses that has everything under it.

The Hon. J.J. Snelling interjecting:

The Hon. I.F. EVANS: Very generous, that is right. On the issue of the $2 million threshold, did I hear you right yesterday when you said you were going to do those calculations to our questions and give them to us between the houses? You did? Thank you.

The Hon. J.J. Snelling: Will try to.

The Hon. I.F. EVANS: Section 99 (clause 8)—that's interesting, there is no clause 8. I don't know whether the industry group that has given me this question has—

The Hon. J.J. Snelling: It would probably be an earlier version.

The Hon. I.F. EVANS: It could be an earlier version, so I don't need to ask that question. We can ask it in the upper house if they have somehow written the wrong number down for us.

In relation to section 102C, which deals with recovery from an entity, the Law Council of Australia suggests that there should be an express restriction on the enforcement of any charge while an objection or appeal is pending. I am wondering whether the government intends to adopt that suggestion as an amendment in another place, to restrict the enforcement of any charge while an objection or appeal is pending.

The Hon. J.J. SNELLING: In cases where a new owner of an entity puts in an objection over the amount of duty payable, the objector does not have to pay the duty while the objection is being considered. However, a charge is put on the land to prevent the new owner from disposing of the land. The reason for that is that the new owner could sell the land belonging to the land rich entity, in which case the land rich entity would no longer be a land rich entity; it would just be a shell without any assets that the tax commissioner would be able to recover from.

Clause passed.

Clauses 8 and 9 passed.

Clause 10.

The Hon. I.F. EVANS: Clause 10 deals with some transitional provisions. In particular, the industry group has raised concerns about the retrospective effect of the general anti-avoidance provisions outlined in clause 10. It argues that the proposed section 10 provides for the general anti-avoidance provisions to continue to have an effect on a scheme carried out prior to it coming into force. The subsequent provisions prevent the commissioner from recovering duty and penalties insofar as taxes involved arose prior to the commencement of the provisions.

The effect is that the legislation will have a retrospective effect in relation to some transactions. It is most likely to have this effect in the land tax and payroll tax areas. Yesterday, when I raised this in my second reading contribution, there was some acknowledgement from the adviser that there may be an issue in relation to land tax and payroll tax. I seemed to get the impression that the adviser might have been nodding his head. Can the Treasurer explain to the house what his understanding is about the retrospective effect in relation to land tax and payroll tax of this bill?

The Hon. J.J. SNELLING: The purpose of this is just to make it workable. The retrospectivity does not mean that the tax commissioner is going to go back and do a retrospective assessment on the person from the date they entered into the arrangement. What it means is that, if they entered into the arrangement before the date the bill comes into operation, they can be taxed appropriately for the 2011-12 financial year.

I am just trying to think what is the best way to explain it. Without this provision, you would only be able to catch people who had entered into a tax avoidance arrangement after the operation of the bill. We do not want to go back and do a retrospective assessment and start collecting tax that they have not been paying for however long they have been in the tax avoidance arrangement. That is not the purpose of this transition.

They will only assess the tax from 1 July 2011 or from the day the bill comes into operation and forward from there, but if you did not have this provision then, unless they have entered into the arrangement after the date that the bill came into operation, you would not be able to get them to pay the appropriate rate of tax.

The Hon. I.F. EVANS: And I thought we had finished! I am confused on that one. You are going to have to walk that past me again. I think you are saying to me that it is possible under this legislation to have signed up an arrangement three months ago and, come 1 July, it is going to be taxed under the new arrangements, not the arrangements that were in force on the date on which the transaction was signed.

The Hon. J.J. SNELLING: This is only for avoidance.

The Hon. I.F. EVANS: There is nothing in the bill that says what avoidance is other than that it is at the commissioner's discretion.

The Hon. J.J. SNELLING: Yes.

The Hon. I.F. EVANS: Right; so none of us knows what avoidance is. None of us knows what avoidance is other than that it is what the commissioner thinks it is, so some poor soul has entered into a transaction in March and then is caught under a different tax regime come 1 July.

