House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

Commissioner's discretion for primary production elections

Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 to provide the Commissioner of Taxation with discretion to disregard certain events (for example, when a beneficiary becomes insolvent) that would otherwise trigger the assessment of certain income for a primary production trust, in the year of the event.

Date of effect : These amendments will apply to the 2005-06 income year and later income years.

The retrospective application of these amendments will give taxpayers the benefit of this favourable change for earlier years back to 2005-06.

Proposal announced : This measure was announced in Parliament by the Assistant Treasurer and Minister for Financial Services and Superannuation on 20 June 2011.

Financial impact : This measure is estimated to have a small unquantifiable cost to revenue over the forward estimates period. It is expected that some of that cost is a timing impact and is likely to be recovered in future years.

Compliance cost impact : Minimal.

Petroleum Resource Rent Tax: clarifying the taxing point

Schedule 2 to this Bill amends the Petroleum Resource Rent Tax Assessment Act 1987 to provide certainty regarding how the 'taxing point' is determined for the purposes of the Petroleum Resource Rent Tax (PRRT).

The taxing point is central to the determination of PRRT liabilities, and was recently considered by the Federal Court in Esso Australia Resources Pty Ltd v The Commissioner for Taxation [2011] FCA 360.

These amendments provide statutory reinforcement of the Federal Court's decision, affirming the long-established application of the PRRT law.

Date of effect : 1 July 1990.

The amendments apply retrospectively to remove any doubt about the long-established operation of the PRRT.

They do not impose any new tax burden, as the amendments merely clarify and confirm the current application of the PRRT, consistent with the policy intent.

Proposal announced : This measure was announced as part of the 2011-12 Budget.

Financial impact : Nil, as these amendments affirm the established application of the PRRT law.

Compliance cost impact : Nil.

Companies' non-compliance with PAYG withholding and superannuation guarantee obligations

Schedule 3 to this Bill strengthens directors' obligations to cause their company to comply with its existing pay as you go (PAYG) withholding and superannuation guarantee requirements. These amendments reduce the scope for companies to engage in fraudulent phoenix activity or escape liabilities and payments of employee entitlements by:

•

extending the director penalty regime to make directors personally liable for their company's unpaid superannuation guarantee amounts;

•

allowing the Commissioner of Taxation (Commissioner) to commence proceedings to recover director penalties three months after the company's due day where the company debt remains unpaid and unreported after the three months passes, without first issuing a director penalty notice; and

•

in some instances making directors and their associates liable to PAYG withholding non-compliance tax where the company has failed to pay amounts withheld to the Commissioner.

Date of effect : Broadly, these amendments will commence on the day on which this Bill receives Royal Assent.

Proposal announced : These proposals were announced in the 2011-12 Budget, confirming an election commitment of 8 August 2010.

Financial impact : The revenue impact of this measure is as follows:

Compliance cost impact : The compliance costs associated with this measure are estimated to be a small increase in compliance activities for certain directors and their associates. The costs, for the most part, are for companies who would be actively seeking to avoid their tax and superannuation obligations to gain an unfair competitive advantage.

Summary of regulation impact statement

Regulation impact on business

Impact : This Schedule deters companies from engaging in fraudulent phoenix activities and improves the regulatory environment for businesses that comply with the tax law by paying PAYG withholding to the Commissioner and superannuation guarantee for the benefit of employees. This is achieved by providing disincentives for companies and their directors that do not comply with their tax law and employee obligations.

Main points :

•

These amendments are not expected to increase compliance costs or operating costs for companies or company directors who are already causing their company to comply with its existing tax or superannuation obligations.

•

These amendments reduce the incentive for companies to engage in fraudulent phoenix activities or to avoid payment of liabilities in order to undercut other companies who are complying with their tax and superannuation obligations.

•

Expanding the director penalty regime to superannuation guarantee improves the likelihood that employees receive the superannuation contributions they are entitled to.

Consequential amendments for taxation of gaseous fuels

Schedule 4 to this Bill makes minor consequential amendments to the taxation arrangements for gaseous fuels. The changes ensure that the legislation applies as intended and does not impose excessive compliance costs on industry.

Date of effect : These amendments apply from 1 December 2011.

Proposal announced : This measure has not previously been announced.

Financial impact : The revenue impact of this measure is negligible and while not zero, has been rounded to zero in the forward estimates.

Compliance cost impact : These amendments minimise industry compliance costs.

Chapter 1 - Commissioner's discretion for primary production elections

Outline of chapter

1.1 Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide the Commissioner of Taxation (Commissioner) with discretion to disregard certain events (for example, when a beneficiary becomes insolvent) that would otherwise trigger the assessment of certain income for a primary production trust, in the year of the event.

Context of amendments

1.2 The income tax law contains provisions allowing taxpayers to defer taxation liabilities on income from certain primary production activities which have been affected by certain diseases and natural disasters (Division 385).

1.3 Subdivision 385-E allows taxpayers to access two forms of concessional tax treatments through an election to either defer or spread profits made on the death and forced disposal of livestock.

1.4 Subdivision 385-F allows taxpayers who receive insurance proceeds for the loss of livestock or trees, which would otherwise be assessable, to spread that income.

1.5 Subdivision 385-G allows taxpayers to defer for one year the profit on the sale of a second wool clip in a year, if natural disasters were the reason for the taxpayers having to shear twice in one income year.

1.6 The concessional treatment under these provisions continues until such time a 'disentitling event' occurs. When a disentitling event occurs, the concession immediately ends and any unassessed portion of the profit is included in the assessable income of the trust, in the same income year. Disentitling events can occur at both the trustee level (for example, when the trustee leaves Australia permanently) and the beneficiary level (for example, when the beneficiary dies).

1.7 Prior to the re-write of the income tax laws under the Tax Law Improvement Project, a Commissioner's discretion existed in the corresponding provisions in the Income Tax Assessment Act 1936.

1.8 Under the former rules, the Commissioner could, broadly speaking, determine that the concession ended and any untaxed profit be included in the assessable income of the taxpayer who made the election if that taxpayer or a beneficiary of the trust died, became bankrupt or left Australia permanently.

1.9 The removal of the Commissioner's discretion was part of a broader approach by the Tax Law Improvement Project of removing discretions pertaining to liability. However, the removal of the discretion can potentially result in harsh outcomes where a trust carries on the primary production business and the disentitling event happens to a beneficiary.

Summary of new law

1.10 This Schedule amends the primary production provisions under Division 385 of the ITAA 1997 to introduce a Commissioner's discretion to ignore certain disentitling events relating to a beneficiary of a primary production trust.

1.11 This Schedule also repeals the death of a beneficiary as a disentitling event from Division 385.

1.12 These amendments will apply retrospectively from the 2005-06 income year and later income years.

Comparison of key features of new law and current law

Detailed explanation of new law

1.13 This Schedule introduces a discretion for the Commissioner to ignore certain disentitling events for a primary production trust which has made an election under Division 385 of the ITAA 1997. The Commissioner in exercising this discretion must have regard to the factors under subsection 385-163(5). [ Schedule 1, item 2, subsections 385-163(4) and ( 5 )]

1.14 The Commissioner's discretion relates to disentitling events that occur at a beneficiary level of a primary production trust. These events include when a beneficiary becomes bankrupt, or leaves Australia permanently. [ Schedule 1, item 2, paragraph 385-163(4)(a )]

1.15 The Commissioner's discretion is confined to events that affect beneficiaries and does not apply to disentitling events that occur at trustee level.

1.16 In exercising this discretion, the Commissioner must take into account certain factors. These are:

•

the nature of the disentitling event to which subsection (3) applies;

•

any relevant circumstances relating to a beneficiary mentioned in paragraph (3)(c) or (d);

•

any other relevant circumstances relating to the trust; and

•

any other matters the Commissioner considers relevant.

[ Schedule 1, item 1, paragraph 385-163(4)(b) and subsection 385-163(5) ]

1.17 The death of a beneficiary as a disentitling event has been repealed as it is difficult to contemplate circumstances where it would not be appropriate for the Commissioner to exercise a favourable discretion. [ Schedule 1, item 1, paragraph 385-163(3)(a )]

Example 1.1

The Chua trust carries on a primary production business. During the 2011-12 income year, the trust is forced to dispose of livestock because of drought and realises a profit of $20,000.

Stephen is the trustee of the Chua trust and makes an election under section 385-130 to spread the $20,000 over five years.

Jonathan is a beneficiary of the Chua trust and declares bankruptcy during the 2013-14 income year. As the bankruptcy of a beneficiary is a disentitling event which is covered by the discretion under paragraph 385-163(4)(a), the Commissioner may make a determination that the disentitling event did not happen, having regard to the factors under subsection 385-163(5).

As the Commissioner is satisfied that it would be fair and reasonable to exercise the discretion, having regard to the factors under subsection 385-163(5), the spreading election for the Chua trust continues.

Example 1.2

The Robinson trust carries on a primary production business. During the 2012-13 income year, the trust is forced to dispose of livestock because of drought and realises a profit of $85,000.

Kevin is the trustee of the Robinson trust and makes an election under section 385-130 of the ITAA 1997 to spread the $85,000 over five years.

Krispin is a beneficiary of the Robinson trust and in the 2014-15 income year decides to leave Australia permanently. As a beneficiary leaving Australia permanently is a disentitling event which is covered by the discretion under paragraph 385-163(4)(a), the Commissioner may make a determination that the disentitling event did not happen, having regard to the factors under subsection 385-163(5).

The Commissioner, after considering all the factors under subsection 385-163(5), determines it is not fair and reasonable to exercise the discretion in this instance. As a result, the spreading election for the Robinson trust ends in the 2014-15 income year.

Example 1.3

The Muscat trust carries on a primary production business. During the 2011-12 income year, the trust receives an insurance recovery of $10,000 for the loss of some trees because of fire.

Hugh is the trustee of the Muscat trust and makes an election under section 385-130 of the ITAA 1997 to spread the $10,000 over five years.

Hugh decides to leave Australia permanently in the 2014-15 income year. The spreading election for the Muscat trust will automatically end in the 2014-15 income year, as the Commissioner's discretion only extends to a beneficiary leaving Australia permanently under subparagraph 385-163(4)(a)(ii).

1.18 The Commissioner's determination must be made in writing. [ Schedule 1, item 1, subsection 385-163(6 )]

1.19 The Commissioner must give the trustee of the trust a copy of the determination. [ Schedule 1, item 1, subsection 385-163(7 )]

Application and transitional provisions

1.20 These amendments are to apply to trusts for the 2005-06 income year and later income years. [ Schedule 1, item 2 ]

1.21 The retrospective application of the amendments is to give taxpayers the benefit of this favourable change for earlier years back to 2005-06.

Consequential amendments

1.22 The standard time limitations on amending an assessment do not prevent the Commissioner from amending an assessment for the purposes of giving effect to the proposed change. [ Clause 4 ]

Chapter 2 - Petroleum Resource Rent Tax: clarifying the taxing point

Outline of chapter

2.1 Schedule 2 describes amendments to the Petroleum Resource Rent Tax Assessment Act 1987 (PRRTAA 1987) to provide certainty about the location of the taxing point for the purposes of the Petroleum Resource Rent Tax (PRRT).

2.2 The amendments do this by clarifying what constitutes a 'marketable petroleum commodity' under the PRRTAA 1987. Where marketable petroleum commodities are produced, within a petroleum operation, is central to the determination of the taxing point.

2.3 These amendments confirm the long established application of the PRRTAA 1987 in relation to the taxing point. This application was recently affirmed by the Federal Court.

Context of amendments

The Petroleum Resource Rent Tax

2.4 The PRRT is a tax of 40 per cent of certain taxable profits derived from the extraction and processing of petroleum recovered in Commonwealth waters (but excluding the North West Shelf project area). The PRRT was imposed by the Petroleum Resource Rent Tax Act 1987, and is assessed under the PRRTAA 1987.

2.5 The PRRT was extended to the Bass Strait project with effect from 1 July 1990.

The operation of the PRRT

2.6 The PRRT is assessed on a petroleum project basis, and is levied on the 'taxable profit' derived by a person in a financial year from a petroleum project. Taxable profit is calculated by deducting the person's eligible project expenses from their assessable receipts derived from the project.

2.7 Deductible expenditure broadly includes those expenditures, whether capital or revenue in nature, which are directly incurred in relation to the petroleum project.

2.8 Assessable receipts primarily comprise the consideration receivable from the sale of petroleum, or marketable petroleum commodities produced from the petroleum, recovered from a project, or their market value where they become 'excluded' other than by sale.

2.9 Where a taxpayer incurs deductible expenditure that exceeds their assessable receipts in a financial year, the excess is carried forward and uplifted to be deducted against assessable receipts derived by the person in future years.

What is a petroleum project?

2.10 Under the PRRTAA 1987, a 'petroleum project' is taken to exist when there is a production licence in force (see subsection 19(1) of the PRRTAA 1987).

2.11 A petroleum project incorporates the activities, facilities and other things related to the recovery of petroleum from the production licence area. A petroleum project also includes such treatment, transport and other facilities and operations integral to the production and initial on-site storage of the petroleum recovered and marketable petroleum commodities produced prior to them becoming 'excluded commodities' (see subsection 19(4) of the PRRTAA 1987).

2.12 The fact that what constitutes a 'petroleum project' is defined by reference to the activities associated with the recovery of petroleum and production of marketable petroleum commodities up to the point of their exclusion - rather than by prescribing particular processes for which relevant activities may be carried on - ensures that the PRRT can be applied in a practical manner to the various types of petroleum project operations that may arise.

What is a marketable petroleum commodity?

2.13 A marketable petroleum commodity is currently defined in section 2 of the PRRTAA 1987 to mean any of the following products produced from petroleum:

(a)

stabilised crude oil;

(b)

sales gas;

(c)

condensate;

(d)

liquefied petroleum gas;

(e)

ethane;

(f)

any other product declared by the regulations to be a marketable petroleum commodity;

not being a product produced from another product of a kind referred to in paragraphs (a) to (f).

2.14 Of these, 'sales gas', 'condensate' and 'liquefied petroleum gas' are further specified in section 2 of the PRRTAA 1987 by reference to their chemical composition. For instance, 'condensate' is specified as meaning a mixture that includes pentane and hexane where the pentane and hexane comprise more than 50 per cent by weight of the mixture. Similarly 'liquefied petroleum gas' means a mixture that includes propane and butane, where the propane and butane comprise more than 50 per cent by weight of the mixture.

The PRRT taxing point

2.15 The taxing point in relation to a particular petroleum project occurs where a 'marketable petroleum commodity' produced from project petroleum becomes an 'excluded commodity' (except in cases where petroleum is sold prior to a marketable petroleum commodity being produced). It is at this point that assessable receipts are brought to account, and up to which eligible project expenditures incurred are deducted to determine PRRT taxable profit.

2.16 In effect, the point at which a marketable petroleum commodity becomes an excluded commodity delineates the boundary between 'upstream' operations, which fall within the PRRT, and 'downstream' operations, which do not. Because it effectively defines the boundary of the PRRT project, the concept of the taxing point is fundamental to the operation of the PRRT.

2.17 Under the PRRTAA 1987, a marketable petroleum commodity becomes an excluded commodity when:

•

it has been sold;

•

after being produced, it has been further processed or treated;

•

it has been moved away from the place of its production other than to a storage site adjacent to that place; or

•

it has been moved away from a storage site adjacent to the place of its production.

2.18 Where the taxing point occurs was recently considered by the Federal Court in Esso Australia Resources Pty Ltd v The Commissioner for Taxation [2011] FCA 360 in relation to the Bass Strait project.

2.19 In that case, it was suggested that what constitutes a marketable petroleum commodity could be ascertained solely through reference to the relevant chemical compositions of particular marketable petroleum commodities specified in section 2 of the PRRTAA 1987, without having regard to the rest of the Act. Specifically, it was argued that a marketable petroleum commodity should be taken to be produced at the point in the production process where a substance first meets the specified composition component of the marketable petroleum commodity definition (for example, sales gas or liquefied petroleum gas), rather than the point at which processing is complete and the product is in its intended final form (whether for sale, use as feedstock for a downstream process, or for use as energy), consistent with how the PRRT has applied since commencement.

2.20 Under the narrow interpretation suggested in that case, a marketable petroleum commodity would become an excluded commodity following either movement away from the point at which it met the particular specification, or further modification of its composition. Similarly PRRT taxable profit would be determined at that point rather than the point at which the marketable petroleum commodity is in its final form, even though much of the operations to treat, transport, produce and initially store the marketable petroleum commodity in its final form may occur only after the point at which the marketable petroleum commodity arguably first meets the particular specification.

2.21 The Federal Court rejected this narrow interpretation, instead affirming the long established application of the PRRT in relation to the taxing point consistent with the policy intent.

