Bills Digest no. 153 2009–10
Tax Laws Amendment (Transfer of Provisions) Bill
2010
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage history
Purpose
Background
Financial implications
Main provisions
Contact officer & copyright details
Passage history
Tax Laws Amendment (Transfer of Provisions)
Bill 2010
Date introduced: 17 March 2010
House: House
of Representatives
Portfolio: Treasury
Commencement: The formal provisions commence on Royal Assent, but
all other provisions commence on 1 July 2010
Links: The
links to the Bill, its Explanatory Memorandum and second
reading speech can be found on the Bills page, which is at http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
at http://www.comlaw.gov.au/.
The Bill rewrites five areas of
income tax law from the Income Tax Assessment Act 1936
(ITAA 1936) into the Income Tax Assessment Act 1997 (ITAA
1997) and the Taxation Administration Act 1953 (TAA 1953),
being:
- the collection and recovery of income tax (including the
expansion of the requirement for a taxpayer to give a security
deposit in certain circumstances, such as suspected involvement in
fraudulent phoenix activity)
- the rules for the income tax treatment of the gain a debtor
makes when one of his or her commercial debts is forgiven
- the income tax treatment of luxury car leases
- the farm management deposit (FMD) scheme, which allows primary
producers to set aside pre-tax income in profitable years for
withdrawal in later, low-income years, and
- the taxation of premium income received by general insurance
companies (and the ability to deduct liabilities for outstanding
claims).
In November 1993, the Joint Committee of Public Accounts
recommended that the ITAA 1936 should be rewritten.[1] In response, the then
Treasurer, John Dawkins MP, announced that a multi-disciplinary
project team (comprising senior personnel from the Treasury, the
Australian Taxation Office (ATO) and the Office of Parliamentary
Counsel) would spend three years rewriting some 500 pages of income
tax law. That project was known as the ‘Tax Law
Improvement Project’ (TLIP) and commenced on 1 July
1994.[2] Its
focus was on revising the structure and language of the existing
law whilst maintaining existing taxation policy. Following
the release of a discussion paper in 1995, the review culminated in
the ITAA 1997 (and various other Acts since that time).
However, in August 1998, the Howard Government announced its
tax reform plan and stated that the resources of the TLIP would be
subsumed into other tax law reform work.[3] Since then, there has been no
formal, systematic rewrite of the ITAA 1936—although
certainly numerous tax law amendments in the past decade have
rewritten provisions of that Act.[4]
The Bill repeals a large number of provisions in the ITAA 1936
and rewrites them into the ITAA 1997 or the TAA 1953. It
reduces 149 pages of tax law to 101 pages.[5] According to the Explanatory
Memorandum, the provisions have been selected for rewriting at this
point in time because they do not involve significant policy
changes, and already use a ‘fairly plain-English
style’.[6] There should thus be little (if any) detriment to
taxpayers as a result of the rewriting. Where the ATO has
published a ruling about the interpretation of a particular
provision of the ITAA 1936 that is being rewritten,
section 357–85 of Schedule 1 to the TAA 1953 states
that (to the extent that a rewritten provision ‘expresses the
same ideas as the old provision’), the ruling ‘is taken
also to be a ruling about that provision as re-enacted or
remade’.[7]
On 17 March 2010, the Senate Selection of Bills Committee
resolved to recommend that the Bill not be referred to a
committee.[8]
While the main purpose of the Bill is simply to rewrite the
existing law, it does make at least one interesting
change—and that is the expansion of the current requirement
for a taxpayer to give a security deposit to the Commissioner of
Taxation in certain circumstances to include not only
income tax liabilities (as is the case at present) but
any existing or future tax-related liabilities. The
proposed change is discussed in detail below.
