House of Representatives

Explanatory Memorandum

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

Chapter 1 Mutual assistance in collection of tax debts

Outline of chapter

1.1 Schedule 1 to this Bill amends the Taxation Administration Act 1953 (TAA 1953) and the Income Tax Assessment Act 1997 (ITAA 1997) to enable the Commissioner of Taxation (Commissioner) to collect a taxation debt on behalf of a foreign taxation authority or to take conservancy measures to ensure the collection of that debt.

Context of amendments

1.2 There are a number of tax paying entities who are resident in Australia, or who hold assets in Australia, that have unpaid tax debts in a foreign state or territory. These tax paying entities will be referred to as foreign country debtors for the remainder of this chapter.

1.3 Under the current taxation law, the Commissioner has very limited authority to collect a tax debt from a foreign country debtor on behalf of the country in which that tax debt arose.

1.4 Consistent with Article 27 of the OECD Model Tax Convention on Income and on Capital (OECD Model), recent treaty actions by Australia (including the New Zealand Protocol) allow for mutual assistance in the collection of tax debts. The amendments to the TAA 1953 and the ITAA 1997 are designed to ensure that the Commissioner can meet Australia's current and future treaty obligations to provide such assistance.

1.5 The reciprocal nature of the international agreements will also allow foreign taxation authorities to:

•

take conservancy measures in relation to unpaid Australian tax debts against taxpaying entities not resident in, or who hold no assets in Australia; and

•

collect unpaid Australian tax debts from taxpaying entities not resident in, or who hold no assets in Australia,

if the foreign country has agreed to assist Australia in collecting Australian tax debts.

Summary of new law

Collecting tax debts or taking conservancy measures on behalf of a foreign country

1.6 These amendments provide that a foreign state or territory, under a relevant international agreement, may formally request the Commissioner to collect an amount (in Australian dollars), and/or take conservancy measures to ensure the collection of that amount, on behalf of that foreign state or territory, from a foreign country debtor.

1.7 The Commissioner will then register that amount, resulting in that amount becoming a tax-related liability under Australian tax law and activating the general debt recovery rules within the tax laws.

1.8 The amount to be recovered will become due and payable after the particulars of the claim are given to the foreign country debtor. If the foreign country debtor does not pay within the specified period, general interest charge will accrue on the debt.

1.9 The Commissioner may in certain situations remove the foreign country debtor from the Register, or reduce the foreign country debtor's debt on the register, if the Commissioner is satisfied that the foreign country debtor should not be on the Register, or that the stated debt exceeds the foreign country debtor's actual debt.

1.10 Once the Commissioner has recovered all or part of the amount from the foreign country debtor, the Commissioner will pay that amount to the foreign state or territory, thus discharging or reducing the foreign country debtor's unpaid tax debt.

Requesting assistance in the collection of an Australian tax debt

1.11 Any amounts received by the Commissioner pursuant to an Assistance in collection request that the Commissioner has made to a foreign taxation authority may be treated by the Commissioner as a credit on the relevant taxpayer's running balance account in Australia.

1.12 The credit will offset the debt on the relevant taxpayer's running balance account, reducing the taxpayer's outstanding liability by the amount of the credit.

Comparison of key features of new law and current law

Detailed explanation of new law

Background

1.13 Currently it can be very difficult for the Commissioner to collect unpaid tax debts from:

•

taxpaying entities who accrue tax debts in Australia but depart Australia without paying; or

•

resident taxpaying entities who do not have sufficient assets in Australia to meet their tax debts, but who have offshore assets; or

•

taxpaying entities who have never been resident in Australia but have accrued a tax debt in Australia (eg, a tax debt that arose from a capital gain made from the disposal of real property in Australia).

1.14 Even under those provisions that do allow the Commissioner to collect the unpaid tax debts, there are very limited provisions that allow the Commissioner to seek the assistance of a foreign country to collect the tax debt.