2.22 Notably, the narrow interpretation would, in most cases, have significantly restricted the scope of what constitutes a petroleum project under the PRRT. In addition to being inconsistent with the intention of the PRRT being a tax on profit, the practical implications of such an interpretation include that:

•

the taxing point would, in many cases, occur at a point earlier than that at which a marketable petroleum commodity is sold, distributed offsite, or ready for processing into another commercial product, requiring a derived market value to be used to determine assessable receipts rather than the actual consideration received, significantly increasing uncertainty and complexity for taxpayers; and

•

the scope of activities related to a petroleum project would be artificially limited, reducing the expenditure which is deductible for PRRT purposes and excluding expenditure on the actual operations to treat, transport, produce and initially store the marketable petroleum commodity the taxpayer actually sells.

2.23 When the Bass Strait project transitioned to the PRRT on 1 July 1990, expenditures incurred prior to that date were made non-deductible on the basis that the project's establishment expenditures had been long recovered prior to the transition. Consequently, having the taxing point occur earlier in the production process, as argued, would have reduced the PRRT payable on the Bass Strait project due to the reduction in assessable receipts far outweighing any reduction in deductible expenditure.

2.24 However, the impact on other PRRT taxpayers would have been less certain, and potentially increased their tax liability. This is because having an earlier taxing point could well reduce the assessable receipts from a project by less than the reduction in deductible expenditure, compared to the intended taxing point.

2.25 The amendments in this Schedule put this matter beyond doubt, by clarifying that a marketable petroleum commodity is only produced when it is in its final form for its intended purpose (within the context of a particular project), and not at some earlier point part-way through the production process.

2.26 This Schedule also puts beyond doubt that the PRRT applies to, inter alia, profits relating to the production of marketable petroleum commodities from petroleum.

2.27 These amendments clarify the tax treatment of those projects currently subject to PRRT, consistent with its application since the PRRT commenced and which was affirmed by the Federal Court. This measure was first announced as part of the 2011-12 Budget.

Summary of new law

2.28 This Schedule amends the PRRTAA 1987 to address any remaining uncertainty regarding the location of the taxing point in relation to a petroleum project. It does this by explicitly inserting within the definition of what constitutes a 'marketable petroleum commodity' the requirement that, to be a marketable petroleum commodity, a product produced from petroleum must be in its final form for:

•

sale (if it is to be sold);

•

use as a feedstock for conversion to another product (if it is to be so used); or

•

direct consumption as energy (if it is to be so consumed).

2.29 Consistent with the existing law, a product cannot be a marketable petroleum commodity if it has been produced wholly or partly from something that was itself a marketable petroleum commodity.

Comparison of key features of new law and current law

Detailed explanation of new law

Definition of a 'marketable petroleum commodity'

2.30 These amendments address any remaining uncertainty regarding where the PRRT taxing point occurs in relation to a petroleum project following the Federal Court's decision in Esso Australia Resources Pty Ltd v The Commissioner for Taxation [2011] FCA 360. It does this by repealing the current definition of 'marketable petroleum commodity' and inserting a new definition. [ Schedule 2, items 1 and 2, section 2, definition of ' marketable petroleum commodity' ]

2.31 The basis for the PRRTAA 1987 defining marketable petroleum commodities on a specific product basis (stabilised crude oil, sales gas, condensate etc.) was to demarcate between upstream and downstream operations, reflecting the fundamental principle that the PRRT is a resource tax and does not extend to downstream activities such as refining and transportation of marketable commodities.

2.32 The current definition of a 'marketable petroleum commodity' requires that it be a 'product produced from petroleum'. In ordinary parlance, a product is the end-result of an activity or process, and production is not complete until the process has been completed and the product is in its final form.

2.33 Implicit in this, was the intention that a substance is not a marketable petroleum commodity until it is in its intended final form, notwithstanding the fact that the substance may have attained a specified composition part-way through a process. This intention is clearly reflected in the explanatory memorandum to the Petroleum Resource Rent Tax Assessment Bill 1987, which states:

'The boundaries of a petroleum project will not extend beyond the first point at which a marketable petroleum commodity is initially stored after production. That is, the project boundaries will not extend to "downstream activities" such as refineries and facilities for the transport of marketable products from that storage.'

'In the event that a marketable petroleum commodity is not sold at the point at or immediately after the point of initial on-site storage (e.g. where stabilised crude oil is refined by the producer), the market value at that point (or such other value as is fair and reasonable) will be treated as an assessable receipt of the project.'

2.34 To put this matter beyond doubt, these amendments make these elements of the definition of a marketable petroleum commodity explicit. Under the new law, for a product to be a marketable petroleum commodity it must, in addition to being one of the products listed in paragraphs (a) to (f) of that definition, be in its final form for:

(a)

sale, if it is to be sold;

(b)

use as a feedstock for conversion to another product, if it is to be so used; or

(c)

direct consumption as energy, if it is to be so consumed.

[ Schedule 2, items 1 and 2, section 2, definition of ' marketable petroleum commodity' ]

2.35 A product produced from petroleum is in its final form when it has been fully processed for its intended use (whether it be for sale, feedstock or otherwise used). The intended final form of the relevant product is a question of fact, and will be informed by the nature and commercial purpose of the activities comprising the particular petroleum operation in question.

2.36 In this context, 'conversion' is not intended to be limited to the case where a product is to be converted into a new product via chemical reaction. It also encompasses the case, for example, where the intention is to convert a product (such as sales gas), into another product with different physical properties (such as liquefied natural gas (LNG)).

2.37 However, 'conversion' is not intended to be so broad as to capture changes in the conditions in which the same product is kept.

Example 2.4 : A marketable petroleum commodity is a product produced from petroleum which is in its final form

Ocean Oil Co operates, and has a 100 per cent interest in, a petroleum project off the coast of South Australia. The project is subject to the PRRT.

Ocean Oil's operation is integrated and continuous, involving the following steps:

•

the use of wells on an offshore platform to recover liquid and gaseous raw petroleum from the production licence area;

•

initial separation of the recovered petroleum on the platform into substantially liquid and substantially gaseous streams, which are then separately piped to shore; and

•

further separation and filtering of the substantially gaseous stream in Ocean Oil's onshore processing plant to produce the commercial product 'sales gas' as well as other products (which are not considered further here).

Ocean Oil sells its 'sales gas' product, which it markets as OneGas, as it exits the onshore processing plant.

By the time the substantially gaseous stream leaves the offshore platform via pipeline, it has a composition which meets that specified for sales gas. However, being only part-way through Ocean Oil's production process it cannot be said that the gas is a product produced from petroleum that is in its final form. The new law makes clear that, to be a marketable petroleum commodity, a product must be in its final form for sale, if it is to be sold, which is clearly Ocean Oil's purpose.

The sales gas is not a marketable petroleum commodity at that point notwithstanding that it might be in its final form for use as feedstock for conversion to another product, or for direct consumption as energy. The purpose of Ocean Oil's operations is to produce sales gas for commercial sale. The production process, involving a series of operations to produce the intended final sales gas product is not complete.

The sales gas which is ultimately sold as OneGas is not in the final form in which it is to be sold, and hence a marketable petroleum commodity, until it has undergone the separation and filtration processes within the onshore processing plant where the production process is concluded and the final sales gas product for sale is produced.

The marketable petroleum commodity, OneGas, is sold at the onshore processing plant gate, and becomes an excluded commodity at that time. Consequently, the consideration receivable from sales are assessable petroleum receipts derived by Ocean Oil in relation to the project; with eligible expenditures being incurred up to the point the OneGas is sold and so being deductible.

Example 2.5 : A marketable petroleum commodity is a product produced from petroleum which is in its final form

Rico Oil Co produces crude oil from an offshore project in which it holds a 100 per cent interest. The crude oil is sufficiently stable for safe storage and transport immediately following extraction at the well-head, due to it having a very low gas to oil ratio. Rico Oil transports the crude oil via pipeline from its platform to an onshore processing plant where unwanted substances, primarily water, are removed. The crude oil is then stored at an adjacent tank farm prior to being sold to nearby refineries.

While the crude oil recovered is in a 'stable' form at the well-head, the object of Rico Oil's operation is to produce marketable stabilised crude oil for sale, and so the crude oil is not a marketable petroleum commodity (stabilised crude oil) at the well-head for PRRT purposes as it is not yet in its final form. The crude oil becomes a marketable petroleum commodity upon the completion of the processing required to remove impurities and producing the stabilised crude oil product Rico Oil sells.

The stabilised crude oil marketable petroleum commodity does not become an excluded commodity when it is moved to the tank farm for storage, as the tank farm is located adjacent to where the marketable petroleum commodity is produced. Rather, the stabilised crude oil will become an excluded commodity when it is sold (if at the tank farm), or when it is moved away from adjacent storage.

In this case, Rico Oil sells the stabilised crude oil at the tank farm and consequently, its assessable receipts will be the receipts received from the sale of the stabilised crude oil (less any expenses of sale). Eligible expenditure incurred in relation to activities occurring up to and including the storage on the tank farm will be deductible for PRRT purposes.

2.38 Whether a particular product produced from petroleum is a marketable petroleum commodity or not at a given place and time cannot be determined solely by reference to its chemical and physical properties. The point at which the taxing point occurs must also have regard to the specific operations, characteristics and purpose of the project from which the product is produced.

2.39 An implication of this is the potential that a product produced from petroleum may be a marketable petroleum commodity in one particular PRRT project, while another identical substance in a different PRRT project is not yet a marketable petroleum commodity because of further things that are to happen in the course of that project before the product is in its final form - whether for sale, downstream processing or treatment into some other commercial product, or for distribution for sale or processing or treatment into some other product. This is consistent with the design of the PRRT as a project-based rent tax.

2.40 Similarly, a marketable petroleum commodity may be produced from petroleum at different points within the same project where it has multiple purposes. For instance, a project may produce sales gas partly for sale to the domestic market, and partly for use as feedstock for conversion to LNG. Where the point at which final form of these products differs (due to them having different processing requirements), the point at which they become a marketable petroleum commodity will also differ.

Example 2.6 : Different projects may have different taxing points

Ocean Oil operates, and has a 100 per cent interest in, a PRRT project off the coast of the Northern Territory. The configuration of this project up to (and including) the onshore processing plant is identical to the one described in Example 2.1.

However, the sales gas that Ocean Oil sells to its Northern Territory customers is of a higher specification than the OneGas product it sells in South Australia. In order to meet these specifications, the gas stream is passed through a secondary onshore plant where further separation and filtration occurs. Ocean Oil sells this gas product, which it markets as SuperGas, as it leaves the second onshore plant.

Applying the same reasoning as in Example 2.1 to this project configuration, the taxing point is when the SuperGas is sold upon leaving the second processing plant. The product is produced to its final form following the secondary processing. It becomes an excluded commodity at the point of sale.

The taxing point for this project differs from that of the South Australian project in Example 2.1, reflecting the differences between the projects. It would be incorrect to suggest that because the gas stream leaving the initial onshore processing plant would be a marketable petroleum commodity in another petroleum project, then it is a marketable petroleum commodity at that point in relation to this project. The Northern Territory project involves an additional processing step, which does not result in the production of a new product, but rather results in the production of SuperGas, which is the marketable petroleum commodity sales gas in its final form for sale in relation to the Northern Territory project.

PRRT only taxes the resource once

2.41 A product cannot be a marketable petroleum commodity if it has been produced, wholly or partly, from a product that was itself a marketable petroleum commodity. This prevents a PRRT liability from arising more than once in relation to the same amount of petroleum. [ Schedule 2, item 2, section 2, definition of ' marketable petroleum commodity' ]

PRRT does not apply to downstream activities

2.42 The new definition of 'marketable petroleum commodity' does not disturb the existing demarcation in the PRRTAA 1987 between upstream production processes which are taken into account under the PRRT and downstream activities, such as refining and distribution, which are not.

2.43 For example, in an integrated gas-to-liquid project the sales gas product is a marketable petroleum commodity and becomes an excluded commodity prior to entering the downstream processing stage, which liquefies the gas for subsequent transport.

Example 2.7 : The taxing point of an integrated gas to liquids project

Coolit Co operates, and has a 100 percent interest in, a West Australian natural gas project. The project supplies gas solely as a feedstock for an integrated LNG plant (also owned by Coolit Co).

The project natural gas is processed via an onshore processing plant to remove contaminants including water, carbon dioxide and hydrogen sulphide, and to remove heavier hydrocarbons prior to liquefaction.

The purpose of the process is to produce sales gas that is suitable for use as feedstock for conversion into the product LNG in the plant operated by Coolit. While the gas meets the specified chemical composition of sales gas part-way through processing, it is not a marketable petroleum commodity at that time. This is because it is not a product produced from petroleum in its final form until the processing involved in preparing it for its intended purpose within the context of the operation is complete.

Notably the sales gas produced by Coolit is not intended to be subject to sale following its production, but is instead to be subject to further processes to convert it to an LNG product. Under the existing (and the new) PRRT law, a marketable petroleum commodity will also become an excluded commodity where it is further processed or treated, or is otherwise moved away from its place of production (other than to adjacent storage) or is moved away from that adjacent storage.

The point at which sales gas is moved away from the processing part of the plant to, or further processed in, the LNG liquefaction part of the plant to produce LNG is the point at which the sales gas becomes an excluded commodity (that is, the taxing point), and is the point at which assessable petroleum receipts related to the sales gas produced are brought to account, and up to which eligible expenditures are able to be deducted.

As the sales gas becomes an excluded commodity other than by sale, the assessable petroleum receipts will be worked out in accordance with the PRRT regulations (see paragraph 24(1)(e) of the PRRTAA 1987).

The point at which the 'sales gas' marketable petroleum commodity is produced is the point at which the product both satisfies the definition of 'sales gas' and is in its final form for its intended purpose. In the context of an integrated LNG plant, that purpose is feedstock for conversion, via further processing, to another product - that being LNG, which is not a marketable petroleum commodity but which is produced from sales gas.

This recognises there is a qualitative difference between recovery and early-stage processing activities (which are subject to the PRRT), and downstream activities, such as refining, distribution, and, in this case, LNG liquefaction. These downstream activities are not subject to the PRRT, which is designed as a rent tax on the petroleum resource (and marketable products produced from it), and is not intended to extend indefinitely so as to capture subsequent value-adding activities.

It is worth briefly examining what the outcome would be if Coolit did not operate nor have an interest in the LNG plant, which was instead owned and operated by another party, who purchased Coolit's sales gas for use as feedstock.

In that case, the outcome would be no different to that described in Example 2.1. The gas product becomes a marketable petroleum commodity once processing is complete (that is, at the exit of the processing plant), and becomes an excluded commodity at the point of sale. The PRRT is unconcerned with the use to which the unrelated purchaser puts this product, whether it is for converting into LNG or otherwise.

Application and transitional provisions

2.44 The amended definition of 'marketable petroleum commodity' applies from 1 July 1990. [ Schedule 2, item 3 ]

2.45 The amendments apply retrospectively to remove any uncertainty regarding the long-established operation of the PRRT. This is particularly important in light of the extension of the PRRT to all Australian oil and gas projects, including onshore projects, from 1 July 2012.

2.46 The amendments do not impose any new tax burden, as they merely clarify and confirm the current application of the PRRT, consistent with the policy intent.

Chapter 3 - Companies' non-compliance with PAYG withholding and superannuation guarantee obligations

Outline of chapter

3.1 Schedule 3 to this Bill amends the Taxation Administration Act 1953 (TAA 1953) by:

•

extending the director penalty regime to make directors personally liable for their company's unpaid superannuation guarantee amounts;

•

allowing the Commissioner of Taxation (Commissioner) to commence proceedings to recover director penalties three months after the company's due day where the company debt remains unpaid and unreported after the three months passes, without first issuing a director penalty notice; and

•

in some instances making directors and their associates, liable to pay as you go (PAYG) withholding non-compliance tax where the company has failed to pay amounts withheld to the Commissioner.

3.2 In this regard, the tax on directors and their associates to give effect to denying their credits is imposed by the Pay As You Go Withholding Non-compliance Tax Bill 2011.

Context of amendments

Director penalty provisions

3.3 In 1993 the director penalty regime was introduced to assist the Australian Taxation Office (ATO) to recover certain company liabilities. The director penalty regime replaced the Commissioner's priority that previously existed under insolvency law for certain amounts withheld (particularly from salary or wages) but not paid to the Commissioner.

3.4 In 2010 the director penalty regime was re-written into Division 269 in Schedule 1 to the TAA 1953, with minimal policy change.

3.5 The policy objective of the director penalty regime is to ensure that directors cause their company to meet certain tax obligations or promptly put the company into liquidation or voluntary administration. This applies generally to directors of all non-complying companies, not only phoenix companies.

3.6 Under the tax laws companies have an obligation to withhold amounts from certain payments they make, such as wages to employees and fees to directors. There is a further obligation to pay those withheld amounts to the Commissioner (and to pay estimates of those amounts where applicable). These obligations exist under the PAYG withholding regime.

3.7 The director penalty regime makes directors of companies that fail to comply with their obligation to pay amounts withheld under the PAYG withholding regime to the Commissioner (or fail to pay an estimate of their PAYG withholding liability) personally liable for the amount that the company should have paid, through imposition of a penalty.

3.8 Where the company fails to pay such amounts, the existing director penalty regime makes directors liable to a penalty at the end of the day the company is due to meet its obligation.

