Chapter 1 Introduction
On 13 October 2011 the Selection Committee referred the Tax Laws
Amendment (2011 Measures No. 8) Bill 2011 and the Pay As You Go Withholding
Non-compliance Tax Bill 2011 to the committee for inquiry and report.
The Bills were introduced by the Government into the House of
Representatives earlier on the same day.
Purpose and overview of the Bills
There are four parts to the Bills:
n to provide the
Commissioner of Taxation with discretion to disregard certain events that would
otherwise trigger the assessment of certain income for a primary production
n to clarify that the
taxing point for the Petroleum Resource Rent Tax (PRRT) is when a product
reaches its final form, rather than when it first chemically meets the definition
of a marketable petroleum commodity;
n to extend the
director penalty regime to make directors personally liable for their company’s
unpaid superannuation guarantee amounts; and
n to make minor
consequential amendments to the taxation arrangements for gaseous fuels.
The second and third parts generated the most interest from stakeholders
and the committee pursued these aspects in the inquiry.
Petroleum Resource Rent Tax
Schedule 2 of the Tax Laws Amendment (2011 Measures No. 8) Bill 2011 amends
the Petroleum Resource Rent Tax Act 1953 (TAA 1953). It has two
main effects, the first of which is to amend the definition of a marketable
petroleum commodity as follows:
marketable petroleum commodity is a product listed in subsection (2) that:
produced from petroleum for the purpose of:
use as a feedstock for conversion to another product (whether a product
listed in subsection (2) or not); or
direct consumption as energy; and
(b) is in
its final form for that purpose.
products are as follows:
other product specified in regulations made for the purposes of this paragraph.
a product cannot be a marketable petroleum commodity if it has been produced
wholly or partly from a product that was a marketable petroleum commodity.
The Schedule’s second main effect is to apply the definition back to the
tax year commencing 1 July 1990.
Subsections (2) and (3) in the new definition are very similar to the
current provisions. The new aspect to the definition is subsection (1), in
particular the clause ‘is in its final form for that purpose’. Petroleum
companies can have a chain of production processes, commencing with drilling
and extraction, but then also processing, where a product can be separated and
filtered in order to meet the specifications for the market in which the
company wishes to compete.
For example, a product might meet the chemical definition of being
liquefied petroleum gas before being processed and might have a possible
commercial demand. Subsection (1) makes it clear that a product becomes a
marketable petroleum commodity when it reaches the state at which the company’s
operations are designed for it to be sold, used for energy by the company, or
to be converted to another product. In other words, the definition depends on
the commercial context of the project in question.
This definition is important because the term ‘marketable petroleum
commodity’ is used in section 24 of the Petroleum Resource Rent Tax
Assessment Act 1987 (PRRTA Act), along with other terms such as an
‘excluded commodity’, to determine a company’s assessable petroleum
receipts. The PRRT is calculated as 40 per cent of a company’s petroleum profits,
which depend on its assessable petroleum receipts. If the point at which
assessable petroleum receipts are calculated is earlier in the production
process when the product is less valuable, this will reduce receipts and profits
for tax purposes, and thus reducing the tax liability.
The current definition of a marketable petroleum commodity was
considered by the Federal Court in Esso Australia Resources Pty Ltd v The
Commissioner for Taxation  FCA 360. The judgement was delivered in
April this year. Esso (ExxonMobil) argued that the ‘taxing point’ occurs at the
earliest stage when the product meets the relevant chemical composition,
regardless of whether it would subject it to further processing for sale. The
Court agreed with the Commissioner that the current definition implies the
later taxing point and that this question must be decided in the context of the
project as a whole. After analysing the Act, Justice Middleton stated, ‘This
points to an actual sale or “marketability” being a concept at the heart of the
determination of liability under the PRRTA Act’.
The Bill is seeking to confirm the Court’s decision. The Explanatory
Memorandum states that the Court’s decision and the approach in the Bill
confirm ‘the long established application of the PRRT’. It also notes that
Esso’s interpretation would lead to greater uncertainty because a derived (or
estimated) market value would needed to calculate the tax amount since the
company is not seeking to sell the product at this point in the production
At the Budget in May this year, the Government announced its intention
to clarify the taxing point and entrench the decision in Esso. The Bill
gives effect to this policy commitment.
