House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Revenue and Financial Services, Minister for Women and Minister Assisting the Prime Minister for the Public Service, the Hon Kelly O'Dwyer MP)

Chapter 5 Compliance measures

Outline of chapter

5.1 Schedule 5 to the Bill amends the TAA to enhance compliance with superannuation guarantee charge and other tax related liabilities. The amendments achieve this in the following ways:

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Strengthening the integrity of the director penalty provisions for directors who fail to comply with their superannuation guarantee charge and PAYG withholding obligations; and

•

Enhancing compliance with the requirement to provide security through the use of Court orders.

5.2 All legislative references in this Chapter are to the TAA unless otherwise stated.

Context of amendments

5.3 The Superannuation Guarantee Cross-Agency Working Group was established in December 2016 to report on the operation, administration and extent of non-compliance in the superannuation guarantee system in Australia.

5.4 In March 2017, the Superannuation Guarantee Cross-Agency Working Group released its final report, which contained its final recommendations on options to improve superannuation guarantee compliance.

5.5 These amendments are measures announced as part of the Government's package of reforms to strengthen compliance with superannuation guarantee obligations by employers. The amendments are based on recommendation 4 contained in the Superannuation Guarantee Cross-Agency Working Group's report.

Penalties for directors of non-complying companies

5.6 In relation to a company's superannuation guarantee obligations, under Division 269 in Schedule 1 a company is liable to pay a superannuation guarantee charge at the time it must lodge a superannuation guarantee statement. The 'due day' for a superannuation guarantee charge for a quarter is the 28th day of the second month after the quarter ends.

5.7 In relation to a company's PAYG withholding obligations, under Subdivision 16-B the obligation to withhold and pay amounts to the Commissioner depends on whether an entity is a large, medium or small withholder. Large withholders must pay amounts within 1 week of the time they are withheld. Medium withholders must pay amounts by the 21st day of the month following the month in which they were withheld. Small withholders are generally required to pay amounts by the 28th day of the month following the end of the quarter in which they are withheld. These payments do not involve an assessment as the obligations to withhold and pay withheld amounts arise because of the particular payments (for example salary and wages) being made.

5.8 Under Division 268 in Schedule 1, the Commissioner can make an estimate of an overdue and unpaid superannuation guarantee charge that has not been assessed or a PAYG withheld amount. Companies are under an obligation to pay the amount of the estimate. The amount of the estimate is due and payable at the time the notice is given.

5.9 Division 269 in Schedule 1 provides for separate obligations imposed on directors and penalties for failing to meet those obligations. Directors have personal obligations to ensure that the company complies with its obligations. These 'director obligations' apply until the company complies with its obligation, an administrator is appointed, or a company begins to be wound up.

5.10 If a company fails to meet its obligations to pay a superannuation guarantee charge, PAYG withholding amount or estimates of these liabilities by the 'due day', the directors of the company are personally liable to pay a penalty to the Commissioner. The amount of the director penalty is equal to the unpaid amount of the company's liability under the obligation. The Commissioner cannot commence proceedings to recover the penalty until 21 days after a director penalty notice is given.

5.11 There are timing differences between when the director obligation to ensure the company pays its superannuation guarantee charge and PAYG withholding liabilities (also referred to in Division 269 as 'underlying liabilities') arises and when the director obligation to ensure the company pays a Division 268 estimates of those unpaid underlying liabilities. An estimate of a superannuation guarantee charge or PAYG withholding liability creates a separate and distinct liability from the underlying liability (and as a consequence, a separate and distinct director obligation to ensure the company pays the estimate).

5.12 The timing differences between these two distinct director obligations can be exploited by directors to frustrate the original intent of the director penalty provisions. This can result in directors avoiding being held personally accountable for unpaid and overdue superannuation guarantee charge and PAYG withholding liabilities incurred while they presided over the company.

Remittance of penalty and the 'lock-down rule'

5.13 Director penalties under Division 269 in Schedule 1 can be remitted if a director stops being under one of the relevant obligations either before the director penalty notice is given to them, or within the 21 day notice period.

5.14 A director of a company stops being under an obligation in the following circumstances:

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If the company pays the outstanding PAYG withholding amount, superannuation guarantee charge, or estimates of these amounts; or

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If an administrator is appointed; or

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The company begins to be wound up.

5.15 The appointment of an administrator or the winding up of a company does not affect a director penalty for a company's unpaid tax related liabilities in the following circumstances:

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Where the company's obligation is to pay PAYG withholding - when three months from the due day have passed (but only to the extent that the company has failed to report the payments or withholding amounts to Commissioner);

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Where the company's obligation is to pay superannuation guarantee charge - when three months from the due day have passed and the company has failed to lodge a superannuation guarantee statement with the Commissioner;

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Where the company's obligation is to pay an estimate of PAYG withholding or superannuation guarantee charge - when three months have passed from the day by which the company was under an obligation to pay the underlying liability to which the estimate relates.

5.16 If one of these items applies, the director penalty will not be remitted if the company goes into liquidation or administration and the penalty is effectively 'locked down'. A 'locked down penalty' can only be remitted if the company pays the liability to which the penalty relates or the director pays the penalty imposed.