One reason for the proposed change is that the Bill is
attempting to address, albeit in very small part only, the rise of
fraudulent ‘phoenix activity’. As the Assistant
Treasurer, Senator Nick Sherry, explained recently:
Phoenix activity involves the
‘deliberate, and often systematic, liquidation of a company
to avoid the payment of liabilities, including employee wages and
superannuation, business creditors and outstanding taxes. The
business then ‘rises’ and continues through another
company free of those debts.[9]
This behaviour is the subject of a current inquiry by the
Treasury, which in November 2009 issued a ‘proposals
paper’ for public comment.[10] The paper outlines possible amendments to
taxation and corporations law. Submissions closed on 15
January 2010 but the Treasury is yet to make any submission (or
report etc) available to the public.[11]
Phoenix activity is not a new phenomenon. Indeed, the ATO
has been concerned about phoenix activity since at least 1998, when
it launched its Phoenix Project.[12] That project provided ‘a planned and
coordinated focus on individuals who use, or promote the use of,
successive company structures to intentionally evade payment of
taxes’, with the ATO making the following observations in a
submission to the Royal Commission into the Building and
Construction Industry in 2002:
This fraud typically occurs when individuals
use limited liability companies to accumulate debts (usually to the
Tax Office), liquidate the companies concerned and then carry on
their business via a newly formed company. In almost all cases the
entities placed into liquidation have no assets.
The major focus of the Project has been on
serial offenders who use deliberate and fraudulent methods to avoid
their obligations.
The Project currently has 32 staff located in
four Tax Office sites in the eastern States where phoenix risk is
at its highest. Phoenix activity has been found to be more common
in NSW, particularly in the building and construction
industry.[13]
The size of the problem of fraudulent phoenix activity is
difficult to estimate but appears to be substantial. In
November 2009, the Assistant Treasurer said that the ATO estimates
that ‘the current stock of suspected phoenix cases it is
monitoring poses an unacceptable risk to revenue in the order of
$600 million’.[14] In March 2010, the Assistant Treasurer again said
that the ‘latest estimates show phoenix activity may be
ripping up to $600 million from the national revenue
base’.[15] However, on 23 April 2010, the Commissioner of
Taxation, Michael D’Ascenzo (the Commissioner), revealed that
$200 million in tax liabilities have been identified as a result of
the ATO’s focus on fraudulent phoenix activity, with up to
nine cases being referred to the Director of Public
Prosecutions.[16] It is not clear why there is apparently a gap of
$400 million between the two figures, but it may well be the case
that the figure of $600 million includes moneys other than tax
liabilities and/or estimates that are yet to be confirmed (with the
gap thus possibly representing the difference between actual and
potential liabilities).
The proposal to allow the Commissioner to require the giving of
a security deposit is not new. In fact it largely replicates
existing section 213 of the ITAA 1936, which has been in place with
only minor revisions since its inclusion in the original
Act.[17]
Section 213 currently provides as follows:
(1)
Where the Commissioner has reason to believe that any person
establishing or carrying on business in Australia intends to carry
on that business for a limited period only, or where the
Commissioner for any other reason thinks it proper so to do, he may
at any time and from time to time require that person to give
security by bond or deposit or otherwise to the satisfaction of the
Commissioner for the due return of, and payment of income tax on,
the income derived by that person.
(2) A person who
refuses or fails to give security when required to do so under this
section is guilty of an offence.
Penalty for contravention of this
subsection:
20 penalty units.[18]
In summary, the Commissioner is currently
empowered to require a taxpayer to provide security, usually by
bond or deposit, for the due return and payment of income
tax. However, the Bill seeks (among other things) to
amend the law to empower the Commissioner to require a taxpayer to
give a security deposit for any existing or future tax-related
liabilities (and not just income tax liabilities, as is the case at
present).
Proposed Subdivision 255–D in Schedule 1
to the TAA 1953 (to be inserted by item 9 of
Schedule 1 to the current Bill) allows the
Commissioner to require a taxpayer to make a security deposit if
the Commissioner has reason to believe that:
- the taxpayer is establishing or carrying on an enterprise in
Australia, and intends to carry on that enterprise for a limited
time only, or
- the requirement is otherwise appropriate ‘having regard
to all relevant circumstances’.[19]
The Commissioner may require the security deposit to be given by
way of a bond or deposit (including by instalments) or by any other
means he or she considers appropriate (such as a guarantee or
mortgage over a property).[20] The Commissioner may require the taxpayer to give
the security at any time and as often as the Commissioner
reasonably believes is appropriate.[21]
The Commissioner must give the taxpayer written notice of the
requirement to give the security.[22] The notice must:
- state that the taxpayer is required to give the security
- explain why the Commissioner requires the security
- set out the amount of the security
- describe how and when the taxpayer is to give the security,
and
- explain how the taxpayer may apply to have the decision
reviewed.[23]
Nonetheless, failure by the Commissioner to comply with
proposed section 255–105 does not affect the
validity of the requirement for the taxpayer to give the
security.[24] In
other words, if the Commissioner does not provide all the details
ordinarily required in the notice, the taxpayer must still provide
the security deposit.