Company directors and the superannuation guarantee
Schedule 3 of the Tax Laws Amendment (2011 Measures No. 8) Bill 2011 amends
the Taxation Administration Act 1953 (TAA 1953). It does this by:
n extending the
director penalty regime to make directors personally liable for their company’s
unpaid superannuation guarantee amounts;
n 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
n 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.
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.
Schedule 3 will provide better protection to workers’ entitlements to
superannuation, further define the statutory obligations of company directors
and enhance the deterrence of fraudulent phoenix activity.
The proposed amendments are designed to provide disincentives for
directors to allow their companies to fail to meet their existing obligations,
particularly obligations to employees. They do not introduce new obligations on
the company but, rather, penalise company directors who fail to ensure that their
companies meet their obligations under the existing director penalty scheme.
This scheme was introduced in 1993 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. The director penalty regime was
re-written into Division 269 in Schedule 1 to the TAA 1953 in 2010,
with minimal policy change.
The regime ensures 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 simply phoenix companies.
The tax laws require companies to withhold amounts from certain payments
they make, such as wages to employees and fees to directors. The withheld
funds must be paid to the Commissioner or, where applicable, to pay estimates
of those funds.
The director penalty regime has always made directors of non-compliant
companies personally liable for the amount that the company should have paid, through
imposition of a penalty.
While the existing director penalty regime makes directors liable to a
penalty, at the end of the day the company is left with the responsibility to
meet its obligation.
Furthermore, as the existing regime allows directors 21 days notice of
the penalty before the Commissioner is able to commence proceedings to recover
the liability, directors inclined to do so are free to 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.
To compound matters still further, company directors are currently able
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
It is also critical to note that while the director penalty regime
addresses non-payment of PAYG withholding amounts to the Commissioner,
non-payment of employee entitlements such as superannuation cannot be addressed
through the regime. Thus, the Commonwealth has effectively established one
standard for its debtors, while leaving other lawful creditors with less effective
means of redress.
Petroleum Resource Rent Tax
The PRRT is a Commonwealth tax and applies to areas where the
Commonwealth has jurisdiction, in particular the offshore areas outside the
three nautical mile boundary. Up until the 1980s, all petroleum was taxed through
a royalty and excise, or volume, basis.
This system had its weaknesses. For example, in order to encourage more
oil exploration and extraction, the Government imposed lower tax rates for more
recently discovered oilfields. Further, the levy did not take into account
changing economic conditions. When oil prices were low, a fixed levy could potentially
make oil production uneconomic and when oil prices were high, the nation missed
the opportunity to participate in these gains.
The PRRT is a profits-based tax. The Australian Petroleum Production and
Exploration Association provided the following summary of how it works:
n it is assessed on a
n liability to pay
PRRT is on a producer/company;
n it is assessed at a
rate of 40 per cent;
n a liability is
incurred when all allowable expenditures (including compounding) have been
deducted from assessable receipts;
n assessable receipts
include the amounts received from the sale of all petroleum;
n deductions include
capital and operating costs that relate to the petroleum project, and are
deductible in the year they are incurred; and
expenditures are compounded forward at a variety of set rates depending on the
nature of those expenditures.
The Petroleum Resource Rent Tax Assessment Act 1987 was effective
from 15 January 1988. It applied retrospectively to exploration permits
awarded on or after 1 July 1984, which relates back to the Government’s formal
announcement of the tax. Initially, it applied to all offshore areas except for
Bass Strait and the North West Shelf. Bass Strait became subject to the PRRT on
1 July 1990.
The tax has several advantages over the previous levy. For example, the Government
does not need to adjust tax rates to achieve certain economic outcomes or to
take into account economic conditions. The tax amounts follow oil companies’
ability to pay. Further, it encourages companies to more fully exploit
available reserves because oil that is more costly to extract will attract
lower rates of tax. In effect, the Government has accepted more risk through
the PRRT, which has reduced risk for oil companies and led to a more secure
supply of oil for the Australian market.
This feature of the tax was related to the decision to include Bass
Strait within the PRRT in 1990. At the time, oil prices were very low, making
it less attractive for Esso and BHP to maintain production with high fixed
costs caused by a fixed levy. When Bass Strait left the volume system between
1990-91 and 1991-92, crude oil excise collections dropped from $1.3 billion to
$64 million. PRRT revenues increased from $300 million to $876 million, which
reduced tax on the joint venture by over $600 million at that time. However,
this came with the possibility that taxes would increase if oil prices rose.
Further, the PRRT, as a tax on profits, has no direct effect on the
petrol price for consumers because it is absorbed by petrol companies. A levy,
similar to other volume based taxes, would directly raise prices for consumers.