3.9 The Commissioner must not commence proceedings to recover a director penalty until 21 days after he gives the director a written penalty notice.

3.10 The Commissioner uses these provisions to pursue directors of companies that fail to meet their PAYG withholding obligations, particularly directors of fraudulent phoenix companies who often fail to meet their PAYG withholding obligations.

Phoenix activity

3.11 Phoenix activity poses a significant threat to employee entitlements, government revenue and the economy as a whole. In its most basic form, a fraudulent phoenix company is used to intentionally accumulate debts and then is placed into voluntary administration or liquidation to avoid paying those debts. The business then 're-emerges' as another corporate entity, controlled by the same person or group, but free of debts. However, it can take much more sophisticated forms.

3.12 The consequences of phoenix activity are felt broadly across the community. When companies 'phoenix', employee entitlements such as superannuation are often left unpaid and are unrecoverable. Phoenix activity is also designed to defeat a range of other creditors, including the ATO. Thus, phoenix activity not only has a direct impact on individuals but also has an indirect impact on everyone through decreased revenue receipts.

3.13 Phoenix companies gain a competitive advantage over compliant companies because their failure to pay employees' entitlements or tax liabilities, allows them to offer lower prices for goods and services. They can reinvest money that other compliant businesses allocate to tax and superannuation payments.

3.14 While the director penalty regime can address non-payment of PAYG withholding amounts to the Commissioner, non-payment of employee entitlements such as superannuation cannot be addressed through the director penalty regime.

3.15 Some aspects of the director penalty regime limit its efficacy in deterring fraudulent phoenix activity. Most notably, as directors are provided 21 days notice of the penalty before the Commissioner is able to commence proceedings to recover the liability, some directors extinguish their personal liability by placing the company into voluntary administration or liquidation within that notice period and before the Commissioner can sue to recover their personal liability. This often means that the full amount of PAYG withholding liabilities is never recovered.

3.16 Compounding these problems is the ability of directors to continue to claim PAYG withholding credits (for amounts withheld from payments to them by the company) in their individual tax returns, even when the company has failed to pay some or all of its PAYG withholding liability to the Commissioner.

3.17 Phoenix operators also tend to use family members or other associates to gain further benefits, such as through inflated incomes or credit claims. Alternatively, a family member or associate of a phoenix company director may actually be the commanding or controlling mind behind the company.

Summary of new law

3.18 These amendments protect workers' entitlements and strengthen directors' obligations by:

•

expanding the application of the director penalty regime to unpaid superannuation guarantee charge;

•

allowing the Commissioner to commence proceedings to recover director penalties three months after the company's due day where the company debt remains unpaid and unreported after the three months passes, without first issuing a director penalty notice; and

•

in some instances making directors and their associates, liable to PAYG withholding non-compliance tax where the company has failed to pay amounts withheld to the Commissioner.

3.19 In this regard, the tax on directors and their associates to give effect to denying their credits is imposed by the PAYG Withholding Non-compliance Tax Bill 2011.

3.20 These amendments, and the ATO's ability to target their application, act to deter company directors from engaging in phoenix activities or using amounts for company or other purposes that should be paid to the Commissioner or superannuation funds.

Comparison of key features of new law and current law

Detailed explanation of new law

Extending the director penalty regime to unpaid superannuation guarantee amounts

Collecting superannuation guarantee charge for the benefit of employees

3.21 Extending the director penalty regime to superannuation guarantee charge better secures workers' entitlements. The amount of the director penalty represents amounts of unpaid superannuation guarantee charge that should have been applied for the benefit of the employee, by providing it to a superannuation fund.

3.22 Amounts collected under the director penalty regime that represent superannuation guarantee charge are dealt with in the same way as superannuation guarantee charge amounts collected under the Superannuation Guarantee (Administration) Act 1992 (SGA Act 1992). [ Schedule 3, items 37 and 50, subsections 63A(3) and ( 4) of the SGA Act 1992 ]

3.23 There may be cases where the Commissioner proceeds with a director penalty based on an estimate of a superannuation guarantee charge and is unable to identify immediately the relevant employee or employees who are entitled to the superannuation that is represented by amounts collected under the director penalty regime. In these cases, the collected amounts are held in consolidated revenue until the employee or employees and their entitlements are identified. During that time an employee may identify their claim to a superannuation entitlement. [ Schedule 3, items 37 and 50, subsections 63A(3) and ( 4) of the SGA Act 1992 ]

3.24 Once the employee or employees and their entitlements are identified, the money is applied for the benefit of the employee via an assessment in the same way as a collection of superannuation guarantee charge under the SGA Act 1992.

Imposing and quantifying director penalties

3.25 Directors of companies that are registered under the Corporations Act 2001 are personally liable for their company's failure to meet its superannuation guarantee obligations. This liability is imposed by a director penalty through an extension of the existing director penalty regime. [ Schedule 3, items 51 to 53, paragraph 269-5(a ), subsection 269-10(1) and section 269-1 in Schedule 1 to the TAA 1953 ]

3.26 Where an employer fails to pay the appropriate amount of superannuation guarantee contributions to funds on behalf of their employees the outstanding amount is referred to as a superannuation guarantee shortfall. Where an employer has a superannuation guarantee shortfall, a superannuation guarantee charge arises, once assessed.

3.27 The director penalty represents the amount of the company's superannuation guarantee charge either:

•

as assessed by the employer through the lodgment of a superannuation guarantee statement;

•

as assessed by the Commissioner through a default assessment; or

•

as notified in a notice of an estimate issued by the Commissioner.

[ Schedule 3, items 43, 44 and 53, subsections 268-10(1) and ( 3) and items 4 and 5 in the table in subsection 269-10(1) in Schedule 1 to the TAA 1953 ]

Timing - when company directors become personally liable

3.28 Under subsections 269-20(1) and (2) in Schedule 1 to the TAA 1953 of the existing director penalty regime, company directors are liable to a director penalty at the end of the day that the company is obliged to pay to the Commissioner its PAYG withholding amounts if the company has not met that obligation. The penalty is due and payable at the end of the day the company is obliged to pay the Commissioner.

3.29 Where a director becomes a director after the company failed to meet its obligation to pay its liability by the due day, a different set of liability rules apply. Under the existing regime (subsections 269-20(3) and (4) in Schedule 1 to the TAA 1953) new directors are liable where they become a director after the company has failed to meet its obligation by the due day and 14 days later the director is still a director and the obligation has still not been met.

3.30 Unlike PAYG withholding, the superannuation guarantee charge is not due and payable under the SGA Act 1992 until the earlier of the employer self-assessing by lodging a superannuation guarantee statement or the Commissioner issuing an assessment.

3.31 This gave rise to the possibility that directors would escape or delay liability for director penalties by failing to lodge their superannuation guarantee statement as required, causing the superannuation guarantee charge to not become due and payable.

3.32 To avoid this outcome, and make a director personally liable for unpaid superannuation in a timely manner, the superannuation guarantee charge must be treated as payable even if it has not yet been assessed.

3.33 For the purpose of the director penalty regime, a company's superannuation guarantee charge is treated as payable on the day the employer is required to lodge their superannuation guarantee statement for the quarter to the Commissioner. This is either lodgment day, or a later day as allowed by the Commissioner (section 33 of the SGA Act 1992). [ Schedule 3, item 54, subsection 269-10(3) in Schedule 1 to the TAA 1953 ]

3.34 Accordingly, the existing directors are liable to a director penalty at the end of the lodgment day (or later day as allowed by the Commissioner under section 33 of the SGA Act 1992) if the company has not lodged its superannuation guarantee statement and paid the corresponding superannuation guarantee charge by the end of that day. [ Schedule 3, items 53 and 54, subsections 269-10(1) and ( 3) in Schedule 1 to the TAA 1953 ]

3.35 The lodgment day is a suitable day to treat the superannuation guarantee charge as falling due for the purpose of the director penalty regime as it is the day that the employer is required to lodge their superannuation guarantee statement (and where that happens, the day that the superannuation guarantee charge becomes due).

3.36 Diagram 3.1 demonstrates the timing of the liability arising, based on a quarter ending on 30 June.

Diagram 3.1 : Due day of superannuation guarantee charge for the purpose of the director penalty regime

Example 3.8 : Imposition of a director penalty for non-payment of superannuation guarantee amounts

Kevin and Ash are directors of Kash Pty Ltd. Aaron is employed by Kash Pty Ltd from 1 January 2013. During the January to March quarter of the 2012-13 income year, Kash Pty Ltd failed to pay any superannuation guarantee amounts to Aaron's superannuation fund.

As there is a superannuation guarantee shortfall, Kash Pty Ltd is required to report that shortfall in a superannuation guarantee statement to the Commissioner by 28 May 2013. However, Kash Pty Ltd does not report its shortfall by this date.

Therefore on 28 May 2013, the director penalty regime imposes a director penalty on each of Kevin and Ash for the value of the superannuation guarantee charge.

Expanding the estimates regime to cover unpaid superannuation guarantee

3.37 In addition to the Commissioner's power to issue an assessment to quantify an unreported superannuation guarantee shortfall, the estimates regime can also be used to quantify unpaid superannuation guarantee charge. The issue of an estimate notice creates a separate liability. A director penalty notice can also be issued for an estimate of superannuation guarantee charge (or PAYG withholding liability). [ Schedule 3, items 38 to 44 and 53, subsections 268-10(1 ), ( 1A) and ( 3 ), item 4 in the table in subsection 269-10(1) and sections 268-1 and 268-5 in Schedule 1 to the TAA 1953 ]

3.38 The ability to estimate a superannuation guarantee charge reduces the scope of phoenix operators to escape liabilities once they become aware that the Commissioner is pursuing them. For example, the issue of an estimate enables the Commissioner to take prompt action when an opportunity arises to secure recovery, without having to delay recovery by waiting for an assessment to be issued.

3.39 Similarly to the director penalty regime, the estimates regime treats the superannuation guarantee charge as being payable even if it has not been assessed, to avoid problems with delaying or avoiding quantification. To enable the Commissioner to estimate the superannuation guarantee charge where it has not been assessed (and therefore is not due and payable under the SGA Act 1992), the estimates regime treats the superannuation guarantee charge as being payable on the day the superannuation guarantee shortfall for the quarter should have been reported to the Commissioner in a superannuation guarantee statement. This is the lodgment day or a later day if permitted by the Commissioner (section 33 of the SGA Act 1992). [ Schedule 3, item 43, subsection 268-10(1A) in Schedule 1 to the TAA 1953 ]

3.40 This timing is consistent with the application of the director penalty regime to unpaid superannuation guarantee charges.

Example 3.9 : Director penalties for estimates of superannuation guarantee charge

Following on from Example 3.1, after 28 May Aaron and another employee, Graeme, make a complaint to the Commissioner about their unpaid superannuation.

Kash Pty Ltd has not lodged a superannuation guarantee shortfall statement and therefore has not reported the shortfall by lodgment day and the Commissioner has not permitted Kash Pty Ltd to lodge its superannuation guarantee statement at a later date.

Kevin and Ash are each liable to a director penalty relating to the superannuation guarantee charge from 28 May 2013, however the amount of the penalty is unknown.

The Commissioner, based on the information available, issues Kash Pty Ltd a notice of an estimate of the superannuation guarantee charge under Division 268 in Schedule 1 to the TAA 1953.

Kash Pty Ltd fails to pay the estimate by the end of the day it was issued, making Kevin and Ash each liable for a director penalty as a result of the estimate. (This is consistent with the operation of the existing director penalty regime.)

The director penalty liability is due and payable at the end of the day the estimate is issued to the company.

The three-month time limit on the Commissioner taking action to recover the penalty without issuing a director penalty notice starts from the original due day of the underlying liability, that is, 28 May 2013.

3.41 Unlike estimates of PAYG withholding liabilities, the general interest charge (GIC) does not accrue on estimates of superannuation guarantee charge. The GIC does accrue on any assessment of the superannuation guarantee charge that is made after the estimate. [ Schedule 3, item 44, subsection 268-75(1) in Schedule 1 to the TAA 1953 ]

Director's ability to provide facts in relation to an estimate

3.42 Consistent with estimates of PAYG withholding liabilities, a director may submit a statutory declaration or affidavit to verify the amount of the underlying liability in relation to an estimate of liability for unpaid superannuation guarantee charges. The effect may be that the estimate is reduced or revoked. [ Schedule 3, item 46, subsection 268-90(2) in Schedule 1 to the TAA 1953 ]

3.43 The statutory declaration or affidavit must verify:

•

the director's name and address;

•

for each employee for which there is unpaid superannuation guarantee charge - their name and postal address, and if known, their tax file number; and

•

the amount of the superannuation guarantee shortfall.

3.44 Additionally, as part of the statutory declaration or affidavit the director must verify what action has been taken to pay the superannuation guarantee charge to the Commissioner. [ Schedule 3, item 47, subsection 268-90(2A) in Schedule 1 to the TAA 1953 ]

Defences available to directors who are liable to director penalties for unpaid PAYG withholding liability or superannuation guarantee charge

3.45 Where the Commissioner seeks to collect a director penalty (whether relating to superannuation guarantee charge or a PAYG withholding liability), the existing statutory defences are available to a director. [ Schedule 3, item 6, subsections 269-35(1) to ( 4A) in Schedule 1 to the TAA 1953 ]

3.46 A director has a defence for a director penalty where they can establish that:

•

because of illness or for some other good reason the director was not involved in the management of the company and it was reasonable for that director not to be involved; or

•

the director took all reasonable steps to ensure the directors caused one of these three things to happen (or no such steps were available):

-

the company to meet its obligation to pay;

-

an administrator of the company to be appointed; or

-

the company to begin to be wound up.

[ Schedule 3, item 6, subsections 269-35(1) and ( 2) in Schedule 1 to the TAA 1953 ]

3.47 It is not sufficient for the director to state that no reasonable steps were available to cause one of those three things to happen. For example, it is not sufficient for a director to say that there were no reasonable steps available to cause the company to pay because the company had insufficient funds.

3.48 To be successful in the defence, there must be no reasonable steps available to ensure the directors caused the company to do any of those three things. Therefore, if there were insufficient funds to pay the PAYG withholding or superannuation guarantee charge amounts, the directors should have taken all reasonable steps to have an administrator appointed or begin winding up the company. The defence only succeeds if there were no reasonable steps available to ensure the directors caused any of those things to happen. [ Schedule 3, item 6, subsection 269-35(2) in Schedule 1 to the TAA 1953 ]

3.49 Criteria replicating the existing criteria in subsection 269-35(4) in Schedule 1 to the TAA 1953 are provided to assist the Commissioner in determining what are 'reasonable steps'. [ Schedule 3, item 6, subsection 269-35(3) in Schedule 1 to the TAA 1953 ]

3.50 The terms 'good reason' and 'reasonable steps' are included in the existing director penalty regime legislation and take their ordinary meaning. [ Schedule 3, item 6, subsections 269-35(2) and ( 3) in Schedule 1 to the TAA 1953 ]

Timing of defences

3.51 Where the method of recovery was not through court proceedings, the director must provide information to the Commissioner within 60 days of receiving notice that the recovery has occurred or receiving a copy of a notice issued to a third party under section 260-5 in Schedule 1 to the TAA 1953. That information must satisfy the Commissioner of the matters relevant to make out one of the defences. [ Schedule 3, item 6, subsections 269-35(4) and ( 4A) in Schedule 1 to the TAA 1953 ]

3.52 The 60-day period to raise a defence applies to the recovery of all director penalties by methods other than court proceedings, regardless of the character of the underlying liability.

3.53 Where the Commissioner has recovered any of the penalty by applying a credit against the director penalty, the 60 days runs from when the Commissioner notifies the director that recovery action has been taken. This notification could be provided in many different forms. For example:

•

a note accompanying a notice of assessment;

•

a running balance account statement which shows the offset has occurred; or

•

a letter explaining that offsetting has occurred.

[ Schedule 3, item 6, subparagraph 269-35(4A)(a)(ii) in Schedule 1 to the TAA 1953 ]

Example 3.10 : Applying credits against a director penalty

Hunter Co has failed to meet their obligation to pay amounts withheld under the PAYG withholding provisions to the Commissioner by the due date. A director penalty is raised against Kayleen as director of Hunter Co. To recover the penalty, the Commissioner applies credits that Kayleen is entitled to offset against her director penalty.

The Commissioner issues Kayleen with a notice of assessment. A note accompanying that notice explains that the credits have been applied against the director penalty.

Thirty days after the Commissioner issued Kayleen with her notice of assessment she provides the Commissioner with information she is relying on to satisfy the Commissioner that she was ill and therefore it was not reasonable for her to take part in the management of the company.

The Commissioner considers the information and is satisfied of the matters set out in the defence in subsection 269-35(1), meaning Kayleen is not liable to the director penalty. The Commissioner takes the necessary steps to return Kayleen to the position she would have been in if the credits had not been used to offset the director penalty liability.

