House of Representatives

New Business Tax System (Consolidation and Other Measures) (No. 2) Bill 2002

New Business Tax System (Venture Capital Deficit Tax) Bill 2003

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 10 - Technical and consequential amendments for collection of unpaid group debts

Outline of chapter

10.1 This chapter explains technical amendments to Division 721 of the ITAA 1997, and amendments consequential to the introduction of the Division. Division 721 deals with liability for payment of tax and tax-related liabilities where the head company of a consolidated group fails to pay on time.

Context of reform

10.2 The May Consolidation Act inserted Division 721 of Part 3-90 into the ITAA 1997. The Division specifies what happens where the head company of a consolidated group fails to satisfy a group income tax-related liability by the due and payable date. The Division provides that the head company and each of the contributing members of the group are joint and severally liable to pay the group liability, unless the liability is covered by a TSA, in which case the members are liable according to that agreement.

10.3 The technical amendments to Division 721 are required to ensure that the Division operates as intended and is compatible with existing administrative provisions. The consequential amendments are required to ensure that the Division is compatible with the other provisions in the current law.

Summary of the amendments

10.4 The amendments will make a number of changes to provisions of the ITAA 1997. These changes are required to ensure that the consolidation liability rules operate as intended.

10.5 The franking provisions for consolidated groups in Division 709 are amended to ensure that payments of group debts by contributing members, and refunds of group tax to contributing members, will give rise to credits and debits only in the franking account of the head company.

10.6 The table of tax-related liabilities in Division 721 to which the consolidation liability provisions apply is amended to include references to GIC liabilities under section 45-870, and to certain administrative penalties under Divisions 284, 286 and 288 in Schedule 1 to the TAA 1953.

10.7 The provisions in Division 721 which specify when a joint and several liability or a TSA liability are due and payable, and the requirements for notification of the liability, are amended to address situations where the group liability is GIC. The GIC will be due and payable on the day of notification.

10.8 A new provision is inserted into Division 721 to provide that the liability of contributing members under a TSA is separate from but linked to that of the head company for the particular group liability. The new provision will also specify how payments made by a contributing member or by the head company towards discharging the group debt are offset against the other linked liabilities.

10.9 The consequential amendments will insert references to the joint and several liability and TSA liability into the list of tax-related liabilities to which the general recovery provisions in Part 4-15 in Schedule 1 to the TAA 1953 apply.

Comparison of key features of new law and current law
New law Current law
Where a contributing member that has left the group makes a payment in discharge of a joint and several group liability, a credit will only arise in the franking account of the head company. If an amount paid towards a group debt is refunded to a contributing member, a debit will only arise in the head company's franking account. Where a contributing member that has left the group makes a payment in discharge of a joint and several group liability, a credit may arise in the franking account of the head company and the franking account of the contributing member. Refunds of group tax to a contributing member will result in a debit in both franking accounts.
The list of tax-related liabilities to which Division 721 applies will include GIC for PAYG instalments, and certain administrative penalties. Division 721 applies to tax-related liabilities listed in the table in subsection 721-10(2). The table does not currently include GIC for PAYG instalments, or administrative penalties.
A group GIC liability that is not paid on time is a joint and several liability or TSA liability of a contributing member. The liability is due and payable at the end of the day on which the Commissioner gives the member written notice of the liability.

When a group liability is GIC that is payable for a day in respect of an unpaid primary group liability, the Commissioner will be taken to have given notice to a contributing member of the GIC that is payable for a subsequent day on that subsequent day. The GIC will be due at the end of that subsequent day.

The law does not specify how a group GIC liability that is not paid on time accrues to contributing members. The current notification rules are not appropriate for GIC.
The liability of the group and the liabilities of the contributing members are separate liabilities but are linked. When an amount is paid or applied towards discharging the TSA liability, the linked group liability is discharged by the same amount.

When a payment by the head company results in the amount unpaid on the TSA liability exceeding the amount unpaid on the linked liability at that time, the TSA liability is discharged to the extent of the excess. The TSA liability is not reduced if there is no excess.

The law does not clearly specify the linked nature of the liability of the head company and the liability of TSA contributing members. The law also does not specify how payments are to be offset against these linked liabilities.
The table of debts to which recovery provisions in Part 4-15 in Schedule 1 to the TAA 1953 apply includes TSA liabilities arising under Division 721. Joint and several liabilities are referred to in a note to the table. The table of debts to which recovery provisions in Part 4-15 in Schedule 1 to the TAA 1953 apply does not refer to the joint and several liability and TSA liabilities arising under Division 721.