1.15 This problem is not confined to Australia. New Zealand taxation authorities, for example, are similarly limited in collecting unpaid tax debts raised in New Zealand if the taxpayer no longer resides in New Zealand nor has any assets in New Zealand.

1.16 In an effort to overcome this shortcoming, Article 27 of the OECD Model was developed in order to allow treaty partners to adopt an article in their international agreements that would provide support in the collection of revenue claims.

Policy objective

1.17 This measure will allow the Commissioner to collect foreign tax debts in Australia and remit those amounts to the foreign state or territory in which those debts arose.

1.18 In certain circumstances, this measure will also allow the Commissioner to take conservancy action, to the extent available under Australian law, in relation to those debts. Conservancy is concerned with preventing a taxpaying entity from dissipating their assets when they have a tax-related liability.

1.19 Finally this measure will treat Australian tax debts collected by a foreign taxation authority that have been remitted to Australia as tax debts collected in Australia.

When a foreign country makes a request to Australia to collect taxes or take measures of conservancy on its behalf

Receiving a request

1.20 Before the Commissioner can collect a foreign debt or take conservancy measures, the Commissioner must first receive from an overseas entity (either a foreign country, a constituent part of a foreign country or an overseas territory) a formal foreign revenue claim.

1.21 Although there are no specific powers, under Australian laws, available to the Commissioner to preserve the assets of an entity for the purpose of that entity being able to meet a tax debt, the Commissioner can apply for a common law remedy such as a Mareva injunction. As Mareva injunctions are a common law remedy, the Commissioner would need to convince a court of law that a Mareva injunction is appropriate and necessary on a case by case basis.

1.22 A 'foreign revenue claim' must:

•

be made by, or on behalf of a competent authority under that international agreement (eg, for New Zealand, the Commissioner of Inland Revenue or an authorised representative of the Commissioner of Inland Revenue);

•

be in accordance with an international agreement (eg, the 'New Zealand Agreement' in Schedule 4 of the International Tax Agreement Act 1953 );

•

be made in the approved form;

•

specify the amount owed by the foreign country debtor, in Australian dollars (A$), calculated on the day that the claim was made; and

•

be accompanied by a declaration by the foreign competent authority that states that the claim is in accordance with the international agreement that the foreign revenue claim is made under.

[ Schedule 1, item 8 ; section 263 - 15 in Schedule 1 to the TAA 1953 ; item 1, subsection 995 - 1(1 ) in the ITAA 1997 ]

Example 1.1

Karen is a taxpayer who is resident in Australia, but has an outstanding tax-related debt in New Zealand. Karen's tax debt is NZ$100,000. The New Zealand Commissioner for Inland Revenue (NZ Tax Commissioner) wants to recover Karen's debt by making a request to the Australian Commissioner to recover that debt.

The NZ Tax Commissioner would have to convert the New Zealand debt into an A$ amount, in accordance with the exchange rate on the day that the request is made to Australia.

Between the time that the request was made and when the amount (in A$) is remitted to the NZ Tax Commissioner, the exchange rate may have changed. However, notwithstanding any appreciation or depreciation of the exchange rate, the amount requested in the foreign revenue claim (in A$) is the amount that the Commissioner is required to recover.

The NZ Tax Commissioner may refund any excess amounts to Karen if after conversion there is a windfall.

1.23 The foreign revenue claim can be for the conservancy of an amount, the collection of an amount or both the conservancy and collection of an amount.

1.24 Currently under Australian law, conservancy remedies will generally only be granted when they are ancillary to a claim for principal relief, such as debt recovery proceedings. Accordingly, it is expected that most claims for conservancy will be of two types:

•

a claim for conservancy accompanied by a claim for recovery of an amount that is currently enforceable in a requesting country; and

•

a claim for conservancy accompanied by a claim for recovery of an amount that is not currently, but will become enforceable in the requesting country.