3.54 Where the Commissioner has served a notice under section 260-5 in Schedule 1 to the TAA 1953 (the Commissioner may collect amounts from a third party) for the purpose of recovering the director penalty, the 60 days commences from when a copy of the notice is served on the director (as required by subsection 260-5(6) in Schedule 1 to the TAA 1953). [ Schedule 3, item 6, subparagraph 269-35(4A)(a)(i) in Schedule 1 to the TAA 1953 ]

Example 3.11 : Period allowed to raise a defence to the recovery of a director penalty

Michael is a director of McGovern Co. McGovern Co has failed to pay its employees their superannuation guarantee entitlements and as a result Michael has a director penalty equal to the superannuation guarantee charge.

To recover the penalty, the Commissioner serves a notice under subsection 260-5(2) on the bank to recover money from Michael's bank account.

After serving the notice on the bank, a copy of the notice is served on Michael. The Commissioner is successful in recovering money from Michael's bank account.

Michael has 60 days from being served the copy of the notice under subsection 260-5(6) to raise a defence against the recovery of the penalty.

Where the Commissioner is satisfied that the defence is satisfied, the money recovered from the bank is returned to Michael.

3.55 Under the existing law, the Commissioner has considered the defences for all forms of recovery under the director penalty regime in section 269-35 in Schedule 1 to the TAA 1953. However, the setting of a distinct period is necessary to deal with the unique nature of the collection of penalties that reflect superannuation guarantee charge. Because superannuation guarantee charge is distributed to superannuation funds for the benefit of employees, and is ultimately be paid out to that employee, there was a risk that if a director left it too long to raise a defence the money would be difficult to recover and repay to the director. This 60-day time frame provides certainty for directors, employees and the ATO in dealing with recovery of superannuation guarantee charge.

3.56 The 60-day period is consistent with the standard objection period that applies under the taxation laws, unless another time period is specified.

Recovery processes for director penalties

3.57 Regardless of the character of the director penalty (that is, whether it relates to unpaid PAYG withholding liability, superannuation guarantee charge or an estimate of either of those liabilities), the Commissioner has two processes available to recover a director penalty from a director, depending on the circumstances. These processes apply to all methods of recovery, for example, commencing court proceedings, statutory offsetting or collection under garnishee notices. [ Schedule 3, items 4, 5 and 55 to 57, subsection 269-25(1) and section 269-25 ]

3.58 The first process ('first recovery process') allows the Commissioner to issue a director penalty notice and wait until the end of 21 days after issuing that notice before commencing proceedings to recover a director penalty. This process must be used where:

•

the company's unpaid liability has been reported to the ATO within three months of when it was due to be paid; or

•

the company's unpaid liability (whether reported by the company or not) is not yet three months overdue.

[ Schedule 3, items 5 and 55, subsection 269-25(1) in Schedule 1 to the TAA 1953 ]

3.59 During that 21-day notice period, the director can reduce or remit their penalty by doing any of the following:

•

paying the penalty;

•

causing the company to comply with its obligation to pay the liability that the director penalty is based on;

•

appointing an administrator of the company; or

•

beginning to have the company wound up.

[ Schedule 3, items 9 and 10, subsection 269-30(2) and section 269-30 in Schedule 1 to the TAA 1953 ]

3.60 The second process ('second recovery process') allows the Commissioner to commence proceedings to recover a director penalty, without issuing a director penalty notice. This process is only available to the Commissioner where the liability remains unpaid and unreported three months after the due day. [ Schedule 3, items 2 to 5 and 55 to 57, subsections 269-20(2 ), ( 4) and 269-25(1) and section 269-25 in Schedule 1 to the TAA 1953 ]

3.61 If the company reports its unpaid liability after the three-month period, the Commissioner is still entitled to commence recovery action, without providing a notice. [ Schedule 3, items 5 and 55, subsection 269-25(1) in Schedule 1 to the TAA 1953 ]

3.62 The three-month period starts from the day after the company liability becomes due. For superannuation guarantee charge, the three months starts on the 'lodgment day'. [ Schedule 3, items 5, 54 and 55, subsections 269-10(3) and 269-25(1) in Schedule 1 to the TAA 1953 ]

Diagram 3.2 : Recovery of a director penalty representing a superannuation guarantee charge under the second recovery process.

3.63 Where the company's unpaid liability remains unreported three months after the due day, the director is still required to cause the company to comply with its obligation to pay the liability or place the company into liquidation or voluntary administration.

3.64 If the circumstances exist for the second recovery process to be used, the director penalty is not remitted where the director places the company into liquidation or voluntary administration after the three months elapses. In these circumstances, even where the company is in liquidation or voluntary administration, the only way to extinguish the director penalty is for them or a fellow director to pay the penalty. (The penalty is also extinguished to the extent that a dividend comes from the insolvency administration.) [ Schedule 3, items 9 and 10, subsection 269-30(2) and section 269-30 in Schedule 1 to the TAA 1953 ]

Example 3.12 : Actions that do not extinguish a director penalty

Kerry and Claire are directors of Phoenix Co. Phoenix Co is a small business and is required to pay amounts withheld under the PAYG withholding provisions to the Commissioner on a quarterly basis. During the January to March quarter in the 2013-14 income year, Phoenix Co withholds $4,000 from payments made to its employees and the directors.

Phoenix Co fails to pay or report any of the withheld amount to the Commissioner by the due day (21 April 2014). From that day Kerry and Claire are liable to a director penalty for the value of the company's unpaid PAYG withholding liability.

By 21 July 2014, Phoenix Co has still not paid or reported the PAYG withholding liability. On 22 July 2014, the Commissioner may commence proceedings against Kerry and/or Claire.

On 30 August 2014 Kerry and Claire appoint an administrator for Phoenix Co.

As the unpaid PAYG withholding liability was not reported within three months of becoming due and the action was taken more than three months after the PAYG withholding was due, Kerry and Claire's penalties continue.

To extinguish their penalties, Kerry and/or Claire must pay their penalty. Where one of them pays all or part of the penalty, the other's penalty is reduced by that amount.

New directors

3.65 The paragraphs above explain how the recovery processes apply to directors who are directors on the day that the company fails to meet the particular obligation listed in section 269-10 in Schedule 1 to the TAA 1953.

3.66 Under the existing subsection 269-20(3) in Schedule 1 to the TAA 1953, new directors are liable for director penalties under the director penalty regime if:

•

when they became a director the company was under an obligation to pay an unpaid amount listed in subsection 269-10(1) (for example, an unpaid PAYG withholding liability or superannuation guarantee charge), appoint an administrator or commence winding up the company (section 269-10 in Schedule 1 to the TAA 1953); and

•

fourteen days after the director started, the company or the company directors had not taken any of the actions that would discharge its obligation.

3.67 The Commissioner can commence proceedings to recover a director penalty from a new director once the new director is liable to the penalty.

3.68 The two recovery processes apply as they do for existing directors.

Diagram 3.3 : A new director becomes liable within three months of the company debt becoming due

3.69 If a new director becomes liable to a director penalty three months after the company liability was due and the liability was not reported within the first three months of becoming due, the Commissioner can commence proceedings to recover the liability from the new director immediately, using the second recovery process. [ Schedule 3, item 5, subsection 269-25(1) in Schedule 1 to the TAA 1953 ]

Diagram 3.4 : A new director becomes liable more than three months after the company debt was due

Issuing an estimate notice or a superannuation guarantee charge assessment

3.70 As the power to recover a penalty from a director under the second recovery process applies only to unpaid liabilities that remain unreported after three months from the due day (and therefore unquantified), the Commissioner may quantify the underlying liability and then issue an estimate notice or a superannuation guarantee charge assessment (as appropriate). [ Schedule 3, items 5, 43, 44 and 55, subsections 268-10(1 ), ( 1A ), ( 3) and 269-25(1) in Schedule 1 to the TAA 1953 ]

3.71 An assessment of superannuation guarantee charge determines the amount of the company's underlying liability. As a consequence, the assessment also determines the amount of the corresponding director penalty. The company's liability and the director penalty are due from the original due date, and the issue of the assessment does not alter that due date. The two recovery processes apply as normal. [ Schedule 3, items 5 and 55, subsection 269-25(1) in Schedule 1 to the TAA 1953 ]

3.72 Under the existing Division 268 in Schedule 1 to the TAA 1953, if the Commissioner issues a notice of an estimate, a separate liability on the company is created (see section 268-20 in Schedule 1 to the TAA 1953). And where the company fails to pay the estimate by the end of its due day, the company directors are liable to a director penalty for the amount of the estimate.

3.73 Although the estimate creates a new liability and a new director penalty arises if the estimate is not paid on time, the issuing of an estimate notice does not alter the due day for the underlying liability. [ Schedule 3, item 5, item 2 in the table in subsection 269-25(1) in Schedule 1 to the TAA 1953 ]

3.74 For the purpose of the second process of recovery with respect to estimates, the three-month period starts to run from the day after the due day of the underlying liability. The estimate does not provide further time before the second recovery process, which allows the Commissioner to immediately commence proceedings to recover the penalty (without a notice or notice period). [ Schedule 3, item 5, item 2 in the table in subsection 269-25(1) in Schedule 1 to the TAA 1953 ]

Diagram 3.5 : Effect of estimate

PAYG withholding non-compliance tax

Background

3.75 Companies (and other entities) are required to withhold a portion of certain payments, such as the wages of their employees and payment of fees to directors, and pay the amounts withheld to the Commissioner (effectively as an instalment of tax). When the Commissioner assesses the payee for that income year, the payee is then entitled to a credit equal to the total of amounts withheld during the income year. The payment summary issued by the company to the payee shows, among other things, the amount the company withheld.

3.76 It is common for fraudulent phoenix operators to withhold amounts from payments but never pay the withheld amounts to the Commissioner. This may also occur when a company is facing financial difficulties. Instead of paying the withheld amount to the Commissioner, those amounts are used to improve their business' cash flow or for wealth creation while compliant businesses forward that money to the Commissioner as required under the law.

3.77 For the purpose of the discussion below, the term PAYG withholding liability refers to the amount that the company withholds but fails to pay to the Commissioner.

Overview

3.78 Company directors and their associates are liable to pay tax where their company has a PAYG withholding liability for an income year and the individual is entitled to a credit for amounts withheld by that company during the income year. [ Schedule 3, item 16, sections 18-125 and 18-135 ]

3.79 The PAYG withholding non-compliance tax is imposed by the Pay As You Go Withholding Non-compliance Tax Bill 2011. [ Schedule 3, item 13, subsection 995-1(1) of the Income Tax Assessment Act 1997 ( ITAA 1997) and Clauses 1 to 4 of the Pay As You Go Withholding Non-compliance Tax Bill 2011 ]

3.80 The imposition of tax on directors and their associates where the company has failed to meet its PAYG withholding obligations provides a new strong incentive for company directors to ensure that their companies comply with existing obligations to pay withheld amounts to the Commissioner.

3.81 The circumstances that must exist before the liability to the PAYG withholding non-compliance tax arises are different for directors and associates. The amount of the tax is determined by the legislation. [ Schedule 3, item 16, sections 18-125 and 18-135 in Schedule 1 to the TAA 1953 ]

3.82 Although the tax is due and payable, the tax is not recoverable unless the Commissioner issues a notice to the individual director or associate. The Commissioner should only issue a notice after determining that it is fair and reasonable for the individual to pay the tax. The Commissioner cannot issue a notice where the relevant director has a director penalty liability because of the company's failure to pay PAYG withholding for the income year. [ Schedule 3, item 16, section 18-140 in Schedule 1 to the TAA 1953 ]

3.83 The exposure draft of the legislation achieved this policy outcome by way of reduction in the credits of the individual director or their associate. This Bill, together with the PAYG Withholding Non-compliance Tax Bill 2011, achieves the same policy outcome by way of a tax to safeguard the measure against constitutional challenge. The objective of this tax is to reverse the economic benefit of all or part of the credit to the extent to which the director (or associate) is entitled. Consequently, the measure achieves similar outcomes to the exposure draft, although the mechanics of achieving those outcomes have changed. [ Schedule 3, items 15 and 16, sections 18-5 and 18-120 in Schedule 1 to the TAA 1953 ]

Directors of companies that do not pay withheld amounts to the Commissioner

3.84 A company director can be liable to pay the PAYG withholding non-compliance tax where the company of which they are a director has withheld more amounts from withholding payments than it has paid to the Commissioner for the director's income year. This includes where the company has paid some, but not all, of the amounts withheld to the Commissioner. [ Schedule 3, item 16, paragraphs 18-125(1)(a) to ( c) in Schedule 1 to the TAA 1953 ]

3.85 The directors can be liable to pay the tax where any amount of the company's PAYG withholding for the director's income year is still outstanding after its due date. [ Schedule 3, item 16, paragraph 18-125(1)(c) in Schedule 1 to the TAA 1953 ]

3.86 To be liable, the director must also have an entitlement to a PAYG withholding credit that is attributable to an extent to an amount withheld by the company from payments made by the company to the director (such as directors fees). [ Schedule 3, item 16, paragraph 18-125(1)(d) in Schedule 1 to the TAA 1953 ]

3.87 Liability to pay the PAYG withholding non-compliance tax arises for individuals that either:

•

were a director when the company was due to pay the withheld amounts to the Commissioner but failed to do so (in full); or

•

became a director after the payment of withheld amounts to the Commissioner was due (and not paid) and 14 days after they started as a director, they are still a director and the overdue withholding amount is still unpaid.

[ Schedule 3, item 16, subsection 18-125(2) in Schedule 1 to the TAA 1953 ]

3.88 The director penalty rules similarly apply to incoming directors (subsection 269-20(3) in Schedule 1 to the TAA 1953).

Example 3.13 : The director is liable to pay PAYG withholding non-compliance tax

Service Co failed to pay to the Commissioner $5,000 for amounts withheld from withholding payments (including employee wages and payments to directors) during the 2012-13 income year.

For the whole of the 2012-13 income year, including at all times when the withheld amounts were due to be paid to the Commissioner, Roxy was a director of Service Co.

During the income year Service Co withheld $3,000 from wages paid to Roxy.

After issuing Service Co with a director penalty notice (because the PAYG withholding liability had been reported before three months elapsed), Roxy caused Service Co to appoint an administrator within 21 days of the Commissioner issuing a director penalty notice and was therefore, liable to a director penalty.

Roxy is liable to pay the PAYG withholding non-compliance tax.

Amount of tax payable

3.89 The amount of tax payable by the director is the lesser of:

•

the total amounts withheld from payments made to the individual by the company in the individual's income year (that is, the extent that the credit is attributable to amounts withheld from payments made by the company of which the individual was a director); and

•

the company's PAYG withholding liability for payments made during the income year.

[ Schedule 3, item 16, subsection 18-125(3) in Schedule 1 to the TAA 1953 ]

Example 3.14 : The amount of PAYG withholding non-compliance tax where the individual's credit is less than the company debt

Computer Co has an unpaid PAYG withholding liability for the 2014-15 income year totalling $100,000.

Diego was a director of Computer Co throughout that income year and received director's fees for the income year. He is entitled to a credit of $25,000 for amounts withheld from his director's fees.

Assume Diego is not liable to a director penalty. Diego must pay $25,000 PAYG withholding non-compliance tax as the total of amounts withheld from payments to Diego is less than the value of the company's unpaid PAYG withholding liability.

Example 3.15 : The amount of PAYG withholding non-compliance tax where the company debt is less than the individual's credit

Maverick Co failed to pay to the Commissioner $4,000 of amounts withheld from withholding payments made during the 2013-14 income year.

Ciara is a director of Maverick Co and is entitled to a credit of $30,000 for amounts withheld by Maverick Co from her director's fees.

Assume Ciara is not liable to a director penalty. Ciara is liable to pay $4,000 PAYG withholding non-compliance tax as the company's PAYG withholding liability is less than the total amounts withheld from payments to Ciara.

When tax is payable

3.90 The PAYG withholding non-compliance tax is due and payable on the same date as the original income tax must be paid by the individuals for that financial year. As income tax is not due to be paid unless an assessment is made, and to account for cases where no income tax is payable by the individual, the individual is treated as being required to pay income tax for the income year. [ Schedule 3, items 16 and 17, subsection 250-10(2) and section 18-145 in Schedule 1 to the TAA 1953 ]

3.91 An individual that fails to pay some or all of an amount of PAYG withholding non-compliance tax on time must pay the GIC. The GIC accrues from the day by which the unpaid amount of tax was due to be paid and stops accruing on the later of the unpaid PAYG withholding non-compliance tax being paid or the GIC on the unpaid PAYG withholding non-compliance tax being paid. [ Schedule 3, items 14 and 16, subsection 8AAB(4) of the TAA 1953 and section 18-150 in Schedule 1 to the TAA 1953 ]

Reducing the amount of the director's PAYG withholding non-compliance tax

3.92 The director may attempt to satisfy the Commissioner that they had grounds for allowing the company not to meet its PAYG withholding obligations. Where the Commissioner is satisfied that the director met one of the specified grounds, the Commissioner is required to issue a notice to reduce the amount of tax payable by that director. [ Schedule 3, item 16, section 18-130 in Schedule 1 to the TAA 1953 ]

3.93 The director may attempt to satisfy the Commissioner of these grounds before or after the liability to pay the tax arises. Regardless of when the notice to reduce the amount of tax payable is issued, the reduction has effect as if the amount of tax payable was always the amount as reduced by the notice. [ Schedule 3, item 16, subsections 18-130(2) and ( 6) in Schedule 1 to the TAA 1953 ]

3.94 Where the Commissioner becomes aware of circumstances that may satisfy one of the grounds for reducing the tax, for example through an application by the director or because the director successfully raised a defence to a director penalty, the Commissioner must consider the circumstances. [ Schedule 3, item 16, subsection 18-130(2) in Schedule 1 to the TAA 1953 ]

3.95 Where the Commissioner is satisfied of the grounds after the liability to pay the tax arises, the notice to reduce the amount of tax payable may only be issued within four years after the original notice of assessment. This time limit is designed to provide finality in the taxpayer's affairs. [ Schedule 3, item 16, section 18-130 and paragraph 18-185(c) in Schedule 1 to the TAA 1953 ]

Grounds on which a director may rely

3.96 The first and second grounds on which the director may rely mirror the existing defences in the director penalty regime (section 269-35 in Schedule 1 to the TAA 1953). The content and considerations are the same under both regimes.