The trigger for the Bills has been a long running court case between ExxonMobil
and the Tax Office about the taxing point under the PRRT. The case commenced in
2004, following correspondence and discussions between the Bass Strait joint
venturers and the Tax Office for the previous 10 years. The case concerns the
tax liability for the Bass Strait joint venturers from 1990-91 to 2001-02,
which were the relevant periods when the legal action commenced.
ExxonMobil stated in evidence that, the maximum refund to which they
would be entitled in relation to the dispute between the years 1990-91 to 2001-02
would be $323 million. It appears that BHP’s
liability would be for a comparable amount.
In April this year, the Tax Office won a decision in the Federal Court
with a single judge. Justice Middleton found that the definition of a
‘marketable petroleum commodity’ depended on the commercial context of a
project, rather than when it met the chemical composition of sales gas,
liquefied petroleum gas, stabilised crude oil, or any of the other compounds
listed in the legislation. This implied a higher value of the product at the
taxing point, which was consistent with the tax payments made by ExxonMobil and
BHP since 1990-91.
In the May Budget, the Government announced that it would legislate to
confirm the Court’s decision. The Budget Papers state:
The Government will amend the tax law to provide greater
certainty around how the taxing point is calculated for the purposes of the
Petroleum Resource Rent Tax (PRRT), with effect from 1 July 1990. This measure
will confirm existing application of the PRRT in relation to the taxing point
and will provide greater certainty for PRRT taxpayers.
The location of the taxing point within a PRRT project is
used in determining PRRT liabilities, and was the central issue recently
considered by the Federal Court in Esso Australia Resources Pty Ltd v The Commissioner
The amendments will provide further statutory support for the
Court's judgment, and will be consistent with the established application of
the PRRT law. As such, this measure has no revenue impact.
ExxonMobil has stated that it would prefer to exhaust its legal options
in the court system. A media report after the Budget announcement stated:
ExxonMobil said it was premature of the Government to change
the law given it had yet to decide whether to appeal against the Court’s decision
‘Obviously we are concerned about the timing of this
announcement given that legal action is ongoing ... and we are reserving all of
our rights in relation to this matter.’
ExxonMobil has appealed the Federal Court’s decision. The Federal
Court’s website lists a hearing in the Full Federal Court for the week
commencing 7 November 2011.
So called phoenix activity refers to the actions of company directors or
management who have deliberately sought to avoid paying liabilities, including
taxation liabilities wages, superannuation and leave entitlements and a variety
of other responsibilities, such as supplier accounts, through the use of
contrived company liquidation.
Once formally liquidated, such companies resume trading through a new
company structure controlled by the same person or group of individuals.
Alternately, phoenix activity may be described as the use of the process of
sequential company registration, liquidation and re-registration as a means of
corporate fraud or tax evasion. A phoenix company may even be used to
intentionally accumulate debts that the directors never intended to repay.
On occasion, phoenix operators may use family members or other
associates to gain further benefits, such as inflated incomes or credit claims.
There are cases where a family member or associate of a phoenix company
director may be the commanding or controlling agent behind the company.
Phoenix activity is conducted for personal enrichment or gaining an
unfair competitive advantage. It invariably constitutes a gross and
unprincipled abuse of the corporate form and the long established privilege of
limited liability which is of essential importance to our economic system. It
undermines the integrity of corporate regulation. It deprives the Commonwealth
of revenue. It reduces public trust in the economic system, lowers the
reputation of business and potentially deters investors. It also confers an
unlawful benefit on those who evade the law and a disadvantage to those who
comply with it.
In cases where phoenix activity involves the evasion of superannuation
liabilities, it deprives workers of their financial security in old age,
potentially contributes towards the creation of otherwise unnecessary welfare
dependence and frustrates the efforts of successive governments to ensure the
highest possible standard of living for Australians in their retirement.
The failure of phoenix companies to pay employees’ entitlements or tax
liabilities enables them to offer lower prices for goods and services. They can
either reinvest money that compliant businesses would have to allocate to tax
and superannuation payments or simply disburse this as profit or wages to the
principals behind the phoenix scheme.
Reports and reviews
Almost a decade ago, the Royal Commission into the Building and
Construction Commission (The Cole Commission) was concerned about the frequency
of phoenix activity in the building industry. The Commission made a number of
recommendations addressing this issue, including that:
The Commonwealth, after consultation with the Australian
Securities and Investments Commission, consider the need for an increase in the
maximum penalties provided in the Corporations Act 2001(C’wth) for
offences that may be associated with fraudulent phoenix company activity.