5.17 There has been observed deliberate behaviour in taking advantage of the three month period before a director penalty for an unpaid superannuation guarantee charge or an estimate is 'locked down' in order to delay placing the company in liquidation or voluntary administration.

Security deposits

5.18 Division 255 in Schedule 1 provides the Commissioner the ability to require a security deposit for the payment of an existing or future tax related liability where the Commissioner has reason to believe that an entity is carrying on a business and intends to carry on that business for a limited time only. The Commissioner may also require a security deposit where they believe it is reasonable to do so. The Commissioner must give notice of the requirement to give security in the required form.

5.19 It is a criminal offence to fail to provide security as required. The penalty for non-compliance is 100 penalty units.

5.20 In the case where there are substantial tax liabilities and the value of the security requested is significant, the penalty for failing to comply with the requirement to provide security can be insufficient to ensure compliance.

Summary of new law

5.21 The amendments strengthens the Commissioner's ability to collect superannuation guarantee charge and PAYG withholding liabilities in the following ways:

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With respect to director penalties under Division 269 in Schedule 1, a director's obligations in relation to ensuring their company pays an estimate of superannuation guarantee charge or withholding liability commence at the same time as their obligations in relation to ensuring the company pays the underlying liability to which the estimate relates;

•

Removal of the three month period before director penalties are 'locked down' in respect of unpaid superannuation guarantee charge liabilities; and

•

Allowing the Commissioner to apply for a Court order to compel entities to comply with a security deposit requirement.

Comparison of key features of new law and current law

Detailed explanation of new law

Timing of obligation to pay estimates for the purposes of Division 269 in Schedule 1

5.22 These amendments alter the time at which a director is taken to be under an obligation to ensure the company pays an estimate of an underlying superannuation guarantee charge or PAYG withholding liability for the purposes of the director penalty provisions in Division 269 in Schedule 1.

5.23 Consistent with the scope of the director penalty provisions generally, the amendments apply in relation to the directors of companies which have been issued with a notice to pay an estimate under Division 268 in Schedule 1. [Schedule 5, item 3, subsection 269-10(4) in Schedule 1]

5.24 The amendments align the date that a director commences being under an obligation to cause their company to pay an estimated liability imposed by the Commissioner to be the same date the company is either liable for the underlying liability or for the end of a quarter. [Schedule 5, item 3, subsection 269-10(5) in Schedule 1]

5.25 The amendments extend back the 'initial day' for a director's obligation with respect to estimates of underlying liabilities that are superannuation guarantee charges, to be the last day of the quarter to which the estimate relates. [Schedule 5, item 3, subparagraph 269-10(5)(b) in Schedule 1]

5.26 The amendments also extend back the 'initial day' for estimates of underlying liabilities that are PAYG withholding liabilities, to be one of the following days:

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For companies who are small and medium withholders, the initial day is the last day of the period identified in the notice of the estimate as the period to which the estimate relates; and

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For companies who are large withholders, the initial day is the day on which the company would have been obliged to pay the underlying liability to the Commissioner.

[Schedule 5, item 3, subparagraph 269-10(5)(a) in Schedule 1]

5.27 The initial day will depend on the classification of the company as either a small, medium or large withholder for PAYG withholding purposes.

5.28 The initial day for large withholders differs from small and medium withholders because the law does not provide large withholders with a distinct period in which they are required to report their PAYG withholding payments. The due date for the PAYG withholding liability depends on the particular day on which the amount is withheld. For companies who are large withholders, it is appropriate for the initial day for estimates to be the day the company it is obliged to pay the amount of the withholding liability to the Commissioner to reflect the shorter time frames between the withholding of a payment and when the company must remit the withholding liability to the Commissioner.

5.29 As noted above, currently there is a timing difference between the time a director begins to be under the obligation to cause the company to pay an estimate and to cause the company to pay the actual underlying liability (to which the estimate relates). The timing difference being that an obligation to pay an estimate of an underlying liability arises at the time notice of the estimate is given, but the obligation to pay the underlying liability arose some time prior to the estimate being given.

5.30 The consequence of this timing difference is that there is a gap between the two director obligations. This gap can be exploited by directors to frustrate the original intent of the director penalty provisions and avoid being held personally accountable for unpaid and overdue superannuation guarantee charge and PAYG withholding liabilities incurred while they presided over the company. These changes resolve this timing issue by aligning the initial day for the company's estimates to a day that can be linked directly to the related underlying withholding liability or the end of the quarter for superannuation guarantee liabilities. This treatment only applies for the purposes of working out whether a director penalty notice can be issued to a director (or former director) of a company under Division 269 in Schedule 1.

5.31 These amendments treat a director as having an obligation to cause the company to pay a Division 268 estimate before the company has an actual obligation to pay the estimate. However, this approach is justified on the basis that the company's obligation to pay the estimate relates directly to the company's obligation to pay the underlying liability relating to that estimate. Therefore, it is appropriate that the directors presiding over the company at the time the underlying liability arose also have an obligation to ensure their company complies with any estimate of that underlying liability issued later in time. This is the outcome these amendments are designed to achieve.