Registration of the request

1.25 If the Commissioner is satisfied that the foreign revenue claim includes all things that are required under this Bill to make it a legitimate foreign revenue claim, the Commissioner must register the claim on a Foreign Revenue Claims Register (the Register) within 90 days of receiving the claim. [ Schedule 1, item 8 ; sections 263 - 20 and 263 - 25 in Schedule 1 to the TAA 1953 ]

1.26 Both foreign revenue claims for conservancy and for collection are to be registered on the Register. However, if a foreign country debtor's debt has already been registered for conservancy purposes, a later foreign revenue claim for the collection and recovery of that debt will not double the foreign country debtor's liability. The Register, in this situation, will only record one debt owned by the foreign country debtor.

1.27 The Register will only record liabilities. Any payments or credits the Commissioner receives in relation to a debt that is registered on the Register will not reduce the amount of the debt on the Register. Credits will instead be reflected on the foreign country debtor's running balance account.

1.28 The Register is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003 because it is not of a legislative nature. This is stated in the law to assist readers. [ Schedule 1, item 8 ; section 263 - 20 in Schedule 1 to the TAA 1953 ]

Consequences of registration

1.29 When the Commissioner registers a foreign revenue claim on the Register, the foreign country debtor's debt becomes a pecuniary liability to the Commonwealth. As the liability arises directly under a taxation law (the TAA 1953), the debt is a tax-related liability under section 255-1 of Schedule 1 to the TAA 1953. [ Schedule 1, items 4 and 8 ; subsections 250 - 10(2 ) and 263 - 30(1 ) in Schedule 1 to the TAA 1953 ]

1.30 This has the effect that the Commissioner's general recovery rules are triggered and the Commissioner can use any of his recovery powers to collect the liability.

1.31 If the foreign revenue claim is for conservancy only, the Commissioner can take steps to reduce the risk that assets will be dissipated or removed from Australia before the debt becomes due and payable. However, the Commissioner will only be able to take those conservancy measures that are available under Australian laws (eg, to seek a Mareva injunction). Australia presently has no special conservancy rules for tax debts.

1.32 As the foreign country debtor's debt is an amount due to the Commonwealth directly under a taxation law, the debt is also a primary tax debt under Part II B of the TAA 1953. This means that the Commissioner can allocate that debt to a running balance account.

Notification of the foreign country debtor

1.33 The Commissioner notifies the foreign country debtor of the particulars of liability if the foreign revenue claim is for the collection of an amount. [ Schedule 1, item 8 ; subsection 263 - 30(2 ) in Schedule 1 to the TAA 1953 ]

1.34 After the Commissioner enters the particulars of a foreign revenue claim on the Register, the Commissioner can serve the particulars of the claim on the foreign country debtor. If the Commissioner has accepted the claim for the purposes of collection (ie, not conservancy), the Commissioner would normally serve these particulars promptly.

1.35 The Commissioner may also notify the foreign country debtor of foreign revenue claims for conservancy only. The fact that a notice has to be served for the debt to become due and payable will not detract from the Commissioner's ability to apply for a Mareva injunction.

1.36 However if the Commissioner has accepted the foreign revenue claim for conservancy purposes but the debt is not yet enforceable in the requesting country, the Commissioner is not required to serve notice to the foreign country debtor. Indeed, the standard Assistance in collection Article will not permit Australia to collect a debt that is not enforceable in the requesting foreign state or territory.

1.37 The normal rules of giving (or serving) notice of liability by the Australian Taxation Office will apply. If the foreign country debtor is absent from Australia and does not have an agent in Australia, the Commissioner can serve the notice of liability to an address in a foreign state or territory. [ Schedule 1, item 5 ; section 255 - 40 in Schedule 1 to the TAA 1953 ]

1.38 The amount of the foreign revenue claim becomes due and payable 30 days after the particulars of the claim have been received by the foreign country debtor or on a later date as specified in the notice. [ Schedule 1, item 8 ; subsection 263 - 30(2 ) in Schedule 1 to the TAA 1953 ]

1.39 If the taxpayer fails to pay the amount after it becomes due and payable, 'general interest charge' will apply on any unpaid amounts. [ Schedule 1, items 2 and 8 ; subsection 263 - 30(3 ) in Schedule 1 to the TAA 1953 and subsection 8AAB(5 ) in the TAA 1953 ]

1.40 Although the amount does not become due and payable until a period after notice of the particulars have been received by the foreign country debtor, the debt becomes a pecuniary liability to the Commonwealth when the claim is registered. The Commissioner can, for example, invoke the recovery powers about collection from third parties under Subdivision 260-A in Schedule 1 to the TAA 1953, unless the relevant international agreement provides that the claim cannot be collected.