The Commission also called on the Commonwealth to consider the need to
amend existing legislation in order to disqualify company directors guilty of
fraudulent phoenix activity.
Several years ago, Treasury estimated that phoenix activity cost the
federal revenue about $600 million per annum.
The subject of phoenix activity has been pursued by Parliament on a
number of occasions in recent years. For example, the Joint Committee on Public
Accounts and Audit were advised in 2009 by the ATO that the incidence of
phoenix activity was increasing: since 2008 the ATO employer obligations
program had identified 6,013 companies as being a high-risk of defaulting on
their obligations; of these over 4,600 had not complied with their PAYG withholding
obligations and almost 3,000 had not met their super guarantee obligations.
At that time the ATO explained the difficulty of prosecution because:
...in the early-2000s we obtained a number of high profile
successful prosecutions, but after a few years we found that the penalties that
were imposed on people who were successfully prosecuted became ineffective. We
went from people getting custodial sentences to people getting home detention,
which included a provision that allowed them out during daylight hours to
conduct business, so there was essentially no penalty. I think that led to a
loss of confidence and a loss of interest, to some extent. When you are dealing
with the court system and the Director of Public Prosecutions, they have an
enormous caseload of very serious cases. It is hard to get cases up when their
assessment is that the penalty is likely to be a slap on the wrist.
In March 2010 the Inspector-General of Taxation (IGT) published a
report, The Review into the ATO’s administration of the Superannuation
Guarantee Charge. In this report he found that insolvent employers were
responsible for approximately $600.8 million owed to the ATO under the
superannuation guarantee charge (SGC) and that most of this debt had been
written-off as lost employee retirement savings.
The report also found that the groups most effected by the problem were employees
of micro businesses, contracted and casual employees, younger employees; and
employees in particular sectors — the arts and recreation services; the
transport, postal and warehousing sectors; accommodation and food services; and
the agriculture, forestry and fishing sector. The mean salary and wages across
each of these high risk segments is less than $30,000 a year, which indicated
that those most at risk of having insufficient superannuation contributed on
their behalf by employers were low-income employees.
The IGT stated that he had received many submissions on the growing
practice of employers misclassifying workers as subcontractors, rather than
employees, to avoid paying superannuation. In addition, over
70 per cent of complaints concerning superannuation guarantee obligations
come from ex-employees. There was also anecdotal evidence to suggest that many
employees are concerned that, if they query their employer about their
superannuation guarantee entitlement or lodge a complaint with the ATO, then
they could either lose their job or no longer be given work. 
Finally, the IGT noted that:
A delay in triggering ATO audit activity significantly
increases the likelihood of non-payment of SGC debt (requiring more costly debt
recovery action) and irrecoverability through insolvency. It also hampers the
ATO’s and government’s efforts to maintain a level playing field amongst
employers and ensure that compliant employers do not face a financial
disadvantage against non-compliant competitors.
The IGT recommended that the Government consider making company
directors personally liable for the unpaid superannuation guarantee charge
liabilities of their companies. 
On 14 November 2009 the Government released a proposals paper containing
options to address such fraudulent phoenix activity.
The paper outlined a number of possible amendments to the taxation and
corporations law to address the problem. These included the following actions
in relation to taxation law:
n amending the
director penalty regime to remove the ability of directors engaged in
fraudulent phoenix activity to avoid personal liability for Pay As You Go
(Withholding) (PAYG(W)) liabilities by placing the company into voluntary
administration or liquidating the company;
n expanding the
director penalty regime Expand the director penalty regime to apply to
superannuation guarantee (SG) liabilities and other taxation liabilities such
as indirect tax liabilities and a company’s own income tax liability;
n amending the promoter
penalty regime to ensure that the promoter penalty regime is able to target
those individuals promoting fraudulent phoenix activity;
anti-avoidance provisions in the taxation law (either through an expansion of
the existing general anti-avoidance rule (GAAR) or through the creation of a
specific provision) to effectively negate any taxation benefit derived from
fraudulent phoenix activity;
n reinstating the
‘failure to remit’ offence that would make it an offence for an entity not to
remit the required PAYG(W) amounts;
n denying directors of
companies (and potentially close relatives) from being able to access PAYG(W)
credits in relation to their own income where amounts withheld have not been
remitted (to the ATO) by the company;
n introducing an
offence for claiming non-remitted PAYG(W) credits by making it an offence for
directors to claim credits in relation to their own income for PAYG(W) amounts
that have not been remitted by the company of which they are a director; and
n providing the
Commissioner of Taxation with the discretion to require a company to provide an
appropriate bond (supported by sufficient penalties) where it is reasonable to
expect that the company would be unable to meet its tax obligations and/or
engage in fraudulent phoenix activity.