3.97 The first ground is that a director may not be responsible for the company's non-compliance because they were not involved in the management of the company and it was reasonable for the director not to be involved because of illness or some other good reason. This applies where the director had a reasonable basis not to be involved in the management of the company at any time during the period on or before a day that the company was required to pay any of its total PAYG withholding liability and ending when the Commissioner issues a reduction notice. [ Schedule 3, item 16, paragraph 18-185(2)(a) in Schedule 1 to the TAA 1953 ]

3.98 The second ground on which a director may rely to reduce their personal responsibility for the company's non-compliance is that the director took all reasonable steps to ensure that the directors caused:

•

the company to pay the withholding liability;

•

an administrator of the company to be appointed; or

•

the company to begin to be wound up.

[ Schedule 3, item 16, paragraph 18-130(2)(b) in Schedule 1 to the TAA 1953 ]

3.99 Alternatively, the director may satisfy the Commissioner that there were no reasonable steps that could have been taken to ensure any of those things happened. [ Schedule 3, item 16, paragraph 18-130(2)(b) in Schedule 1 to the TAA 1953 ]

3.100 The director must cause the directors to take all reasonable steps to cause one of those three things to happen. A reduction in the amount of tax payable is not available where the director says that no reasonable steps were available to cause one of those three things to happen. For example, it is not sufficient for a director to say that there were no reasonable steps available to cause the company to pay because the company had insufficient funds.

3.101 To be successful in satisfying the Commissioner that there are grounds to reduce the tax payable, there must be no reasonable steps available to ensure the directors caused the company to do any of those three things. Therefore, if there were insufficient funds to pay the PAYG withholding, the directors should have taken all reasonable steps to have an administrator appointed or begin winding up the company.

3.102 In determining what would be reasonable steps for the director to have taken, the Commissioner must have regard to all of the relevant circumstances, including when, and for how long, the director was a director and took part in the management of the company. [ Schedule 3, item 16, subsection 18-130(3) in Schedule 1 to the TAA 1953 ]

Amount of the reduction in tax payable

3.103 The amount of the reduction in tax payable is determined by the Commissioner and is the amount stated in the notice issued by the Commissioner. [ Schedule 3, item 16, subsection 18-130(4) in Schedule 1 to the TAA 1953 ]

3.104 Where the director has satisfied the first ground, the Commissioner must have regard to:

•

when, and for how long, the director did not take part in the management of the company;

•

when, and for how long, the director could not have been expected to take part in the company; and

•

what is fair and reasonable in the circumstances.

[ Schedule 3, item 16, paragraphs 18-130(5)(a) and ( c) in Schedule 1 to the TAA 1953 ]

3.105 In determining the amount of a reduction based on the second ground, the Commissioner must have regard to:

•

when the individual was a director of the company;

•

how long the individual was a director of the company;

•

how long the director took part in the management of the company; and

•

what is fair and reasonable in the circumstances.

[ Schedule 3, item 16, paragraphs 18-130(5)(b) and ( c) in Schedule 1 to the TAA 1953 ]

3.106 Where the Commissioner reduces the tax because the director has satisfied one of the grounds, the director will be entitled to interest. [ Schedule 3, items 18 and 22 to 24, paragraph 3(1)(cab ), subsection 10(2) and sections 3C and 10 of the Taxation ( Interest on Overpayments and Early Payments) Act 1983 ]

Associates of directors of companies that do not pay withheld amounts to the Commissioner

3.107 An individual who is an associate of a company director can be liable to pay PAYG withholding non-compliance tax for an income year if amounts withheld by the company (of which they are an associate of the director) have not been paid to the Commissioner by the last day for remitting any of the amounts withheld during the associate's income year. [ Schedule 3, item 16, paragraphs 135(1)(a) to ( c) in Schedule 1 to the TAA 1953 ]

3.108 An associate is defined in section 995-1 of the Income Tax Assessment Act 1997 as having the meaning given by section 318 of the Income Tax Assessment Act 1936. The latter section provides a very broad definition of 'associates of a natural person' which includes relatives, partners, a spouse and children of the natural person. [ Schedule 3, item 16, paragraph 18-135(1)(a) in Schedule 1 to the TAA 1953 ]

3.109 To be liable to pay the PAYG withholding non-compliance tax, the associate must be entitled to a credit which can be attributed to some extent to amounts withheld from payments such as salary or wages made to them by the company during the income year. [ Schedule 3, item 16, paragraph 18-135(1)(c) in Schedule 1 to the TAA 1953 ]

3.110 To be subject to the tax, the associate must also have been an associate of a director, and the director a director of the company, either:

•

when that company was due to pay the withheld amounts to the Commissioner but failed to do so (in full); or

•

after the unpaid withholding amount became due, and 14 days later the director was still a director and the overdue PAYG withholding remained unpaid.

[ Schedule 3, item 16, subsection 18-135(2) in Schedule 1 to the TAA 1953 ]

3.111 For the second scenario (new directors) the associate must have been an associate of the director for the full 14-day period. [ Schedule 3, item 16, paragraph 18-135(2)(b) in Schedule 1 to the TAA 1953 ]

3.112 Employees who are not associates of a company director are not liable to pay the PAYG withholding non-compliance tax.

3.113 Merely being an associate of the director does not mean that an individual is liable to pay the tax. The Commissioner must also be satisfied that due to the associate's relationship with the director or their relationship with the company, that the associate knew, or could reasonably be expected to have known, that the company had failed to pay amounts withheld to Commissioner. [ Schedule 3, item 16, paragraphs 18-135(1)(d) and 3(a) in Schedule 1 to the TAA 1953 ]

3.114 In addition to the knowledge or reasonable expectation of knowledge requirement, the Commissioner must also be satisfied that the associate did not:

•

take reasonable steps to influence the director to cause the company to notify the Commissioner about the amount withheld;

•

take reasonable steps to influence the director to cause the company to pay the withheld amounts to the Commissioner;

•

take reasonable steps to influence the director to appoint an administrator or have the company wound up; or

•

report to the Commissioner or another relevant authority that the company has not paid the amount withheld to the Commissioner.

[ Schedule 3, item 16, paragraph 18-135(3)(b) and subsection 18-135(4) in Schedule 1 to the TAA 1953 ]

3.115 In determining what are 'reasonable steps' the Commissioner may have regard to:

•

the length and timing of the individual's relationship with the director as an associate;

•

the length and timing of the director being a director and taking part in the management of the company; and

•

all other relevant circumstances.

[ Schedule 3, item 16, subsection 18-135(5) in Schedule 1 to the TAA 1953 ]

3.116 The other relevant authorities to whom the associate could report non-payment of PAYG withholding liabilities could include the Minister, the police, and regulatory bodies including the Australian Securities and Investments Commission and industry Commissioners. [ Schedule 3, item 16, paragraph 18-135(3)(b) in Schedule 1 to the TAA 1953 ]

3.117 An associate is not required to be actively involved in the company's finances to be liable to pay the PAYG withholding non-compliance tax.

Example 3.16 : An associate with reasonable knowledge of a company's non-compliance

Jackson is a sole director of Onkey Pty Ltd which has not paid $200,000 of amounts withheld to the Commissioner. Lisa is married to Jackson and is employed by the company to complete ad hoc administrative work but is constantly kept up to date about the operation of the company by Jackson. She received a payment summary from the company that indicated that the company had withheld $5,000 of credits on her behalf.

The Commissioner is satisfied that Lisa knew that the amounts had not been paid to the Commissioner, and that she had not reported the debt to the Commissioner or another body. Also the Commissioner is satisfied that she had not taken any action to encourage the payment or the winding up of the company. Additionally, assume Jackson does not have a director penalty liability. Therefore, Lisa is liable to pay $5,000 of PAYG withholding non-compliance tax.

Example 3.17 : An associate without reasonable knowledge of a company's non-compliance

Stephen was one of eight directors of Greenfield Pty Ltd for a period of two years. During this time his son, Riley, was employed by Greenfield for six months as a weekend courier. Greenfield has not paid $500,000 of amounts withheld to the Commissioner. Riley receives a payment summary from Greenfield Pty Ltd indicating that the company has withheld $400 of tax from his salary.

Assume Stephen does not have a director penalty liability.

However, as Riley was not in a position to know of the withholding debt there was no possibility that he could report the liability or encourage his father to cause Greenfield to pay the Commissioner. Riley is not liable to pay the PAYG withholding non-compliance tax.

3.118 Alternatively, where the associate was an employee of the company, the associate is liable to pay PAYG withholding non-compliance tax if the Commissioner is satisfied that the associate was treated more favourably than other company employees. [ Schedule 3, item 16, paragraph 18-135(1)(d) and subsection 18-135(6) in Schedule 1 to the TAA 1953 ]

3.119 What constitutes more favourable treatment depends on the circumstances of each case. Where there is evidence of a difference in treatment it is most likely that the associate is being treated more favourably than other employees. For example, where the associate's wage is higher than other employees doing similar work or where the associate is receiving their entitlements whilst other employees are not. Alternatively, it may be that income is being split amongst associate employees to ensure lower tax rates or other entitlements. This list is not exhaustive of the instances of favourable treatment.

Example 3.18 : Favourable treatment of an associate

Mustapha is the director of Multi Co. Mustapha's wife Mariam was employed by Multi Co.

During the 2012-13 income year, Multi Co failed to make superannuation guarantee payments and some wage payments for the employees other than Mariam.

Mariam has received all of her entitlements for the year and claimed $500 of credits relating to payments made to her by Multi Co.

Multi Co has not paid $10,000 of amounts withheld to the Commissioner.

Assume Mustapha does not have a director penalty liability.

Given that Mariam is an associate of Mustapha and the Commissioner is satisfied that Multi Co has treated Mariam more favourably than the other employees, Mariam is liable to pay $500 of PAYG withholding non-compliance tax.

Amount of tax payable by an associate

3.120 Like with a director, the amount of tax payable by the associate is the lesser of:

•

the total amounts withheld from payments made to the individual by the company in the individual's income year (that is, the extent that the credit is attributable to amounts withheld from payments made by the company of which the individual was an associate of a director); and

•

the company's PAYG withholding liability for payments made during the income year.

[ Schedule 3, item 16, subsection 18-135(7) in Schedule 1 to the TAA 1953 ]

When tax is payable for an associate

3.121 The due and payable date for an associate's PAYG withholding non-compliance tax is the same as for directors (see paragraph 1.90). [ Schedule 3, items 16 and 17, subsection 250-10(2) and section 18-145 in Schedule 1 to the TAA 1953 ]

3.122 The imposition of GIC on an associate's overdue PAYG withholding non-compliance tax is also the same as for directors (see paragraph 1.91). [ Schedule 3, items 14 and 16, subsection 8AAB(4) of the TAA 1953 and section 18-150 in Schedule 1 to the TAA 1953 ]

Recovering unpaid PAYG withholding non-compliance tax

3.123 If a company director or their associate is liable to pay PAYG withholding non-compliance tax, or GIC on that tax, and they have failed to do so, the Commissioner may only commence proceedings to recover the tax after issuing a notice to the individual. [ Schedule 3, item 16, subsection 18-140(1) in Schedule 1 to the TAA 1953 ]

3.124 The Commissioner must not issue a notice to enable recovery of PAYG withholding non-compliance tax from a director if that director has a director penalty liability that relates to the company's failure to meet its PAYG withholding obligations in item 1 in the table in subsection 269-10(1) in Schedule 1 to the TAA 1953. [ Schedule 3, item 16, subsection 18-140(3) in Schedule 1 to the TAA 1953 ]

3.125 The Commissioner must not issue a notice to enable recovery against an associate if the director who the individual is an associate of has a director penalty liability that relates to the company's failure to meet its PAYG withholding obligations in item 1 in the table in subsection 269-10(1) in Schedule 1 to the TAA 1953. [ Schedule 3, item 16, subsection 18-140(3) in Schedule 1 to the TAA 1953 ]

Notices

3.126 The notice must specify the company that the PAYG withholding non-compliance tax relates to, the income year of the individual and the amount of PAYG withholding non-compliance tax the individual is required to pay. [ Schedule 3, item 16, subsection 18-140(4) in Schedule 1 to the TAA 1953 ]

3.127 If, on the basis of the information available to the Commissioner, the Commissioner is satisfied that it is fair and reasonable for the individual to pay the PAYG withholding non-compliance tax, the Commissioner may issue a notice. [ Schedule 3, item 16, subsection 18-140(2) in Schedule 1 to the TAA 1953 ]

3.128 A notice given by the Commissioner to the individual director or their associate in order to recover an amount of unpaid PAYG withholding non-compliance tax is taken to be conclusive evidence of the making of the notice and that the amount and all particulars of the notice are correct. The only exception in regard to the amount and particulars is for objection and review proceedings under Part IVC of the TAA 1953. [ Schedule 3, item 16, subsection 18-155(2) in Schedule 1 to the TAA 1953 ]

3.129 A notice given by the Commissioner is valid even if the Commissioner has not complied with a provision of the Act, such as a procedural requirement under the Act. [ Schedule 3, item 16, subsection 18-155(1) in Schedule 1 to the TAA 1953 ]

3.130 These provisions are standard provisions in the tax law to facilitate the collection of tax. [ Schedule 3, item 16, sections 18-145 to 18-155 in Schedule 1 to the TAA 1953 ]

The company complies, or partially complies, before the notice day

3.131 If the company has paid some or all of their unpaid PAYG withholding liability after the day it was due but before the Commissioner issues a notice to enable recovery, the amount of the tax that is recoverable from the individual is reduced as a result. [ Schedule 3, item 16, subsections 18-140(5) to ( 7) in Schedule 1 to the TAA 1953 ]

3.132 If the company's discharge means that no tax would have been payable by the individual had the discharge occurred before the day the company was required to pay the amounts withheld to the Commissioner, the individual's amount of tax is reduced to nil and treated as always having been nil. [ Schedule 3, item 16, subsection 18-140(5) and paragraph 18-140(6)(a) in Schedule 1 to the TAA 1953 ]

3.133 However, if the company's discharge would have only reduced the amount of PAYG withholding non-compliance tax payable by the individual (had the discharge occurred before the company was required to pay PAYG withholding to the Commissioner), the individual's tax is reduced.

3.134 The reduction is by the amount that the original of PAYG withholding non-compliance tax exceeds the amount that would have been payable, had the discharge occurred before the due day for the company paying its PAYG withholding to the Commissioner. [ Schedule 3, item 16, subsection 18-140(5) and paragraph 18-140(6)(b) in Schedule 1 to the TAA 1953 ]

3.135 Again, the reduced amount is treated as always having been the amount of PAYG withholding non-compliance tax payable by the individual. [ Schedule 3, item 16, subsection 18-140(7) in Schedule 1 to the TAA 1953 ]

The company complies after a recovery notice has been issued

3.136 A company may pay some or all of its PAYG withholding liability after the individual director or an individual associate of the director has become liable to pay an amount of PAYG withholding non-compliance tax.

3.137 If this occurs after the Commissioner issues a notice to enable recovery of the PAYG withholding non-compliance tax from the individual, the individual may be entitled to a credit. [ Schedule 3, item 16, section 18-165 in Schedule 1 to the TAA 1953 ]

3.138 To work out if the individual is entitled to a credit, the Commissioner must replace the amounts originally used to determine the amount of tax payable with amounts worked out taking into account the company's repayment. Where the new circumstances do not impact on the amount of tax payable by the individual, the Commissioner is not required to provide the individual a credit, although a discretion to do so exists. In determining whether to exercise that discretion the Commissioner must have regard to what is fair and reasonable in the circumstances.

3.139 If the Commissioner exercises that discretion, the amount of the credit entitlement must not exceed either the amount of PAYG withholding non-compliance tax payable by the individual, or the amount of the discharge. [ Schedule 3, item 16, section 18-175 in Schedule 1 to the TAA 1953 ]

Example 3.19 : A later payment of the PAYG withholding liability with no impact on an entitlement to credits

Danielle is the sole director of Tucker Pty Ltd. Danielle was entitled to a credit of $5,000 for amounts withheld from payments made to her by Tucker Pty Ltd during the 2013-14 income year. Tucker Pty Ltd had an unpaid withholding liability of $10,000 for amounts due in that income year.

