Posted 22/03/2018 by Phillip Hawkins and Dr. Jonathon Deans
The most material change made by the Treasury Laws Amendment (2018 Measures No. 1) Bill 2018 (the Bill) is to strengthen the rules for the remittance of GST on the sale of new properties. The change aims to reduce the risk of non-remittance arising from sellers being deliberately liquidated in order to escape their liabilities to creditors, employees or to the Australian Taxation Office (ATO), before re-forming as a new legal entity, a practice known as ‘phoenixing’ (see ATO).
Other changes proposed by the Bill include:
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repealing a number of inoperative Acts (previously contained in the Omnibus Repeal Day (Spring 2015) Bill 2015, which lapsed at the end of the last Parliament)
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making changes that would allow the ATO Commissioner—rather than the Chief Executive of Medicare—to authorise the release of superannuation to individuals on compassionate grounds (previously contained in the Treasury Legislation Amendment (Repeal Day 2015) Bill 2016, which lapsed at the end of the last Parliament) and
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extending, until 1 July 2020, an existing provision that provides Capital Gains Tax (CGT) relief to merging superannuation funds.
Extent of phoenixing
The Explanatory Memorandum notes that, in the last five years, around 4,000 individuals—controlling more than 12,000 insolvent entities and responsible for $1.8b in written-off debt—have engaged in phoenixing to avoid paying GST. A media report in the AFR claimed that the ATO has ‘written off more than $10 billion in GST as a result of phoenixing in the decade to 2012’. The Explanatory Memorandum also notes that the ATO has a range of strategies which it currently uses to tackle non-compliance, but these ‘strategies are labour-intensive, and costly to undertake and sustain’.
Government response
In the 2017–18 Federal Budget, the Government announced it would change the law to address tax evasion through phoenixing in property transactions.
Under current arrangements, residential property developers receive GST payments from property purchasers, which are not remitted to the ATO until the next Business Activity Statement. Up to three months may elapse between receipt of the GST payment and it being forwarded to the ATO. In the intervening period, assets may be stripped from the company, leaving liabilities which cannot be met.
The proposed legislation would require purchasers of new residential premises or subdivisions, rather than developers, to pay the GST to the ATO as part of the settlement process. This reform would eliminate the opportunity for developers to avoid their GST liabilities. The proposals would apply to sale contracts entered into from 1 July 2018.
Views of major parties
The Australian Labor Party (ALP) has indicated that supports the legislation but would like the Government to take further measures to address phoenixing activity. In his second reading speech on the Bill, Shadow Assistant Treasurer, Dr Andrew Leigh stated:
…while we support the government's measures on phoenixing by developers to avoid GST, we urge them to go further and crack down on phoenixing activity, as the Australian community demands, and reduce the cost of this to the community and the heartache that it imposes on workers, taxpayers and honest businesses.
Views of industry stakeholders
The Minister for Revenue and Financial Services, Kelly O’Dwyer, released an Exposure Draft of the amendments for consultation in November 2017. The two-week consultation received 15 submissions, a number of which made the point that this reform would burden all developers with additional compliance costs in order to target a small number of non-compliant entities. Several submissions recommended the adoption of a more targeted approach or allowing exemptions for companies with a history of compliance.
For example, in its submission the Property Council of Australia stated:
We support the objective of the measure in seeking to reinforce the rule of law and protect competitive neutrality in the property sector and the wider economy. But the introduction of any integrity measure should be targeted to avoid causing significant disruption and creating inherent risk for the rest of the industry that is already meeting its tax obligations.
The Housing Industry of Australia’s submission states that the Bill:
…is not a fair or measured response to this problem [phoenixing] or the problem of tax avoidance. The Bill bluntly targets every residential property development rather than dishonest and unscrupulous operators. Such an approach does not ‘even the playing field’. It penalises everyone, including future homeowners.
Regulatory Impact
The regulation impact statement (RIS) to the Bill estimates that the increased regulatory costs to business as a result of the Bill would be in the order of $4 million per annum over 10 years. These additional compliance costs primarily reflect the impact on vendors, conveyancers and other legal professionals in understanding the changes, informing their clients and updating their standard sales contracts and systems to implement the change. Developers would also lose the cash-flow benefit that they obtain from remitting the GST up to three months after the sale. However, the RIS argues that developers would also benefit from a more even playing field, if developers are no longer able to engage in illegal phoenix activity.