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Wide ranging beneficial ownership reforms proposed for Australia

12 December 2022 | Australia
Legal Briefings – By Andrew Rich and Jennifer Douglas

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The Australian Treasury has issued a Consultation Paper titled “Multinational Tax Integrity: Public Beneficial Ownership Register” relating to the Government’s proposal to introduce a public register of beneficial ownership information to record who ultimately controls, owns and receives benefits from a legal entity operating in Australia.

The proposal, if adopted, will have a very wide-ranging impact and will affect around 3 million Australian legal entities of all shapes and sizes, including large and small private companies, managed investment schemes, corporate collective investments vehicles and even family trusts.

IN BRIEF

  • The Government is proposing to introduce a public register of beneficial ownership information to record who ultimately owns, controls, and receives benefits from entities operating in Australia.
  • The reform is a key element of the Government’s commitment to ensuring multinational enterprises pay a fairer share of tax.
  • However, the proposed reforms are very wide ranging and will introduce significant regulatory and compliance burden on millions of entities which have absolutely nothing to do with the tax avoidance practice of MNEs.
  • Listed entities are expected to continue to identify their beneficial ownership through the substantial holding notice and tracing notice regimes. Whilst it is not proposed that listed entities would be required to maintain a beneficial ownership register, the Government is considering opportunities to expand and harmonise these regimes.

The Proposal

The Treasury has issued a Consultation Paper titled “Multinational Tax Integrity: Public Beneficial Ownership Register” relating to the Government’s proposal to introduce a public register of beneficial ownership information to record who ultimately controls, owns and receives benefits from a legal entity operating in Australia. The proposal, if adopted, will have a very wide-ranging impact and will affect around 3 million Australian legal entities of all shapes and sizes, including large and small private companies, managed investment schemes (MISs), corporate collective investments vehicles (CCIVs) and even family trusts.

The stated basis for the proposal

The proposal to introduce a public register of beneficial ownership information is part of the Government’s election commitment to ensure that multinational enterprises (MNEs) pay a fairer share of tax.

The Consultation Paper states that reform is required to further align Australia with international standards and to address gaps in regulatory coverage.

The Consultation Paper suggests the current lack of transparency surrounding beneficial ownership information provides an opportunity to:

  • conceal ownership of assets through overseas companies or trusts to evade tax liabilities, debts, or sanctions laws
  • launder money and disguise the true ownership of assets acquired with illegally obtained wealth
  • conceal related party transactions and other dealings which are not at arm’s length.

The definition of beneficial ownership

It is proposed that Australia largely adopts the UK approach to beneficial ownership and requires a regulated entity to include on their beneficial ownership register any entity or individual who either:

  • holds, directly or indirectly, 20% of the shares or units in the regulated entity;
  • holds, directly or indirectly, 20% of the voting rights in the regulated entity;
  • holds the right, directly or indirectly, to:
    • appoint or remove a majority of the directors of the regulated entity (where the regulated entity is an unlisted proprietary or unlisted public company);
    • appoint or remove the regulated entity’s responsible entity (where the regulated entity is a MIS); or
    • appoint or remove the regulated entity’s corporate director (where the regulated entity is a CCIV); or
  • has the right to exercise, or actually exercise, significant influence or control over the regulated entity.

In recognition that regulated entities may not always be aware of all beneficial owners, it is also proposed that ultimate beneficial owners must identify themselves and provide relevant information to the relevant regulated entity.

The content and availability of beneficial ownership registers

The beneficial ownership register would be required to include the following information for:

  • Natural Persons: full name, full date of birth, address for communication and service and residential address, nationality, nature of control or influence and the date the person became or ceased to be a beneficial owner;
  • Companies, Registered MISs and CCIVs: name, registered office address, electronic address, entity type, date of registration, country of registration, registration number, nature of control or influence and date the person obtained or ceased to have control or influence; and
  • Trusts: name, unique superannuation identifier, date of creation and information on trustees, beneficiaries, appointors, settlors and any other member of the trust.

The Consultation Paper is seeking feedback on privacy considerations.

Enforcement

The proposed new regime contains an unusual approach to enforcement and compliance: largely outsourcing compliance responsibility onto the relevant entities themselves.

Penalties would apply to regulated entities, their officers, and the beneficial owners for non-compliance with the new regime.

The regulated entity would be given the power to request information from persons it suspects to be a beneficial owner. If the person does not provide them with this, they would have the power to issue a “warning notice” and if the information was still not provided they may serve a “restrictions notice” to prevent the person from dealing in their interests. Specifically, this would prevent a person from selling or transferring their interest or exercising any rights associated with the interest and would prevent a regulated entity from issuing securities with respect to that interest or making any payment in respect of the interest (unless the regulated entity is liquidated).

What does the proposal say in respect of listed entities and the existing substantial holding and tracing notice regimes?

The Consultation Paper states that listed entities are expected to continue to identify their beneficial ownership through the substantial holding notice and tracing notice regimes in the Corporations Act. It is therefore proposed that listed entities would not be required to maintain a beneficial ownership register. However, the Government is considering opportunities to expand and harmonise these regimes and the Consultation Paper poses a number of questions in relation to potential changes to the regimes.

The Government is proposing to strengthen the existing enforcement regime applying to listed entities in respect of the substantial holding notice and tracing notice regimes. Under the new arrangements, ASIC would have powers to make orders restraining the disposal, acquisition, and exercise of rights attached to interests in listed entities where satisfied a person has, without reasonable excuse, failed to comply with the substantial holding notice or tracing notice regimes.

Commentary

As noted above, the proposed beneficial ownership register is part of the Government’s election commitment to ensure that MNEs pay a fairer share of tax.

However, the proposal goes way further than that and, on one view, represents a significant policy overreach and will impose a significant regulatory and compliance burden on millions of entities (including ‘mum and dad’ businesses and family trusts) which have absolutely nothing to do with the tax avoidance practice of MNEs. Describing the proposed new regime as a proverbial ‘sledgehammer to crack a walnut’ would be apt to describe just how wide-ranging the proposed reforms are.

The compliance cost of the proposed new regime should not be understated. For example, if the cost of compliance per entity is, say, $1,000 on average (noting that there is both an obligation to create the register and an ongoing to keep it updated), this would translate to the imposition of a $3 billion cost onto Australian entities. One might query how this could be considered proportionate, reasonable and justifiable in light of the fact that the policy objective of the proposed reform is to address the tax avoidance practice of MNEs.

If the proposed reform really is about ensuring that MNEs pay a fairer share of tax, then surely a more efficient and appropriate way of achieving this policy objective would be to define what a MNE is in the applicable legislation and then to require only those entities to prepare a public register of beneficial ownership.

Finally, the European Court of Justice (ECJ) held on 22 November 2022 that public access to the European Union’s (EU’s) equivalent of the beneficial ownership register constituted a serious interference with fundamental rights. The EU provisions provided access to the name, month and year of birth, nationality, country of residence, and nature and extent of the beneficial ownership to any member of the public and to any relevant government authorities. This was a departure from the previous requirement that the person or organisation seeking access to the information had to demonstrate a legitimate interest. The ECJ held that this breached Articles 7 and 8 of the Charter of Fundamental Rights of the EU. Although this is European law, the decision highlights the significant potential privacy issues with the Government’s proposal.

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