Detailed explanation of the amendments

Franking credits and debits

10.10 The general principle governing the operation of franking accounts for consolidated groups is that a transaction will give rise to a change in the franking account of the head company only. Section 709-65 provides that the franking account of a subsidiary member does not operate during the period of consolidation. Sections 709-70 and 709-75 provide that payments and refunds that would give rise to credits and debits in the franking account of the subsidiary, instead give rise to credits or debits of the same amount in the account of the head company.

10.11 A member of a consolidated group may exit the group but will remain liable to pay the joint and several liability arising under Division 721. The franking account of the member is re-activated when the member leaves a consolidated group. A franking credit would arise in the contributing member's franking account if the member makes a payment in discharge of a joint and several liability for which it is liable after the time of leaving ( leaving time ). Similarly, a debit will arise in its franking account where there is a refund of an amount to the exited contributing member. These credits and debits are contrary to the intention of the imputation rules for consolidation that payments of group debts will give rise to credits and debits only in the franking account of the head company.

10.12 Section 709-95 is inserted into Division 709 to ensure that a payment of group tax by an exited member will not give rise to a franking credit for the member. The new section will apply if an entity ceases to be a subsidiary member and at or after the leaving time pays income tax or a PAYG instalment that would give rise to a credit in its franking account. The payment will not give rise to a credit at the crediting time in the franking account of the former subsidiary. The credit will instead arise in the franking account of the entity that was the head company at the leaving time. The group of which this company is the head company is described in the provisions as the old group to address cases where the group continues, as well as cases where consolidation ceases. [Schedule 14, item 1, section 709-95]

10.13 Section 709-100 is inserted to ensure that a refund of group tax to a contributing member that has exited the group does not give rise to a debit in the franking account of the contributing member. The provision is expressed in similar terms to section 709-95 The debit will instead arise in the franking account of the entity that was the head company at the leaving time. [Schedule 14, item 1, section 709-100]

10.14 Members are also liable to pay amounts under a TSA after leaving the group unless they satisfy the conditions specified in section 721-35. The key condition is that the member makes a payment to the head company before it leaves the group. However, credits and debits will not arise in relation to TSA liabilities because the TSA liability is a separate and distinct liability. The amount paid by the contributing member is an amount that will be credited against the group liability, but it does not itself represent a payment of income tax or of a PAYG instalment.

Additional tax-related liabilities to which Division 721 applies

10.15 Subsection 721-10(1) provides that Division 721 operates if a tax-related liability of the head company of a consolidated group mentioned in the table in subsection 721-10(2) is not paid or otherwise discharged in full by the time the liability became due and payable. The table in subsection 721-10(2) also specifies the period to which the tax-related liability relates. The table is amended to mention additional tax-related liabilities to which Division 721 is to apply, and the period to which the liability relates. The liability for GIC under section 45-875 in Schedule 1 to the TAA 1953 is inserted. The period is the instalment quarter to which the GIC relates. [Schedule 14, item 2, subsection 721-10(2), item 60 in the table]

10.16 The other liabilities inserted are administrative penalties in Schedule 1 to the TAA 1953 that arise in respect of the other liabilities listed in the table. The administrative penalties are a:

penalty for a tax shortfall under section 284-75;
penalty for a scheme shortfall under section 284-145;
penalty for failing to lodge documents on time under section 286-75; and
penalty for failure to keep or retain records under section 288-25.

[Schedule 14, item 2, subsection 721-10(2), item 65 in the table]

10.17 The relevant period for each of these administrative penalties is the period specified for the liability to which the penalty relates in the table in subsection 721-10(2). This will ensure that only penalties related to liabilities covered by the consolidation regime are subject to Division 721.

10.18 A number of the other administrative penalties specified in Division 288 are not included in the table because they relate primarily to liabilities that are not included in the consolidation regime such as GST and PAYG withholding liabilities. The penalty for preventing access is not included because it would not be possible in practice to determine whether the penalty applies to a liability within the scope of Division 721.

Application of general interest charge

10.19 Subsections 721-15(5) and 721-30(5) require the Commissioner to provide written notice of a joint and several liability or a TSA liability to the person liable. The debt is due 14 days after the date of notification. This notification rule would create difficulties for GIC, because GIC continues to accrue for each day during the 14 day notification period. The amount notified would not represent the full amount of the liability.