If the taxpayer fails to give the security required by the
Commissioner, the taxpayer commits an offence.[25] The offence carries a
maximum penalty of 100 penalty units (or $11 000).[26]
The main differences between proposed Subdivision
255–D in Schedule 1 to the TAA 1953 and
existing section 213 of the ITAA 1936 are as follows.
First the current provision refers to a person
‘establishing or carrying on business in
Australia’, whereas the proposed provisions refer to a
taxpayer who is ‘establishing or carrying on an
enterprise’. The term
‘business’ is defined in section 6 of the ITAA
1936 to have the meaning given by section 995–1 of the ITAA
1997. There it is defined to include ‘any profession,
trade, employment, vocation or calling, but does not include
occupation as an employee’. The term
‘enterprise’ is not defined in the ITAA 1936
but is defined in section 995–1 of the ITAA 1997 to have the
meaning given by section 9–20 of the A New Tax System
(Goods and Services Tax) Act 1999 (the GST Act). There
it is defined as ‘an activity, or series of activities,
done’ in a variety of specified forms (such as a business or
an adventure) or ‘on a regular or continuous basis, in the
form of a lease, licence or other grant of an interest in
property’, or done by various, specified persons or
positions, including by the trustee of a superannuation fund,
charitable institution or religious institution. The term
‘enterprise’ does not include an
activity done by a person as an employee.[27] Thus the revised provision will
apply to a broader range of taxpayers than the current
provision.
Second, while the current provision applies only to the payment
of income tax, the proposed provisions will apply to all taxes
administered by the Commissioner, including the superannuation
guarantee charge and payments of the goods and services tax
(GST).
Third, the proposed provisions contain greater detail about:
(a) how the
Commissioner is to give notice to the taxpayer of the requirement
to give security, and
(b) how the taxpayer
is to provide the security to the Commissioner.
Finally, the current penalty is increased fivefold from 20
penalty units (or $2200) to 100 penalty units (or
$11 000). The penalty bears no relationship to the
amount required to be given as a security deposit, and thus it
bears no relationship to the amount of tax which is due, or may
become payable, to the Commissioner. It would still appear to
be a fairly nominal amount, but it remains to be seen how effective
a deterrent such a penalty will be.
Press commentary on fraudulent phoenix activity and the
Bill
The proposal to extend the requirement for a security deposit to
cover not just income tax but any taxes which a taxpayer may owe to
the Commissioner has drawn criticism from a number of sectors,
particularly because of the effects it may have for the cash-flow
of businesses which are forced to use limited cash resources or
borrow funds to give a security deposit for a range of future tax
liabilities.[28]
For example, Gerry Bean, head of the Law Council of
Australia’s tax committee, drew attention to the wide
discretions vested in the Commissioner and the fact the proposed
amendments ‘represented a significant departure from current
policy’. Dr Bean said: ‘To the extent that it is
a cash deposit it will strip out small-to-medium enterprise (SME)
working capital and, if they have to borrow to finance it, then
that will push up costs for the SME’.[29] Similarly, a tax and insolvency
lawyer, David Marks, is reported as saying:
The provisions apply potentially to every
entity, and to every person who conducts a business. It might
be an unintended consequence, but the tax office will have the
power to squeeze small business and I don’t think this has
been fully appreciated yet.[30]
Roger Mendelson, chief executive of Prushka debt collection
agency, said the proposal ‘protects the ATO at the expense of
small to medium-sized businesses’.[31] He explained:
While the ATO’s plan will protect the
revenue from losses resulting from phoenix activity, it essentially
leaves other creditors such as small businesses out in the cold and
unprotected from companies that become liquidated without paying
their debts.[32]
According to the Explanatory Memorandum, the Bill has a nil to
minimal financial impact.[33]
As the Bill primarily rewrites (and/or repeals) numerous
provisions in the ITAA 1936, it is unnecessary to provide much
discussion of the individual provisions or Schedules in the
Bill. It should suffice to provide a short, general
explanation of each of the Schedules, but then to comment
specifically on a few items of interest.