Assume Danielle did not have a director penalty liability. Therefore, Danielle was liable to pay $5,000 PAYG withholding non-compliance tax.

The Commissioner was satisfied that it was fair and reasonable for Danielle to pay the PAYG withholding non-compliance tax and issued a notice to enable recovery of the tax.

After this occurred, Tucker Pty Ltd made a payment of $3,000 toward its withholding liability. As a result the Commissioner reconsidered Danielle's requirement to pay the tax.

Because the company debt after the partial repayment ($7,000) still exceeds Danielle's original entitlement to credits ($5,000), the Commissioner is not required to take any action.

3.140 If, under the new circumstances, the amount of PAYG withholding non-compliance tax payable by the individual is less than under the original circumstances (including if the amount payable would have been nil), the individual is entitled to a credit and the Commissioner must issue a notice. [ Schedule 3, item 16, subsection 18-170(1) in Schedule 1 to the TAA 1953 ]

3.141 An individual is entitled to a credit if the Commissioner issues a notice and becomes entitled to the credit on the day the notice is issued. [ Schedule 3, item 16, subsections 18-170(2) and ( 3) in Schedule 1 to the TAA 1953 ]

3.142 If, under the new circumstances, the individual would not have been required to pay the PAYG withholding non-compliance tax because the company debt no longer existed, the value of the entitlement must be equal to the original amount of PAYG withholding non-compliance tax. [ Schedule 3, item 16, subsections 18-170(4) and ( 5) in Schedule 1 to the TAA 1953 ]

3.143 Where the new circumstances lead only to a reduction in the amount of PAYG withholding non-compliance tax payable by the individual, the amount of the credit entitlement is determined by the Commissioner, having regard to what is fair and reasonable in the circumstances.

3.144 However, the credit entitlement must not be more than the original amount of PAYG withholding non-compliance tax or the amount of the company's discharge. The amount also must not be less than the amount by which the original PAYG withholding non-compliance tax exceeds the amount of tax that would have been payable had the company's discharge occurred before the notice was issued. [ Schedule 3, item 16, subsections 18-170(6) and ( 7) in Schedule 1 to the TAA 1953 ]

3.145 The amount of the credit is the amount stated in a notice issued by the Commissioner. [ Schedule 3, item 16, subsection 18-170(4) in Schedule 1 to the TAA 1953 ]

Example 3.20 : A later payment of a PAYG withholding liability resulting in an entitlement to credits

Fran is the sole director of Scott Pty Ltd. For the 2012-13 income year Fran is entitled to a credit of $15,000 for amounts withheld from payments made to her by Scott Pty Ltd. As Scott Pty Ltd had a PAYG withholding liability of $20,000, and assuming Fran does not have a director penalty liability, Fran is liable to pay $15,000 PAYG withholding non-compliance tax.

After this occurred, Scott Pty Ltd pays $18,000 of its PAYG withholding liability to the Commissioner.

Accordingly, the Commissioner must consider the impact on Fran's requirement to pay PAYG withholding non-compliance tax.

Because the original amount of tax ($15,000) exceeds the revised company debt ($2,000) Fran is entitled to a partial credit.

The Commissioner must provide Fran with a credit of at least $13,000, which is the amount by which the original amount tax exceeds the company's revised debt.

The revised company withholding debt is used to calculate the credit entitlement because, had Scott Pty Ltd made the payment before Fran's credits were reduced, the amount of tax payable by Fran would have been equal to Scott Pty Ltd's debt ($2,000) as it was less than Fran's credits.

3.146 The company may make numerous part-payments of its debt and, as a result, the individual may be entitled to a credit due to the Commissioner providing a notice. Where this has occurred, any reference to an amount of PAYG withholding non-compliance tax for the purpose of notices for later compliance, is treated as the amount of the tax, reduced by the total of credits which an individual is already entitled to due to earlier notices. Once the company has paid all of their withheld amounts to the Commissioner, all of the directors (and any associates that have been impacted) are entitled to a credit equal to the original amount of PAYG withholding non-compliance tax they were liable to pay. [ Schedule 3, item 16, sections 18-170, 18-175 and 18-180 in Schedule 1 to the TAA 1953 ]

3.147 In accordance with existing law, the credit or credits may be offset against existing debts, such as a PAYG withholding non-compliance tax debt, or, if there PAYG withholding non-compliance tax has been paid, it may entitle the individual to a refund.

3.148 The purpose of making a director or their associate entitled to a credit where the company has subsequently paid withheld amounts is to encourage company directors to cause their companies to comply.

3.149 Where a company has debts other than PAYG withholding liabilities, the Commissioner has a broad discretion (under Division 3 of Part IIB of the TAA 1953) as to how payments or credits are applied. The ATO's existing administrative practice statement explains the order in which payments by a company are applied against debts of various types.

3.150 An individual's entitlement to a credit as a result of the company making late payments of withheld amounts to the Commissioner does not entitle the individual to interest on the credit. This avoids providing an incentive for companies to pay withheld amounts after they are required to by the law. [ Schedule 3, items 19 to 21, subsections 3(1) and ( 3) of the Taxation ( Interest on Overpayments and Early Payments) Act 1983 ]

Timing of notices

3.151 Notices issued for the purpose of enabling the Commission to collect the PAYG withholding non-compliance tax can be issued no later than two years after the notice of assessment for the individual's income tax for that income year is issued. [ Schedule 3, item 16, paragraph 18-185(b) in Schedule 1 to the TAA 1953 ]

3.152 Notices that result in an increase in the amount of PAYG withholding non-compliance tax payable (for example, through an amendment to a notice that reduces tax) or a notice that decreases or disentitles an individual's credit entitlement (for example, through an amendment to a credit entitlement notice) can be issued no later than two years after a notice of assessment is given. [ Schedule 3, item 16, paragraph 18-185(6) in Schedule 1 to the TAA 1953 ]

3.153 Notices that result in a reduction in the amount of PAYG withholding non-compliance tax payable, or that entitle an individual to a credit (or increase a credit entitlement) can be issued no later than four years after the notice of assessment for the individual's income tax for that income year is issued. [ Schedule 3, item 16, paragraph 18-185(c) in Schedule 1 to the TAA 1953 ]

3.154 If no notice of assessment for the individual's income tax for that income year has been issued, or if the notice is to give effect to a decision on a review or appeal or because of an objection made by the individual or pending a review or appeal, there is no time limit of the Commissioner issuing a notice of any sort. [ Schedule 3, item 16, paragraphs 18-185(a) and ( d) in Schedule 1 to the TAA 1953 ]

3.155 The longer period for notices that reduce the tax payable or entitle an individual to a credit (or a greater credit) also allows a greater period for individuals to benefit from the company later meeting its obligation to pay its PAYG withholding liability to the Commissioner.

Review of decisions

3.156 A director or an associate who receives a notice enabling the Commissioner to recover an amount of PAYG withholding non-compliance tax may object against any decision the Commissioner has made under section 18-51, 18-52AA, 18-54A or 18-55. This includes decisions in relation to:

•

reducing the amount of tax payable by a director;

•

issuing a notice to enable recovery of the tax; or

•

entitling the individual to a credit (and the amount of the credit).

[ Schedule 3, item 16, section 18-190 in Schedule 1 to the TAA 1953 ]

3.157 Where a director or associate succeeds in a review of a Commissioner's decision to reduce (or not reduce) the tax or a Commissioner's decision to issue a notice to enable recovery, the taxpayer is entitled to interest.

Right of indemnity and contribution

3.158 The treatment of directors under the PAYG withholding non-compliance tax provisions is consistent with that under the director penalty regime - directors effectively have joint and several liability.

3.159 To deal with the potential unfairness associated with recovering different amounts from company directors (as a consequence of their original credit entitlement being lower than other directors and therefore the amount of PAYG withholding non-compliance tax payable also being lower), a right of indemnity and contribution allows directors to recover the amounts they have been responsible for contributing on behalf of the company against the company or other directors. [ Schedule 3, item 16, section 18-160 in Schedule 1 to the TAA 1953 ]

3.160 A director whose PAYG withholding non-compliance tax was reduced by the Commissioner because the Commissioner was satisfied that the director was not, to some extent, responsible for the company's non-compliance, has their responsibility to contribute to other directors reduced to the same extent. [ Schedule 3, item 16, section 18-51 and subsection 18-160(4) in Schedule 1 to the TAA 1953 ]

Example 3.21 : Directors seeking contributions from each other

Wilhelm and Aislinn are the directors of Rainbow Co. In the 2013-14 income year, Rainbow Co had a PAYG withholding liability of $50,000. (Assume neither Wilhelm nor Aislinn have director penalty liabilities.) Wilhelm's credit entitlement attributable to amounts withheld by Rainbow Co was $15,000, making Wilhelm liable to pay $15,000 PAYG withholding non-compliance tax. Aislinn's credits attributable to amounts withheld by Rainbow Co was $20,000, making her liable to pay $20,000 PAYG withholding non-compliance tax.

Wilhelm and Aislinn are both able to claim their contributions back from Rainbow Co.

Alternatively, they both may seek a contribution from each other.

3.161 Because associates may also have to pay PAYG withholding non-compliance tax, the right of contribution allows them to claim back the tax they have paid from the company or the company's directors.

3.162 However, no individual may recover their contribution from an associate.

Example 3.22 : An associate seeking a contribution from a director

Matt is a director of Kingsgate Pty Ltd. In the 2013-14 income year, Kingsgate Pty Ltd had a PAYG withholding liability of $10,000 (assume Matt does not have a director penalty liability). Matt was liable to pay $8,000 PAYG withholding non-compliance tax. The Commissioner was also satisfied that Matt's associate Pam, was liable to pay $2,000 PAYG withholding non-compliance tax.

Matt and Pam are both able to claim payments of $8,000 and $2,000 back from the company.

Pam is also entitled to claim her payment of $2,000 back from Matt directly.

However, Matt is not entitled to claim his payment of $8,000 back from Pam as she is his associate, not a director of Kingsgate Pty Ltd.

3.163 The right of indemnity and contribution is an important aspect of ensuring that any one individual, particularly an associate, is not solely responsible for the financial burden caused by the company's failure to comply with their obligations.

Application and transitional provisions

3.164 The automated recovery provisions in Part 1 in Schedule 3 to the Tax Laws Amendment (2011 Measures No. 8) Bill 2011 apply to all director penalties that are due and payable at or after commencement of these amendments on the day after Royal Assent. The automated recovery provisions also apply to director penalties that were in existence (under Division 269 in Schedule 1 to the TAA 1953) before the commencement of Part 1 if those penalties were not extinguished before commencement. [ Schedule 3, items 7, 8 and 11 ]

3.165 To be extinguished, the penalty would have been paid, remitted or discharged before these provisions came into effect. Where a company was liquidated or went into voluntary administration before the commencement of Part 1, the director penalties that existed before that action are taken as being extinguished. Accordingly, those penalties are not subject to the automated recovery provisions. [ Schedule 3, item 8 ]

3.166 The amendments to extend the director penalty regime and the estimates regime to superannuation guarantee charges, apply if the company is originally required to lodge a quarterly superannuation guarantee statement to report unpaid and overdue superannuation guarantee shortfall on or after the day on which the amendments formally commence. The amendments do not apply where the original requirements to report a superannuation guarantee shortfall arose before the amendments commenced. The amendments commence on the day after Royal Assent. [ Schedule 3, items 48, 49 and 58 ]

3.167 The amendments for reduction of credits to directors and associates apply to amounts withheld during the 2011-12 income year and later income years, if the company withholding the amounts is required to pay them to the Commissioner on or after the day after this Bill receives Royal Assent. [ Schedule 3, item 25 ]

Consequential amendments

3.168 The consequential amendments to the Corporations Act 2001 reflect changes associated with the extension of the estimates regime and director penalty regime to the superannuation guarantee charge to ensure consistent treatment of superannuation guarantee charge amounts regardless of how they are quantified or collected. [ Schedule 3, items 26 to 36 ]

3.169 A consequential amendment to the ITAA 1997 instructs taxpayers on how to treat the PAYG withholding tax for the purpose of the alienation of personal services income. [ Schedule 3, item 12, subsection 86-40(2) of the ITAA 1997 ]

Applying payments and credits against unquantified director penalties

3.170 Under the existing payment and crediting rules in Division 3 of Part IIB of the TAA 1953 the Commissioner must treat a payment or credit using one of two methods (allocating the amount first to a running balance account or applying the amount first against a non-running balance account. Although this gives the Commissioner considerable discretion as to how a payment or credit is applied, prima facie there is no discretion not to apply a payment or credit (except in three specified cases).

3.171 Amendments to the payment and crediting rules give the Commissioner a discretion not to treat the amount of a payment or credit using either of the stipulated methods if doing so would require him to apply that amount against a director penalty. A discretion is being included for director penalties because of their unusual nature of being 'parallel liabilities'. That is, the relevant company has an underlying liability for an equivalent amount (and other directors also have a liability for an equivalent amount). Consequently, where an individual has a director penalty liability and is entitled to a credit, the Commissioner is not compelled to apply that credit against the director penalty liability, although the credit can be applied under the rules in Division 3 of Part IIB in the TAA 1953. [ Schedule 3, item 1, subsection 8AAZL(4) of the TAA 1953 ]

REGULATION IMPACT STATEMENT

Introduction

3.172 During the 2010 election campaign, the Australian Labor Party (ALP) committed to address fraudulent phoenix activity. In particular, the ALP committed to:

•

legislate to automate the current director penalty regime so that it automatically applies three months after payment to the Commissioner was due if the company does not report its outstanding liability;

•

provide the ATO with the authority to stop directors and their associates accessing PAYG withholding credits in their own tax returns where their company has not made the PAYG withholding payments to the ATO; and

•

extend the director penalty regime to include superannuation guarantee payments.

3.173 These policy outcomes are achieved by legislative amendment to the TAA 1953.

3.174 The 'automation' of the director penalty regime is achieved by allowing the Commissioner to commence proceedings to recover director penalties three months after the company's due day where the company debt remains unpaid and unreported after the three months passes, without first issuing a director penalty notice.

3.175 Stopping directors and their associates accessing PAYG withholding credits is achieved by making directors and their associates liable to PAYG withholding non-compliance tax where the company has failed to pay amounts withheld under the PAYG withholding regime to the Commissioner. The director or associate must also have a credit that is attributable to amounts withheld from payments made to them by the relevant company.

3.176 Further criteria apply for a liability to arise for an associate. For both associates and directors, the Commissioner cannot commence recovery where the relevant director is under a director penalty liability.

3.177 Making company directors personally liable for their company's unpaid superannuation guarantee amounts is achieved by extending the director penalty regime to the superannuation guarantee charge.

What is fraudulent phoenix activity?

3.178 Fraudulent phoenix activity involves the accumulation of debts in a corporate structure and the liquidation of that company to avoid liability for those debts. It is important to distinguish such activity from honest behaviour.

3.179 Corporate law in Australia has traditionally reinforced the values of entrepreneurship and commercial risk taking, which are seen to be fundamental to wealth creation and a well-functioning market. Directors and shareholders are encouraged to engage in entrepreneurship and risk taking by limited liability, which can protect them from the costs associated with a company's failure.

3.180 A genuine business failure where the business has been managed responsibly and subsequently continues using another corporate entity is not of itself an illegitimate use of the corporate form. This use of the corporate form should be contrasted with dishonest practices that abuse the corporate form and the privilege of limited liability as a means of generating personal wealth or an unfair competitive advantage. Such arrangements may be used to avoid debts, including debts to other creditors, the ATO and employees.

3.181 Fraudulent phoenix activity can take a variety of forms. In its most basic form, fraudulent phoenix activity may include accumulating debts without any intention of repaying those debts (for the purpose of wealth creation or to boost the cash flow of the business) and liquidating to avoid repaying the debt. The business then continues in another corporate entity, controlled by the same person or group of individuals.

3.182 However, fraudulent phoenix activity can often be more sophisticated, for example, arrangements involving a number of companies controlled by the same person. One company will hold the assets and wealth for the group while another company provides services. The service company may be liquidated and replaced with little disruption to the day-to-day operation of the overall business and the financial benefits from the unpaid liabilities are shared amongst the wider group. The services company has little or no assets to cover the company's debts (including employee entitlements).

3.183 Because of the variety of structures that phoenix activity can take and the need to protect entrepreneurialism, fraudulent phoenix activity is inherently difficult to define. However, underlying the distinction between illegitimate, or fraudulent, phoenix activity and a legitimate use of the corporate form is the intention for which the activity is undertaken.

Impact of fraudulent phoenix activity

3.184 Phoenix activity has a significant impact on employee entitlements, government tax revenue collections and the economy more generally. Although it is difficult to measure precisely the cost of fraudulent phoenix activity, in 1996 the Australian Securities Commission (now the Australian Securities and Investments Commission (ASIC)) estimated the annual loss to the Australian economy due to phoenix activity as $670 million to $1.3 billion (Australian Securities Commissioner 1996, Research Paper No 95/01 - Phoenix Companies and Insolvent Trading, Canberra).