10.20 This difficulty is overcome for joint and several liabilities by inserting a new rule into section 721-15 to specify the due date for group GIC liabilities that are not paid on time. The rule will provide that where the group liability is GIC, the liability becomes due and payable at the end of the day on which the Commissioner gives written notice to the contributing member of that liability. [Schedule 14, item 3, subsection 721-15(5A)]

10.21 A new section will also be inserted to address joint and several liabilities to GIC that subsequently accrue on an unpaid group liability. When a group liability is GIC that is payable for a day in respect of an unpaid primary group liability, the Commissioner will be taken to have given notice to a contributing member of the GIC that is payable for a subsequent day on that subsequent day. The GIC will be due for each subsequent day at the end of that day. [Schedule 14, item 4, section 721-17]

10.22 Similar rules are inserted into Division 721 to specify the due date and notification of TSA liabilities. Subsection 721-30(5A) provides the same new rule for TSA liabilities as that provided for joint and several liabilities by subsection 721-15(5A). Section 721-32 is inserted to specify for TSA liabilities the same rule specified for joint and several liabilities by section 721-17. [Schedule 14, items 5 and 6, subsection 721-30(5A) and section 721-32]

10.23 These rules will ensure that GIC liabilities for which contributing members are joint and severally liable or liable under a TSA are payable at a time that is consistent with the general GIC rules. The general rule is section 8AAE of the TAA 1953, which provides that GIC for a day is due and payable to the Commissioner at the end of that day.

Tax sharing agreement liability and group liability are linked

10.24 Section 721-25 creates a liability for the TSA contributing member separate and distinct to the liability of the head company for the group liability. Although separate and distinct, the TSA liability is linked to the group liability to which it relates for the purpose of offsetting payments. Section 721-40 is inserted to describe this characteristic of these liabilities. [Schedule 14, item 7, subsection 721-40(1)]

10.25 Section 721-40 also specifies how payments are to be offset in discharge of the TSA liability and the linked group liability. When an amount is paid or applied towards discharging the TSA liability, the linked group liability is discharged by the same amount. [Schedule 14, item 7, subsection 721-40(2)]

10.26 A separate rule is specified for offsetting payments by the head company against the TSA liabilities. When a payment by the head company results in the amount unpaid on the TSA liability exceeding the amount unpaid on the linked liability at that time, the TSA liability is discharged to the extent of the excess. The TSA liability is not reduced if there is no excess. This rule will ensure that TSA liabilities remain in existence until the group liability is fully discharged. Without this rule a payment towards a group liability could discharge the TSA liabilities of the contributing members to an amount less than the unpaid amount of the group liability. Where the group liability is fully discharged, the unpaid TSA liabilities that are outstanding at that time are reduced to nil to reflect the full discharge of the group liability . [Schedule 14, item 7, subsection 721-40(3)]

10.27 These new rules will operate for a liability under a judgement in the same way as they will operate for the TSA liability or group liability on which the judgement is based. [Schedule 14, item 7, subsection 721-40(4)]

10.28 The new rules in section 721-40 do not discharge a liability to a greater extent than the amount of the liability. [Schedule 14, item 7, subsection 721-40(5)]

10.29 Rules of this kind are not required for joint and several liability, as the obligation of the head company and each contributing member is for the one and same liability, rather than for separate but linked liabilities.

Consequential amendments to the TAA 1953

10.30 The tables in subsections 250-10(1) and 250-10(2) of Schedule 1 to the TAA 1953provide an index to the tax-related liabilities to which the recovery rules in Part 4-15 of that Act apply. Tax-related liabilities for which a contributing member of a consolidated group is joint and severally liable are also to be recoverable under Part 4-15 of the TAA 1953. However, a reference to section 721-15 would not fit within the current structure of the tables because the section does not by itself impose a liability, rather it specifies the joint and several nature of a group liability. A note is inserted after subsection 250-10(1) to make clear that members and former members of a consolidated group may be jointly and severally liable to pay the tax-related liabilities. [Schedule 14, items 8 and 9, subsection 250-10(1) note 2]

10.31 The table in subsection 250-10(2) is amended to include a reference to section 721-30 of the ITAA 1997, which specifies when the amounts payable under a TSA are due and payable. [Schedule 14, item 10, subsection 250-10(2), item 39 in the table]

10.32 The note inserted after the table in subsection 250-10(1) is also inserted after the table in subsection 250-10(2) to make clear that members and former members of a consolidated group may be jointly and severally liable to pay the tax-related liabilities. [Schedule 14, items 11 and 12, subsection 250-10(2) note 2]

Application provisions

10.33 The amendments will apply from the date of commencement of the consolidation regime, which is 1 July 2002.


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