Part 1 of Schedule 1 repeals
Part VI of the ITAA 1936 but also rewrites existing Divisions 1, 8,
9 and 10 of Part VI of the ITAA 1936 into the ITAA 1997 and the TAA
1953.
Part VI of the ITAA 1936 deals with the collection and recovery
of tax, and currently contains just four Divisions (being those
four Divisions which are to rewritten). Division 1 of
Part VI of the ITAA 1936 is a general division (setting out matters
such as when tax is payable; temporary business; and consolidated
assessments). It is being largely rewritten as
proposed Division 5 of the ITAA 1997—How to
work out when to pay your income tax.[34]
Division 8 of Part VI of the ITAA 1936 deals with the prompt
recovery, through estimates and payment agreements, of certain
amounts not remitted. It is being largely rewritten as
proposed Division 268 in Schedule 1 to the TAA
1953, which is headed ‘Estimates and recovery of PAYG
withholding liabilities’.
Division 9 of Part VI of the ITAA 1936 deals with penalties for
directors of non-remitting companies.[35] It is being largely rewritten
as proposed Division 269 in Schedule 1 to the TAA
1953, which is headed ‘Penalties for directors of
non-complying companies’.[36]
Division 10 of Part VI of the ITAA 1936 deals with
‘miscellaneous items’ but currently only contains one
section. Existing section 222ARA states that Part VI of the
ITAA 1936 ‘is not intended to limit or exclude the operation
of Chapter 5 of the Corporations Act 2001, in so far as
that Chapter can operate concurrently’ with Part VI.[37] It is rewritten
as proposed section 269–55, which states
that proposed Division 269 is not intended to limit or exclude the
operation of Chapter 5 of the Corporations Act 2001.
Part 2 of Schedule 1 to the
Bill makes consequential amendments to a variety of Acts as a
consequence of the repeal of existing provisions in the ITAA 1936
by Part 1 of Schedule 1 to the Bill.
Part 3 of Schedule 1 contains
various application, transitional and saving provisions.
Part 1 of Schedule 2 to the
Bill repeals Schedule 2C to the ITAA 1936 and in its place inserts
proposed Division 245 into the ITAA
1997. Existing Schedule 2C to the ITAA 1936
comprises only one Division: Division 245, which is headed
‘Forgiveness of commercial debts’. It applies
if:
(a) a debt or
part of a debt ceases to be payable because the obligation to pay
the debt or part is released or waived, or is otherwise
extinguished (this is referred to as the forgiveness of the debt or
part); and
(b) there are
amounts (reducible amounts) that would otherwise be taken
into account in reducing the debtor’s taxable income of the
year of income in which the debt is forgiven or a later year of
income.[38]
Proposed Division 245 of the ITAA 1997 largely
replicates existing Division 245 of Schedule 2C to the ITAA 1936
but the language has been greatly simplified and some provisions
have been renumbered.
Part 2 of Schedule 2 to the
Bill makes consequential changes to the ITAA 1936 and the ITAA 1997
as a result of the amendments in Part 1 to Schedule 2.
Part 1 of Schedule 3 to the
Bill repeals Schedule 2E to the ITAA 1936 and it its place inserts
proposed Division 242 into the ITAA 1997.
Existing Schedule 2E to the ITAA 1936 comprises only one
Division: Division 42A, which deals with leases of luxury
cars. Proposed Division 242 of the ITAA 1997
largely replicates existing Division 245 of Schedule 2C to the ITAA
1936 but the language has been greatly simplified and some
provisions have been renumbered.