3.185 This figure is likely to have grown as the ATO reports that, although fraudulent phoenix activity has historically been most prevalent with small business, that is, those businesses with a turnover below or around $2 million, fraudulent phoenix activity is being undertaken by much larger businesses and by individuals who already have significant levels of wealth.

3.186 Concern over the spread of fraudulent phoenix activity to a wider range of businesses and across more industries is also heightened by the apparent increase in the numbers of individuals promoting the benefits of fraudulent phoenix activity. This was noted by the Joint Committee of Public Accounts and Audit in its report on tax administration tabled on 26 June 2008 (Joint Committee of Public Accounts and Audit 2008, Report 410 into Tax Administration, Canberra).

3.187 The ATO estimates that the current stock of phoenix activity that it is monitoring poses a risk to revenue of around $600 million.

3.188 In the past the biggest impact on the revenue has come from phoenix companies which fail to pay to the Commissioner amounts withheld under the PAYG withholding system. These funds relate to the tax liability of a particular employee and it is as if the employer holds these funds 'on trust'. Such funds should never become part of the cash-flow of a business. However, the tax law does not make the employee liable for unpaid PAYG withholding amounts. In fact, under the existing law, the ATO cannot even pursue the outstanding PAYG withholding in relation to the salary and wages of the director of a phoenix company.

3.189 Fraudulent phoenix operators may also avoid other tax liabilities, such as the goods and services tax (GST) and the superannuation guarantee. The non-payment of superannuation guarantee is of particular concern as, unlike other liabilities imposed under Australia's taxation laws, it will result in a direct loss to the individual employee.

3.190 In addition, fraudulent phoenix operators may fail to pay employees' redundancy entitlements, outstanding leave entitlements and voluntary superannuation contributions. The Government has committed to provide further protection for employees through the Fair Entitlements Guarantee.

3.191 Many fraudulent phoenix operators also leave debts to other creditors, such as suppliers of goods. These creditors receive some protection from the fact that, unlike the ATO and employees, they have the power to refuse credit or to require a personal guarantee from the directors.

3.192 Phoenix operators also impact on the efficient operation of the market because they can offer lower prices for their goods and services because they intend to avoid the tax and other liabilities associated with the project.

Problems with the existing law

3.193 The existing taxation law includes a number of features that can be used to address fraudulent phoenix activity. However, they have some limitations.

The director penalty regime

3.194 The director penalty regime encourages a company director to cause the company to pay outstanding PAYG withholding amounts or enter into voluntary administration by making the director(s) personally and severally liable for those outstanding amounts if the ATO has given written notice to the director. The director can avoid liability by causing the company to do one of the following four things within 21 days of receiving the notice:

•

comply with its obligations in relation to paying the PAYG withholding amounts;

•

enter into a payment agreement with the Commissioner in relation to the amounts;

•

appoint an administrator of the company; or

•

wind up the company.

3.195 The director will not be held personally liable for the debt if one of the defences in section 269-35 in Schedule 1 to the TAA 1953 is satisfied. These defences are:

•

non-participation in the management of the company because of illness or some other good reason; and

•

taking all reasonable steps to achieve compliance unless no such steps were available.

3.196 The ability of the director penalty regime to address fraudulent phoenix activity is limited by a number of factors. Notably:

•

issuing director penalty notices to make a director's debt recoverable is highly resource intensive and, as a result, they are issued only to a small percentage of the directors who are liable to a director penalty;

•

there may be a time lapse between the company's non-compliance and the ATO issuing the director penalty notices because the ATO must first identify that the company has an outstanding PAYG withholding liability (which is often hindered by the company failing to report its PAYG withholding liability) and then identify who the directors are (in consultation with ASIC), allowing the company to accumulate additional debts before taking action; and

•

as the regime focuses only on PAYG withholding liabilities, it does not provide any disincentive for fraudulent phoenix operators to accrue other liabilities, such as superannuation guarantee payments.

3.197 A company that fails to report is currently liable to a criminal penalty of 20, 40 or 50 penalty units (see sections 8C and 8E, and sections 16-150 and 16-153 in Schedule 1 to the TAA 1953). Section 8Y of the TAA 1953 allows directors to be pursued personally for such penalties. However, such criminal penalties are often negligible compared to the outstanding tax liabilities. In addition, section 8Y of the TAA 1953 is currently being reviewed as part of a Council of Australian Governments review of provisions that make directors criminally liable for the conduct of companies. It is not feasible to enforce such a penalty against a phoenix company because they are likely to be in liquidation with limited funds to pay such penalties.

PAYG withholding credits

3.198 An individual who has had amounts withheld through the PAYG withholding system is entitled to a credit for those amounts, irrespective of whether they have been paid to the Commissioner. Indeed the usual practice of the Commissioner is to allow a taxpayer credit upon assessment for amounts withheld substantiated by a payment summary completed by the payer or a statutory declaration in lieu.

3.199 While a credit cannot be denied for amounts that have not been paid to the Commissioner, the Commissioner does deny credits on the basis that an amount was not withheld in the first place. In the context of fraudulent phoenix activity the Commissioner's current practice is to deny the credit where the payee is a director of the paying entity and the Commissioner has evidence to support the view that moneys were not actually withheld.

3.200 However, the ability of the Commissioner to deny directors unpaid PAYG withholding credits is limited.

•

It is relatively difficult for the Commissioner to obtain evidence that an amount was not withheld, particularly where the Commissioner is presented with a completed payment summary that suggests otherwise. It is relatively easy to prove that an amount was not paid to the Commissioner, which is readily apparent from the absence of a payment to the Commissioner.

•

Conducting prosecutions for fraudulent conduct under the Crimes Act 1914 and the Criminal Code Act 1995 provides some disincentive to engage in such behaviour. However, such prosecutions generally require the involvement of the Australian Federal Police and the Commonwealth Director of Public Prosecutions, are highly resource intensive and can take several years to be finalised.

The desired objectives

3.201 The objective of these reforms is to reduce the incentives for company directors to allow their companies to engage in fraudulent phoenix activity, reducing its impact on the community. The reforms also aim to better protect workers' entitlements to superannuation. There should be sufficient deterrents in the tax law to discourage directors from undertaking fraudulent phoenix activity with the intention of the company avoiding its tax and superannuation obligations or avoiding the company's obligations to creditors more generally.

Implementation options

3.202 The Action Against Fraudulent Phoenix Activity proposals paper, which was released by the Government for public consultation on 14 November 2009 set out a number of taxation law and corporations law options for addressing fraudulent phoenix activity. Taxation law options include:

•

automating the director penalty regime;

•

extending the director penalty regime to other taxes;

•

amending the promoter penalty regime;

•

expanding the anti-avoidance provisions;

•

re-instating the failure to remit offence;

•

denying PAYG withholding credits to directors and their close associates;

•

creating offences for claiming PAYG withholding credits that had not been paid to the Commissioner; and

•

extending the bond provision.

3.203 Corporations law options included:

•

expanding the scope for disqualifying directors;

•

restricting the use of similar names by successor companies; and

•

adopting a doctrine of inadequate capitalisation.

3.204 As set out above, during the 2010 election campaign the Government committed to address fraudulent phoenix activity by:

•

extending the director penalty regime to include the superannuation guarantee;

•

amending the current director penalty regime so that it automatically applies after three months; and

•

providing the ATO with the authority to stop directors and their associates accessing PAYG withholding credits in their own tax returns where their company has not made the PAYG withholding payments to the ATO.

3.205 The Government also announced that it would restrict the use of similar names by successor companies and further examine:

•

extending the promoter penalty regime to include schemes to avoid payment of tax; and

•

extending the director penalty regime to indirect taxes.

Expanding the director penalty regime to apply to unpaid superannuation guarantee liabilities

3.206 Under the Government's election commitment, the existing director penalty regime would be extended to include unpaid superannuation guarantee liabilities (that is, the superannuation guarantee charge payable to the ATO because the company has not met their superannuation guarantee obligations to an employee).

3.207 The director penalty regime is sometimes seen as draconian because it makes directors personally liable for the debts of the company.

3.208 Extending the director penalty regime to the superannuation guarantee charge is appropriate because the superannuation guarantee is similar to PAYG withholding in that the amounts represent the entitlements of employees. In the case of PAYG withholding amounts, the Government will give the employee a credit regardless of the amount collected from the company. However, in the case of the superannuation guarantee the Government will only credit an employee's superannuation fund when the amount is recovered from the company.

3.209 The Commonwealth Ombudsman estimates that 10 per cent of complaints about tax administration last year related to the ATO's inability to recover unpaid superannuation. Extending the director penalty regime to the superannuation guarantee will discourage phoenix operators from using employee entitlements to disguise the company's cash flow issues and generally discourage fraudulent phoenix activity.

Automating the director penalty regime

3.210 As set out above, the existing director penalty regime makes a director personally liable for a company's outstanding PAYG withholding. The penalty is recoverable by the Commissioner 21 days after issuing a director penalty notice if the director has not caused the company to pay the debt, or placed the company into administration or liquidation. The director's ability to put-off payment of the penalty indefinitely until they receive a notice, and then to avoid liability absolutely by liquidating the company is a significant limitation on the effectiveness of the director penalty regime.

3.211 These amendments allow the Commissioner to commence proceedings to recover a director penalty without issuing a director penalty notice or providing the 21-day notice period three months after payment of the PAYG withholding or superannuation guarantee debt was due if the company has not paid or reported its outstanding liability. As set out above, directors may already be subject to criminal penalties for failing to report their PAYG withholding liability, however, the criminal penalties may be negligible compared to the outstanding PAYG withholding.

3.212 Limiting the application of the automated director penalty regime to amounts that were not reported within the first three months after they became due will help to ensure that compliant taxpayers are not affected by the measure as it will encourage companies to report outstanding liabilities (even if they are not paid). The ATO will then have the opportunity to consider whether a director penalty notice should be issued for the purpose of recovering the penalty.

3.213 Directors will still be able to avoid personal liability if they were not involved in the management of the company, took all reasonable steps to cause compliance (or no such steps were available), put the company into liquidation before the three-month period expires. Directors also have a right of indemnity against the company for such debts.

3.214 The three-month time frame is considered appropriate as it prevents companies accruing large debts before going in to liquidation to avoid those debts. A longer period would, obviously, provide time for more debt to be accrued. Targeting the proposed measure at companies that do not report in a timely manner will prevent phoenix operators using non-reporting as a tool to prolong the life of the phoenix company and accrue larger debts.

Denying PAYG withholding credits

3.215 Under the Government's election commitment, PAYG withholding credits would be denied to directors and their associates if the company failed to pay amounts withheld under PAYG withholding to the Commissioner.

3.216 To achieve this outcome, directors are liable to PAYG withholding non-compliance tax where the company has failed to pay the total of the amount withheld during the income year to the Commissioner. The director must also have a credit that is attributable, to an extent, to an amount withheld from a payment made to the director by the company.

3.217 The amount of PAYG withholding non-compliance tax that a director is liable to pay is the lesser of the extent to which a credit is attributable to an amount withheld from a payment made to the director by the company or the company's PAYG withholding liability. This cap on the amount of the tax effectively ensures that the consequence is a denial of the director's credit. In cases where the company debt is less than the director's credit, the outcome would effectively be a partial denial of the credit.

3.218 Where a director can satisfy the Commissioner that they were not involved in the management of the company (and there was a good reason for that lack of involvement), that they took all reasonable steps to cause the company to comply or no such reasonable steps were available, a defence is made out and the amount of tax payable will be reduced.

3.219 An associate is liable to PAYG withholding non-compliance tax where the company has failed to pay the total of the amount withheld during the income year to the Commissioner. The associate must also have a credit that is attributable to an extent to an amount withheld from a payment made to the associate by the company. In addition, the Commissioner must be satisfied that the associate had knowledge of the company's non-compliance (or could reasonably be expected to have that knowledge) and did not take appropriate actions to cause the company to pay the withholding, or to bring it to the attention of authorities.

3.220 Again, the amount of PAYG withholding non-compliance tax that an associate is liable to pay is the lesser of the extent to which a credit is attributable to an amount withheld from a payment made to the associate by the company or the company's PAYG withholding liability. This effectively results in a denial of credits for associates of directors.

3.221 For both directors and their associates, the Commissioner is not able to commence proceedings to recover the tax where the relevant director has a director penalty liability.

Assessment of impacts

3.222 The proposal is expected to result in a net benefit to the community. The potential compliance costs to businesses are small compared to the benefits associated with addressing fraudulent phoenix activity.

Analysis of benefits

Businesses

3.223 These proposals benefit businesses that comply with their tax and superannuation obligations and put them on an even playing field with companies that might otherwise seek to engage in phoenix behaviour to obtain a competitive price advantage for the provision of goods and services to customers.

3.224 The automation of the director penalty regime will encourage directors to address solvency issues earlier.

Employees

3.225 Expanding the director penalty regime to superannuation guarantee amounts will improve the likelihood that employees will be paid their superannuation entitlements. As the Government only provides credits for the amount actually collected, the possibility that directors will become personally liable for unpaid superannuation guarantee amounts provides an incentive for companies to comply with their superannuation obligations. The higher the level of compliance, the greater the amount of superannuation credits that employees will be able to access.

ATO

3.226 These proposals are designed to strengthen the powers of the ATO to pursue phoenix activity by improving their ability to recover PAYG withholding and superannuation guarantee liabilities. The automation of the director penalty regime will make the recovery process less resource intensive for the ATO and will encourage taxpayers to report their liabilities even if they remain unpaid.

3.227 It is anticipated that the changes will also increase voluntary compliance.

3.228 The ATO estimates that the current stock of phoenix activity that it is monitoring poses a risk to revenue of around $600 million.

Creditors

3.229 The automation of the director penalty regime and extending it to superannuation guarantee liabilities is likely to encourage company directors to address their solvency issues in a more timely manner and will prevent them from using PAYG withholding and superannuation guarantee amounts to disguise cash flow problems.

3.230 The proposed changes to the director penalty regime and the potential financial impacts on directors personally should encourage them to treat their company's solvency issues more seriously and discourage directors from pursuing fraudulent phoenix activities.

3.231 Removing incentives to undertake fraudulent phoenix activity would reduce the extent to which debt can be accumulated in a phoenix company. As such, not only will smaller debts be owed to creditors (including employees and the ATO) at the time of liquidation, but the nature of the company (and its successors) as a fraudulent phoenix company will become more readily apparent to creditors, who may then take action to protect themselves.

3.232 The amendments provide more incentive for directors to focus on the solvency of their company and therefore the company will be in a better position to manage potential debts to creditors.

Community

3.233 Although it is difficult to measure precisely the cost of fraudulent phoenix activity, in 1996 the Australian Securities Commission (now ASIC) estimated the annual loss to the Australian economy due to phoenix activity as $670 million to $1.3 billion.

3.234 According to the 2011-12 Budget these proposals are expected to provide a revenue gain of $260 million over the four-year period 2011-12 to 2014-15.

3.235 In addition to improving worker's access to entitlements, the community at large will benefit from the collection of tax debts and improved tax compliance. The proposals will improve market efficiency by reducing the amount of fraudulent phoenix activity.

Analysis of costs

Business

3.236 The director penalty regime already applies to all directors where their company has failed to pay its PAYG withholding to the Commissioner. The extension of the director penalty regime to the superannuation guarantee charge and the imposition of the PAYG withholding non-compliance tax will increase the potential personal liability of directors for their company's failure to meet its obligations. However, the legislation provides the Commissioner with some flexibility about how to target the amendments to the highest risk and most egregious cases, such as fraudulent phoenix companies.

3.237 The changes will reduce the benefits associated with fraudulent phoenix activity, as they will reduce the ability of fraudulent phoenix companies to use their employees' PAYG withholding and superannuation guarantee as part of their cash flow and to accumulate large debts.

3.238 These factors will reduce their ability to undercut legitimate business operators in the market place and will make it easier for creditors (including the ATO and employees) to identify fraudulent phoenix activity, potentially exposing the participants in phoenix activity to additional penalties and trading difficulties. These factors are designed to make fraudulent phoenix activity less attractive overall.

3.239 These amendments are not expected to increase compliance or operating costs for businesses or directors of companies who are complying with their existing obligations. The amendments do not introduce any new obligations on company's but they do increase disincentives for directors (and their associates) to allow companies to engage in fraudulent phoenix activity.

3.240 There is a small risk that the amendments may reduce entrepreneurial activity because of the changes to a director's potential personal liability. However, the fact that directors are already subject to potential penalties for the same conduct, and the targeting of the changes, will reduce the risk to honest and competent entrepreneurs.

3.241 The inability of the Commissioner to commence proceedings to recover the PAYG withholding non-compliance tax whilst a director has a director penalty liability reduces the possibility that directors will be impacted twice for the company's same PAYG withholding non-compliance debt.

Employees

3.242 These amendments potentially impact directors that are receiving payments from their company such as director's fees. They also potentially impact associates of directors who are employed by the company through the imposition of the PAYG withholding non-compliance tax where certain criteria are met.