The Hon. J.J. SNELLING: No.

The Hon. I.F. EVANS: Then I have misunderstood your explanation, but that is how I understood your explanation. Run it past me again and I will see if I get it second time round.

The Hon. J.J. SNELLING: This is an anti-avoidance provision. This is to catch people who, as the legislation says, have entered into a blatant, artificial or contrived scheme.

The Hon. I.F. Evans: In the commissioner's view.

The Hon. J.J. SNELLING: No, ultimately in the court's view. Ultimately it would be up to a court to decide whether this person had entered into a blatant, artificial or contrived scheme. Without this provision, the person who had entered into such a scheme would only be able to be part-charged the proper rate of tax that they should pay if they entered into the scheme after the date this bill came into operation. So, the example you used of someone who had entered into a blatant, artificial or contrived scheme three months ago—so they had entered into the scheme before the bill came into operation—there would not be anything that the tax commissioner could do about them because they had entered into the scheme before the bill came into operation.

So, if someone had entered into an arrangement three months ago and this transitional provision was not there, the tax commissioner would not be able to do anything about them. They would continue to be able to operate their avoidance scheme. The only purpose for this provision is to make sure that, regardless of when they entered into the avoidance arrangement, they still get caught up. It is not there so that the tax commissioner can go back and retrospectively assess them, and make them pay how ever much tax they should have paid over the time that they were entered in the scheme. It is simply to make sure that, regardless of whether they entered into the scheme before or after the operation of the act, they still get caught up by this provision, and the tax commissioner can still make sure that they pay the appropriate rate of tax.

The Hon. I.F. EVANS: I will not hold you long on this, minister, because the house is about to adjourn, but how far back can the commissioner go in making the judgement about whether there is an avoidance scheme? I think you are telling me that he has open discretion to go back and look at any arrangement put in place—it could be two, three, four, five years ago if the commissioner so wants. Does that not then create uncertainty for people who entered transactions five years ago, say, and are suddenly going to get unwound or somehow found liable for this new level of tax?

If the scheme has been in place for four or five years, surely the scheme should stand. It should be the forward schemes that are dealt with under the anti-avoidance measures, otherwise the commissioner is going back is he not, and looking back three, four, five, six years, at all the arrangements and saying, 'I can ping this one; I can have a go at that one.' Is that not retrospective by its very nature?

The Hon. J.J. SNELLING: No, because, firstly, the commissioner is not going to try to recover against someone who has entered into one of these arrangements the tax they should have paid from the time they started paying, or not paying, the tax to the operation of this provision. The tax commissioner is not going to go and retrospectively assess someone under this provision.

For the purposes of the tax they pay, and the tax they should pay, it is only going to apply from the date the bill comes into operation. But, you are right, if Mr Blogs, for instance, entered into an avoidance arrangement five years ago, an arrangement which is blatant, artificial or contrived, a scheme to avoid tax, then if the commissioner is potentially able to prove in a court that this was a blatant, contrived or artificial scheme, he is only going to have to pay the proper rate of tax from the date of the operation of the act. He is not going to be retrospectively assessed.

Without this provision, in relation to the people who have entered into such an arrangement, whether it was three months ago or five years ago, the commissioner would have his or her hands tied. They would keep avoiding tax and there would be nothing the commissioner could do, because they entered into the scheme before the date the act came into operation. It is only retrospective if someone enters into a scheme before the operation of the act. The act will then be able to pick them up, but it will not be retrospective. The old lady, or whoever, is not going to have to pay tax back before the date that the act came into operation. They are only going to have to pay the appropriate amount of tax from the date the act comes into operation.

Clause passed.

Title passed.

Bill reported without amendment.

Third Reading

The Hon. J.J. SNELLING (Playford—Treasurer, Minister for Employment, Training and Further Education) (17:58): I move:

That this bill be now read a third time.

I thank the people who assisted in the drafting of the bill and provided advice to the house.

Bill read a third time and passed.


At 17:58 the house adjourned until Thursday 19 May 2011 at 10:30.

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