Part 2 of Schedule 3 to the
Bill makes consequential amendments to the ITAA 1997 as a result of
the amendments made by Part 1 of the Schedule. Part
3 of Schedule 3 contains application and
transitional provisions.
Part 1 of Schedule 4 to the
Bill repeals Schedule 2G to the ITAA 1936 and it its place inserts
proposed Division 393 into the ITAA 1997.
Existing Schedule 2G to the ITAA 1936 comprises only one
Division: Division 393, which deals with farm management
deposits. A ‘farm management deposit’ is
essentially a deposit made with a financial institution by an
individual carrying on a primary production business which allows
the taxpayer to carry over income from years of good cash flow and
access that income in the future when required. Existing
Division 393 sets out various tests and conditions that must be met
in order for a taxpayer to be eligible to deduct a farm management
deposit from the taxpayer’s taxable income in a particular
income year, including the fact that:
- the deposit must not be more than $400 000
- the taxpayer can have a farm management deposit with only one
financial institution
- the sum of the balances of the taxpayer’s farm management
deposits from time to time with the financial institution must not
be more than $400 000
- the deposit must generally be held for at least 12 months,
and
- the taxpayer’s taxable non-primary production income for
the year must not exceed $65 000.
Existing Division 393 allows the taxpayer to defer including the
amount of the farm deposit bond as income until the income year in
which the deposit is repaid (that is, accessed or ‘drawn
down’ by the taxpayer). Proposed Division
393 of the ITAA 1997 largely replicates existing
Division 393 of Schedule 2G to the ITAA 1936 but the language
has been greatly simplified and some provisions have been
renumbered. A large number of explanatory notes have been
retained.
Part 1 of Schedule 4 to the
Bill also inserts proposed Division 398 into
Schedule 1 to the TAA 1953. Proposed Division 398 deals with
miscellaneous reporting obligations and currently contains only one
subdivision which deals specifically with farm management deposit
reporting. Proposed section 398–5 in
Schedule 1 to the TAA 1953 states that a provider of a farm
management deposit must within 60 days of the end of a quarter give
written information to the Agriculture Secretary about:
- the number of farm management deposits held by the provider at
the end of each month in the quarter
- the number of depositors in respect of such deposits
- the sum of the balances of such deposits, and
- any other information in relation to farm management deposits
held by the provider at any time in the quarter that is required by
the regulations.
Failure to provide the information is a criminal offence which
attracts a maximum penalty of 10 penalty units.[39]
The regulations must not require the disclosure of the identity
of any depositor or information from which the identity of a
depositor could reasonably be inferred.[40]
Proposed section 398–5 simply rewrites
existing section 264AA of the ITAA 1936. That provision does
not appear in existing Schedule 2G but rather appears in Part VIII
of that Act, which contains miscellaneous provisions.
Part 2 of Schedule 4 to the
Bill makes consequential amendments to the Farm Household
Support Act 1992, the ITAA 1936, the ITAA 1997 and the TAA
1953.
Part 3 of Schedule 4 to the
Bill contains application and transitional provisions.
Part 1 of Schedule 5 to the
Bill repeals Schedule 2J to the ITAA 1936 and it its place inserts
proposed Division 321 into the ITAA 1997.
Existing Schedule 2J to the ITAA 1936 comprises two Divisions:
Division 321, which deals with the taxation of general insurance
companies, and Division 323, which makes provision for (and payment
of) outstanding claims for workers’ compensation liabilities
against companies that are not required by law to insure, and do
not insure, in respect of such liabilities.
These two existing Divisions are condensed into proposed
Division 321 of the ITAA 1997, which deals with both
general insurance companies and companies that self-insure in
respect of workers’ compensation liabilities. Again the
language has been greatly simplified and provisions have been
renumbered. The provisions that apply to each type of company
are readily apparent from the structure of the proposed
Division.
Members, Senators and Parliamentary staff can obtain further
information from the Parliamentary Library on (02) 6277 2795.
[27]. For the text of
section 9-20 of the GST Act, see
http://www.austlii.edu.au/au/legis/cth/consol_act/antsasta1999402/s9.20.html
viewed 10 May 2010.
Morag Donaldson
26 May 2010
Bills Digest Service
Parliamentary Library
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