Amending the Register

1.41 If after registration, the Commissioner concludes that a foreign revenue claim that is on the Register should not be on the Register, the Commissioner can remove that foreign country debtor from the Register provided that the Commissioner first obtains the agreement of the foreign competent authority. [ Schedule 1, item 8 ; paragraph 263 - 35(2 )( a ) in Schedule 1 to the TAA 1953 ]

Example 1.2

Vivian has assets in Australia and an unpaid tax debt in New Zealand. The NZ Tax Commissioner makes a foreign revenue claim, requesting the Commissioner take steps to recover an amount of A$50,000 from Vivian. The foreign revenue claim is in the correct form and is a valid claim.

The declaration attached to the foreign revenue claim, also in the correct form, identifies Vivian as the taxpayer who has the outstanding tax debt in New Zealand.

As both the request and the declaration are in the correct form, the Commissioner registers the particulars of the NZ Tax Commissioner's claim against Vivian on the Register.

However, after some investigation, it is later discovered that the named tax debt in New Zealand is the result of identity theft.

In a situation like this, after informing the foreign competent authority and obtaining their agreement, the Commissioner will be allowed to remove Vivian's particulars from the Register. Vivian will be taken to have never been liable to pay that amount.

1.42 If after registration the Commissioner receives advice from the requesting foreign competent authority that the amount to be recovered from the foreign country debtor should be reduced, the Commissioner can amend the Register to reflect the reduction. [ Schedule 1, item 8 ; paragraph 263 - 35(2 )( b ) in Schedule 1 to the TAA 1953 ]

1.43 If there is a minor administrative error in relation to the register (eg, name spelt incorrectly), the Commissioner may correct that error so long as the Commissioner first obtains the agreement of the foreign competent authority. [ Schedule 1, item 8 ; subsection 263 - 35(1 ) in Schedule 1 to the TAA 1953 ]

1.44 The foreign country debtor, after receiving the details of a foreign revenue claim, can apply to the Commissioner to have their details removed from the Register. If the Commissioner is satisfied with the foreign country debtor's explanation, the Commissioner may remove the foreign country debtor from the Register, without obtaining the agreement of the foreign competent authority. [ Schedule 1, item 8 ; subsections 263 - 35(3 ) and ( 4 ) in Schedule 1 to the TAA 1953 ]

1.45 If the Commissioner decides to remove the details of a foreign country debtor from the Register as a result of an application by the foreign country debtor or because the foreign country debtor should never have been registered, it will be as if the foreign country debtor was never required to pay that amount, including any amounts of general interest charge that may have accrued, in relation to a foreign revenue claim. [ Schedule 1, item 8 ; subsections 263 - 35(4 ) and ( 5 ) in Schedule 1 to the TAA 1953 ]

1.46 If the Commissioner receives advice from the foreign competent authority that the amount to be recovered from the foreign country debtor's debt should be reduced, it will be as if the foreign country debtor was never required to have paid that extra amount. [ Schedule 1, item 8 ; paragraph 263 - 35(2 )( b ) and subsection 263 - 35(6 ) in Schedule 1 to the TAA 1953 ]

1.47 If all or a portion of a foreign revenue claim is paid by a foreign country debtor and the Commissioner subsequently either removes that foreign country debtor from the Register or reduces an amount included on the Register, such amount as was overpaid by the foreign country debtor will be subject to interest on any overpayments. [ Schedule 1, items 9 and 10 ; subsection 3(1 ) and section 3C in the Taxation ( Interest on Overpayments and Early Payments ) Act 1983 ]