The paper also identified the following options in the corporations law:
n expanding the scope
for disqualification of directors by giving a Court or the Australian
Securities and Investment Commission (ASIC) a discretion to disqualify a person
from being a director if the relevant company has been wound up and the conduct
of the person, as a director of that company, makes them unfit to be concerned
in the management of a company;
n restricting the use
of a similar name or trading style by successor company and making directors
personally liable for the debts of a liquidated company in circumstances where
a ‘new’ company adopts the same or similar name as its previous incarnation;
n adopting the doctrine
of inadequate capitalisation by allowing the corporate veil to be lifted where
a company sets up a subsidiary with insufficient capital to meet the debts that
could reasonably be expected.
Treasury received 28 submissions, 2 of which were confidential.
In their submission the Australian Institute of Company Directors
supported the case for reform in relation to companies that fail to pass on
PAYG deductions to the ATO. Apart from that, they did not believe that there
was strong case for additional legislation. They opposed ASIC being awarded any
additional powers to disqualify a director beyond that which it already has
under section 206F of the Corporations Act. They wanted greater clarity
concerning the use of similar names or trading style by successor companies and
claimed that no case had been made for introducing the concept of ‘inadequate
In their submission the Corporations Law Committee of the Business Law
Section of the Law Council of Australia:
n strongly opposed the expansion
of ASIC’s power to disqualify a person from managing corporations by
n strongly opposed the
adoption of the doctrine of adequate capitalisation;
n stated that there was
simply no need to extend the director penalty regime in the taxation law beyond
The Insolvency and Reconstruction Law Committee of the Business Law
Section of the Law Council of Australia took issue with the definitions
involved in criminalising phoenix activity. They argued that not all phoenix
activity was necessarily immoral or unethical:
...if one defines phoenix activity merely as the phenomenon
by which a person or persons who have been controlling company A carry on the
same or substantially the same business through company B, often with the same
or substantially the same name, following the demise of company A...[there will
be] circumstances where this might happen quite legitimately – eg where a
director buys the business, including the right to use the name, from the
The Insolvency and Reconstruction Law Committee argued that the concept
could be defined by way of the intention of the parties or by way of the
consequences. They suggested that sections 216-217 of the UK’s Insolvency
Act 1986, which restricts the re-use of a company’s name after liquidation,
might be relevant. They also suggested that thought needed to be given to
protect the interests of innocent directors caught up unwittingly in phoenix
The Committee argued against any amendment to the director penalty
provisions which would make a company director automatically liable for
unremitted withholding taxes 3 months (or any other period) after the date they
should have been remitted. They were concerned that such changes might catch
many directors not engaged in phoenix activity of any sort who may, for
example, be reasonably engaged in proper attempts to restructure a company’s
affairs. In their view, such an amendment would not target the issue of phoenix
activity with any precision. They also believed that the proposal would provide
the ATO with an unwarranted advantage over other creditors.
In their submission, the Taxation Law Committee of the Law Council of
Australia took the general view that existing legal remedies against fraud were
sufficient to resolve the problem of fraudulent phoenix activity, but were not
used as often as they should be:
If relevant agencies established a track record of regularly
prosecuting phoenix activity under existing laws, then the Committee believes
the problem would be much smaller and the case for a further erosion of civil
and economic liberties would largely vanish.
Committee objectives and scope
The objective of the inquiry is to investigate the adequacy of both
Bills in achieving their various policy objectives and, where possible,
identify any unintended consequences.
Conduct of the inquiry
Details of the inquiry were placed on the committee’s website. A media
release announcing the inquiry and seeking submissions was issued on Wednesday
19 October 2011.
Eighteen submissions and seven exhibits were received. These are listed
at Appendix A.
A public hearing was held in Canberra on Thursday 27 October 2011. A
list of the witnesses who appeared at the hearing is available at Appendix B.
The submissions and transcript of evidence were placed on the committee’s
website at http://www.aph.gov.au/house/committee/economics/index.htm.