3.243 These proposals are not expected to lead to increased costs or increased compliance burdens for other employees.

ATO

3.244 The ATO may engage in activities to raise awareness about the new laws, through changes to the ATO websites and publications, and by contacting tax agents and insolvency specialists, particularly through consultative forums and seminars.

3.245 According to the 2011-12 Budget, the amendments have a related increase in ATO departmental expenses of $22.1 million over the forward estimates period.

Creditors

3.246 The proposals may encourage companies to pay their tax and superannuation obligations ahead of debts to other creditors and once the company goes into liquidation there is less money and assets available for distribution to these other creditors.

Community

3.247 These proposals are not expected to lead to increased costs or increased compliance burdens for the community in general.

Conclusions

3.248 Although it is difficult to quantify the benefits and costs of these proposals, it is considered that on balance the proposals will provide a net benefit. The benefits will be based around improved tax compliance by companies and reduced incentives for companies to undertake fraudulent phoenix activity. The reduction of phoenix activity will provide benefits for employees, with regard to access to superannuation guarantee amounts and the community through improved collection of tax debts. The costs, for the most part, are for companies who would be actively seeking to avoid their tax and superannuation obligations to gain an unfair competitive advantage. The measures are expected to even the playing field for companies that comply with their tax and superannuation obligations; these companies are not expected to bear any additional costs from these proposals.

Consultation statement

3.249 A range of options were set out for public consultation in the Action Against Fraudulent Phoenix proposals paper. The proposals that formed this election commitment were included in that proposals paper. The paper was open to submissions from the public from 14 November 2009 to 15 January 2010.

3.250 Consultation on draft legislation was undertaken from 5 July 2011 to 1 August 2011. The majority of the submissions related to the policy underlying the changes, not to the technical nature of the legislative amendments.

3.251 Twenty-eight submissions were received in response to the proposals paper. The views set out in the public submissions in relation to the three proposals are set out below.

Automating the director penalty regime

3.252 Fifteen submissions commented expressly on automation.

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Six submission supported automation after three months on the basis that it will reduce the incentive to engage in fraudulent phoenix activity and it will ease the administrative burden on the ATO, allowing the ATO to respond more effectively to a problem that is already unlawful and appears to be extensive.

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Two submissions supported automation after a period of six months on the basis that PAYG withholding reflects amounts that are held on trust.

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The Commonwealth Ombudsman's submission gave general support for the automation of the director penalty regime, but suggested that there should be a review mechanism to allow the ATO to release a director from liability and suggested that notices setting out the outstanding liability should be sent to directors.

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Several defences will be available to directors, including the where the director was not involved in the management of the company, took all reasonable steps to achieve compliance or no such steps were available (section 269-35 in Schedule 1 to the TAA 1953). In addition, the Commissioner has a general power to decide whether to enforce a tax debt.

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Another two submissions, while not rejecting the proposal, expressed concern that the proposal was not sufficiently targeted at fraudulent phoenix activity and that the automatic period should be long enough to allow for seasonal fluctuations in cash flow and give directors time to become familiar with the business's financial situation.

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The current proposal has been targeted at fraudulent phoenix activity by limiting it to companies that do not report their outstanding liabilities. As a result, most honest and competent directors will not be impacted by the change.

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PAYG withholding amounts that have been withheld should be held on trust and therefore should not be included in business cash flow.

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Directors will have a right of indemnity against the company (section 269-45 in Schedule 1 to the TAA 1953). Directors will also be able to access defences, such as where the director was not involved in the management of the company or took all reasonable steps to achieve compliance (section 269-35 in Schedule 1 to the TAA 1953).

3.253 Four submissions did not support automating the director penalty regime. Three of these submissions were made by committees of the Law Council's Business Law Section (the Corporations Law Committee, the Reconstruction Law Committee and the Taxation Law Committee) and one was made by the law firm Pitcher and Partners. They were concerned that:

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automation effectively reinstates the ATO's priority in company liquidations because companies will pay tax debts before private debts;

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automation is unnecessary - the ATO should utilise its existing powers more effectively; and

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the proposal should be more targeted:

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It is important to remember that these amounts are essentially held on trust and should not be included in the company's everyday cash flow.

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As set out above, the existing director penalty regime is undermined by the large administrative burden that it imposes on the ATO and because directors can easily escape liability by putting the company into liquidation during the notice period.

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The current proposal has been targeted more directly at fraudulent phoenix activity by only applying automatic liability where the company has not reported its outstanding liability. As such, dishonest directors will not be able to prolong the life of a phoenix company by failing to report outstanding liabilities.

Extending the director penalty regime to superannuation guarantee

3.254 Fourteen submissions commented on the proposal to extend the director penalty regime to superannuation guarantee liabilities.

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Nine out of 14 submissions supported extending the director penalty regime beyond PAYG withholding.

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All of those nine submissions supported extending the director penalty regime to a range of taxes, such as company income tax and GST, not just superannuation guarantee liabilities.

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Three submissions supported extending the director penalty regime beyond tax liabilities to include other worker entitlements.

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These submissions noted that extending the director penalty regime would discourage fraudulent phoenix activity and remove distortions in the tax system (where one type of tax is paid in preference to another).

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These submissions considered that other creditors would not be prejudiced and that honest directors would have nothing to fear.

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The submissions noted the importance of superannuation guarantee liabilities to retirement incomes and their relationship with other entitlements, such as insurance and workers compensation.

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The Commonwealth Ombudsman noted that 10 per cent of complaints it received about taxation administration were about the ATO's inability to recover superannuation guarantee liabilities.

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Overall, they considered that extending the director penalty regime to superannuation guarantee liabilities was justified on public interest grounds.

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The Institute of Chartered Accountants stated that they do not support extending the director penalty regime beyond PAYG withholding on the basis that attaching personal liability to directors is only appropriate for PAYG withholding because it represents amounts that are essentially held on trust.

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Although superannuation guarantee is not held on trust per se, it does represent an amount that the company is obliged to pay for the benefit of the employee. Employees receive the benefit of PAYG withholding credits regardless of whether the amount is recovered from the employer. In contrast, employees do not receive superannuation guarantee amounts that are not recovered from the employer.

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Pitcher Partners did not object to the extension of the director penalty regime but did not believe that it would help to curb fraudulent phoenix activity.

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There is evidence to suggest that fraudulent phoenix operators often use their employees' superannuation guarantee entitlements as part of the businesses cash flow to generate profits for themselves and to prolong the life of the phoenix company. Making directors potentially liable for such amounts will discourage this behaviour.

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The Australian Institute of Company Directors and the three committees of the Business Law Section of the Law Council of Australia opposed the expansion of the director penalty regime on the basis that it would effectively make the Crown a priority creditor.

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Providing an incentive to pay a particular debt will encourage that debt to be paid in preference to other debts, in the same way that the other debts might be preferred in the absence of that debt. Unlike other creditors, the ATO cannot protect itself by refusing to provide credit.

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The Taxation Law Committee of the Business Law Section of the Law Council of Australia suggested that it is not always clear whether a person is an employee (and, therefore it may not be clear that there is a superannuation guarantee liability).

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The term 'employee' for superannuation guarantee purposes is defined under section 12 of the SGA Act 1992 to include common law employees and an expanded definition of employees including individuals working under a contract wholly or principally for labour, members of the board of directors or executive body of a company and artists, musicians and sportspersons who are paid to perform or present.

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Whether a person is an employee or an independent contractor for the purposes of the superannuation guarantee is a question of fact to be determined by examining the terms and circumstances of the arrangement between the payer and the person performing the work. The ATO superannuation guarantee ruling SGR 2005/1 provides guidance on how to determine whether an individual is an employee. The ATO also has an online decision tool to assist businesses to determine whether a worker is engaged under an employment relationship.

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In the circumstances where the company or director was not aware, and could not reasonably have known, that a person was an employee, then the director would be able to utilise the defence that they took all reasonable steps to comply or that no such steps were available (subsection 269-35(3) in Schedule 1 to the TAA 1953).

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Directors will also have a right of indemnity against the company (section 269-45 of Schedule 1 to the TAA 1953).

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The Corporations Committee of the Business Law Section of the Law Council of Australia commented that extending the director penalty regime to superannuation guarantee liabilities would exacerbate the existing administrative problems with the director penalty regime.

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Most fraudulent phoenix operators avoid paying more than one type of tax. As such, certain efficiencies would be achieved by expanding the director penalty regime. For example, after contacting ASIC to identify the directors of a company, the ATO could issue director penalty notices in relation to more than one tax liability without contacting ASIC again.

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The administrative problems associated with the director penalty regime will be eased through the automation of the regime as set out in this proposal.

Denying PAYG withholding credits to directors and their associates

3.255 Nine submissions commented on the proposal to deny PAYG withholding credits to directors and their associates for unpaid PAYG withholding.

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Five submissions supported the proposal on the basis that it would discourage fraudulent phoenix activity.

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The submissions generally supported denying PAYG withholding credits to directors and their families on the basis that this would provide an additional incentive not to engage in fraudulent phoenix activity.

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Barrett Walker suggested that denying credits to other employees who knew of, or were involved in, the non-payment of PAYG withholding would encourage reporting of fraudulent phoenix behaviour.

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Pitcher and Partners submitted that the proposal had merit but would not directly address fraudulent phoenix activity.

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There is evidence that fraudulent phoenix company operators routinely fail to pay PAYG withholding to the Commissioner and then benefit from the non-payment by claiming those credits.

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Three submissions did not support the proposal.

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The Housing Industry Association rejected the proposal on the basis that an error on the part of the ATO would adversely affect taxpayers. However, it was not clear why the Housing Industry Association considered this a bigger risk than the ATO making errors generally.

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The Taxation Committee of the Law Council of Australia considered that denying such credits would require allocating unpaid PAYG withholding amounts between directors and employees and that the benefit achieved would not be worth the effort required.

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The election costing of this proposal suggests that there will be a positive gain to the revenue from these proposals even after an allowance has been made for the administrative costs of the ATO.

Conclusion and recommended option

3.256 This proposal is an election commitment so there is no recommended option for the purpose of the regulation impact statement.

Chapter 4 - Consequential amendments for taxation of gaseous fuels

Outline of chapter

4.1 Schedule 4 to this Bill amends the Excise Act 1901 and the Fuel Tax Act 2006. The purpose of these minor consequential amendments is to ensure that the legislation bringing the gaseous fuels (liquefied petroleum gas (LPG), liquefied natural gas (LNG) and compressed natural gas (CNG)) into the fuel tax regime applies as intended and does not impose excessive compliance costs on gaseous fuel manufacturers, importers, distributors, or suppliers.

Context of amendments

4.2 The Taxation of Alternative Fuels legislation package of four Bills received Royal Assent on 29 June 2011. The package brings the transport use of LPG, LNG and CNG into the excise and excise-equivalent customs duty regime (otherwise referred to as the fuel tax regime) from 1 December 2011, with the full rate of fuel tax applicable from 1 July 2015. The fuel tax rate increases in equal amounts on 1 July each year over the transition period.

Summary of new law

4.3 This Schedule makes minor consequential amendments to the taxation arrangements for gaseous fuels. The amendments include:

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confirming that excise duty does not apply where CNG for transport use is manufactured in a home refuelling unit or units that collectively do not have commercial scale capacity;

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confirming that entitlements to fuel tax credits are available to distributors of LPG in a wider range of circumstances; and

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ensuring that the content of LPG notices may be prescribed in regulations only and that the content of these notices is not also set out in primary legislation.

Comparison of key features of new law and current law

Detailed explanation of new law

Notice requirements for supplies of LPG

4.4 Section 77L of the Excise Act 1901, as enacted in the Taxation of Alternative Fuels Legislation Amendment Act 2011, imposes an obligation to give notices when LPG subject to a remission of duty is supplied for non-transport use. Paragraphs 77L(3)(a) and (b) of the Excise Act 1901, as enacted, required that the notice:

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set out that excise duty has not been paid on the LPG supplied;

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set out the effect of the penalty provisions that apply for selling or using duty free LPG for transport purposes; and

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be given in the manner and form prescribed in regulations.

4.5 The requirements to set out in LPG notices that LPG for non-transport use is duty free and that penalties apply for sale or use for transport purposes are removed. The result of this change is that while the requirement to provide a notice when LPG is supplied for non-transport use is maintained in the legislation, the content of notices may only be prescribed in regulations. This allows maximum flexibility to develop, in consultation with industry, the text of notices that inform purchasers of LPG for non-transport use of their obligations. This approach minimises the compliance cost impact for entities that supply these notices. [ Schedule 4, item 3, subsection 77L(3) of the Excise Act 1901 ]

Transitional arrangements for notices

4.6 Regulations concerning the form and content of LPG notices that were made under the regulation-making power in paragraph 77L(3)(b) of the Excise Act 1901 are treated as having been made under the corresponding power under this Schedule. This transitional provision is required as the regulation-making power for the form and content of LPG notices has been relocated within subsection 77L(3) in this Schedule. [ Schedule 4, item 4 ]

Exemption of CNG manufactured in home refuelling units

4.7 Natural gas supplied to residential premises can be compressed in home compressing units and used as CNG fuel for vehicles. There is currently limited home refuelling of CNG because of the significant cost of domestic CNG manufacturing equipment, installation costs and the cost of converting vehicles. Without amendment of the law, home CNG refuellers who carry on an enterprise, for example as tradespeople, would be required to apply for an excise manufacturing licence, and make regular excise returns for small amounts of excisable CNG transport fuel. Accordingly, the exemption for home refuelling available to entities that are not carrying on an enterprise is extended to CNG produced in domestically-rated manufacturing equipment even if it is used in a vehicle used for business purposes.

4.8 The exemption is capped by limiting the collective manufacturing capacity of all CNG refuelling equipment at a residence to equipment capable of manufacturing no more than 10 kilograms per hour of CNG or such other amount prescribed in regulations. The capping of the exemption ensures that larger scale CNG manufacturing for transport use at residences is subject to excise duty. [ Schedule 4, items 1 to 2 of the Excise Act 1901 ]

Example 4.23 : Home CNG refuelling - business use

Camille and Sebastien have installed domestically-rated CNG manufacturing equipment at their home. The equipment has a capacity to manufacture 8 kilograms of CNG per hour. Camille operates her business vehicle on CNG manufactured by this equipment, while Sebastien owns a car, which is used for private purposes, and uses CNG that is refuelled from the CNG equipment at their home.

There is no excise liability from the manufacture of the CNG at their residence as the total CNG manufacturing capacity at their home is not more than 10 kilograms of CNG per hour.

Eligibility for fuel tax credits

4.9 The Fuel Tax Act 2006 is amended to ensure that fuel tax credits are available to unlicensed distributors of LPG who supply customers with LPG in storage tanks or supply LPG into customers' storage tanks that have a capacity of 210 kilograms or less. This amendment ensures that the entitlement arises whether or not the customer carries on an enterprise. This ensures that unlicensed distributors who buy LPG subject to duty (provided a fuel tax credit has not been claimed earlier in the supply chain) can claim fuel tax credits where they, for example, supply bottled LPG to customers regardless of whether the customer carries on an enterprise. [ Schedule 4, item 5 of the Fuel Tax Act 2006 ]

Example 4.24 : Supply of bottled LPG

Australian Camping Supplies is a business that sells camping goods, including LPG gas bottles for camping applications. The business buys duty paid LPG that is stored in a one tonne storage cylinder and then fills small LPG cylinders for sale to customers for camping gas. Australian Camping Supplies can claim a fuel tax credit on its Business Activity Statement for duty that it has paid on LPG that is sold to customers in the small cylinders for camping applications.

Application and transitional provisions

4.10 The amendments in this Schedule come into effect immediately after the commencement of Schedule 1 to the Taxation of Alternative Fuels Legislation Amendment Act 2011 on 1 December 2011. [ Clause 2, table item 7 ]

4.11 The commencement date of this Schedule ensures that the broadening of the CNG excise exemption, the expanded fuel tax credit entitlement and the more flexible LPG notice requirements benefit the gaseous fuels industry as soon as the new taxation arrangements for gaseous fuels come into operation on 1 December 2011.

4.12 The amendment to the fuel tax credit entitlements of unlicensed distributors of LPG applies to fuel acquired, manufactured or imported from immediately after the commencement of Schedule 1 to the Taxation of Alternative Fuels Legislation Amendment Act 2011. [ Schedule 4, item 7 ]

Consequential amendments

4.13 This Schedule replaces the reference to 'carrying on an enterprise' with the same term but with the inclusion of asterisks to highlight that the terms are defined terms in the fuel tax legislation. [ Schedule 4, item 7 of the Fuel Tax Act 2006 ]

Index

Tax Laws Amendment (2011 Measures No. 8) Bill 2011

Schedule 1: Commissioner's discretion for primary production concessions

Schedule 2: Clarifying the taxing point for Petroleum Resource Rent Tax

Schedule 3: Companies non-compliance with PAYG withholding and superannuation guarantee obligations

Schedule 4: Consequential amendments for taxation of gaseous fuels

Pay As You Go Withholding Non-compliance Tax Bill 2011