Evidence

1.48 In proceedings for recovery of a foreign revenue claim, the Commissioner may produce an evidentiary certificate. The evidentiary certificate may state any of the following (in addition to any of the matters already permitted to be set out in an evidentiary certificate):

•

that a foreign revenue claim has been made by a foreign competent authority;

•

that the foreign revenue claim has complied with all the requirements that it must meet under the relevant international agreement that the foreign revenue claim was made under;

•

that the claim had been registered;

•

that, as at the date of the certificate, whether the Commissioner has received advice from a foreign competent authority as to the reduction or discharge of the debt; and

•

the particulars of any reduction or discharge in the amount of the debt, if the Commissioner did receive advice from a foreign competent authority.

1.49 An evidentiary certificate will be prima facie evidence of the matter in a proceeding to recover an amount or in proceedings with respect to conservancy. This means that once the Commissioner produces a valid evidentiary certificate, the onus is on the foreign country debtor to prove that the contents of the evidentiary certificate are incorrect. [ Schedule 1, items 6 and 7 ; section 255 - 45 in Schedule 1 to the TAA 1953 ]

What if the foreign country debtor disputes their liability?

1.50 The Assistance in collection Article in the international agreement will normally provide that proceedings about the existence, validity or amount of a revenue claim of a contracting state shall not be brought before the courts or administrative bodies of the other contracting state (eg, see Article 27(6) of the New Zealand Agreement). Consequently, if the foreign country debtor considers that they have a legitimate legal argument that they are not required to pay the foreign tax debt, the matter must be litigated and resolved in the country in which the tax debt arose, under the laws of that country. Those arguments cannot be raised in proceedings in Australia for recovery of a registered foreign revenue claim.

Remittance of collected amounts

1.51 If the Commissioner recovers any of the amounts from a foreign country debtor with respect to a foreign revenue claim, the Commissioner must pay that amount to the relevant foreign competent authority or another entity on behalf of that competent authority.

1.52 The Commissioner may also pay any amounts collected from the foreign country debtor in relation to general interest charges in accordance with any arrangements the Commissioner has with the relevant foreign competent authority. [ Schedule 1, item 8 ; section 263 - 40 in Schedule 1 to the TAA 1953 )]

When Australia makes a request to a foreign country to collect taxes on Australia's behalf

1.53 The reciprocal nature of Article 27 of the OECD Model means that while the Commissioner can be required to collect taxes on behalf of an overseas entity, foreign competent authorities can also be required to collect Australian tax-related debts on behalf of Australia.

1.54 The legal and administrative frameworks that the overseas entities use to reflect their obligations will be up to those overseas entities, however the foreign competent authority will be required to remit to the Commissioner any monies collected pursuant to an Assistance in collection request.

1.55 Although the Commissioner may be required, under the law of an overseas entity, to make the Assistance in collection request in a foreign currency, the amount remitted to the Commissioner from the foreign competent authority may be in A$.

1.56 If an amount is remitted to the Commissioner in a foreign currency, as a result of the Commissioner making an Assistance in collection request, before that amount can be allocated to the foreign country debtor's running balance account as a 'credit', the amount must be converted into an A$ amount. [ Schedule 1, item 3 ; section 8AAZA ( definition of ' credit' ) in the TAA 1953 ]

1.57 After conversion to an A$ amount, the whole of the A$ amount may be allocated as a credit to the foreign country debtor's running balance account in order to reduce the outstanding debt in relation to which the Assistance in collection request was first made.

1.58 As a result of appreciation or depreciation in the exchange rate in the intervening period between when the Assistance in collection request was made and the amount was remitted, the credit may or may not completely offset the initial debt.

1.59 The normal rules in Part II B of the TAA 1953 about payments and credits will apply.

Application and transitional provisions

1.60 These amendments apply to claims for assistance in collection of foreign debts made after the day on which this Bill receives Royal Assent, provided that the relevant international agreement under which this request has been made, has entered into force. [ Schedule 1, item 11 ]