Example 5.1 - 'initial day' for an estimate of superannuation guarantee liability

Thien, Cristiano and Harry are directors of a company, C-R7 Pty Ltd which operates a business. C-R7 Pty Ltd employs 50 individuals. C-R7 Pty Ltd has failed to comply with its superannuation guarantee obligations by failing to lodge a superannuation guarantee statement and pay the superannuation guarantee charge for the quarter ended 31 March 2018. On 31 May 2018, Cristiano resigns as a director of C-R7 Pty Ltd. On 1 July 2018 the Commissioner issues C-R7 Pty Ltd a notice of an estimate for the superannuation guarantee charge for the quarter ended 31 March 2018.

For the purpose of the director penalty provisions in Division 269 in Schedule 1, the directors (including Cristiano who resigned) will be deemed to have an obligation to ensure that C-R7 Pty Ltd complies with the estimate. This obligation commenced on 31 March 2018 (the initial day) even though the estimate was not given until 1 July 2018. Consistent with existing law, the directors are still required to ensure that C-R7 Pty Ltd complies with the estimate at the time the estimate was given to the company: 1 July 2018 (the due date). If C-R7 Pty Ltd does not comply with the notice on 1 July 2018, the directors will be personally liable to a director penalty equivalent to the amount of the unpaid estimate for superannuation guarantee charge liability. The Commissioner can commence proceedings to recover the penalty from the directors 21 days after the directors are served with a director penalty notice.

Example 5.2 - 'initial day' for an estimate of PAYG withholding liability

In continuing on from Example 5.1, the Commissioner issues C-R7 Pty Ltd a notice on 1 July 2018 of an estimate for the PAYG withholding liability for the month of March 2018 arising from salaries paid to its employees. C-R7 Pty Ltd is a medium withholder.

For the purpose of the director penalty provisions in Division 269 in Schedule 1, the directors (including Cristiano who resigned on 31 May 2018) will be deemed to have an obligation to ensure that C-R7 Pty Ltd complies with the estimate. This obligation commenced on the last day of the period identified in the notice of the estimate as the period to which the underlying liability relates, this being 31 March 2018 (the initial day). Consistent with existing law, the directors are still required to ensure that C-R7 Pty Ltd complies with the estimate at the time the estimate was given to the company: 1 July 2018 (the due date). If C-R7 Pty Ltd does not comply with the notice on 1 July 2018, the directors (including Cristiano) will be personally liable to a director penalty equivalent to the amount of the unpaid estimate for PAYG withholding liability for the month of March 2018. The Commissioner can commence proceedings to recover the penalty from the directors 21 days after the directors are served with a director penalty notice.

Compliance with the obligation relating to an estimate of a liability

5.32 Under the existing law, the directors of a company must cause the company to comply with its obligations. The directors of the company continue to be under this separate obligation until the company complies, an administrator is appointed or the company begins to be wound up.

5.33 The amendments make it clear that if the obligation referred to in the existing law relates to an obligation to pay an estimate, the director is considered to be subject to their obligation to cause the company to pay the estimate in certain circumstances. [Schedule 5, item 4, subsection 269-15(2A) in Schedule 1]

5.34 One of these obligations requires a director be subject to the obligation to ensure their company complies with an estimate at all times on and after the 'initial day' of the estimate until the director's obligation ceases. This includes any time before the Commissioner has issued the estimate. [Schedule 5, item 4, paragraph 269-15(2A)(c) in Schedule 1]

5.35 These amendments superimpose obligations in respect of estimates of liabilities which are extended back to either the last day of the period to which the estimate relates or the time when the underlying PAYG withholding liability was payable (depending on the withholding size of the company) or at the end of a quarter for underlying superannuation guarantee charge liability (being the initial day of the estimate). A director is required to establish that they have taken steps to ensure their company complies with the obligation relating to the actual underlying liability (before the estimate was issued). This step must be considered as part of the director establishing that they have taken the necessary steps to ensure their company discharges the obligation arising from the estimate of that underlying liability.

5.36 These changes resolve the timing issue identified above by aligning the timing of the obligations of a company's estimates with the timing of the obligations for the related underlying liability.

Defences

5.37 The amendments introduce new conditions in the existing defences for directors who have been issued with a director penalty notice for an estimate of an underlying liability.

5.38 A director has a defence with respect to a director penalty for an unpaid estimate where they can show that during their time as a director, they took all reasonable steps to ensure that they caused the company to pay the estimate, as well as the underlying liability to which the estimate relates. [Schedule 5, item 5, subsections 269-35(3AA) and (3AB) in Schedule 1]

5.39 The new conditions on this defence are necessary to ensure that directors are not able to frustrate a director penalty in respect of estimates. The amendments deem a director's obligation with respect to estimates to arise from the 'initial day', being the time when the underlying PAYG withholding liability was payable or at the end of a quarter for underlying superannuation guarantee charge liability. The new conditions on the defence are designed to protect current or former directors if during their tenure or their management and control of the company, the director can show they took all reasonable steps to ensure their company discharged the obligation in respect of both the estimate and the actual underlying liability, or alternatively show that there were no reasonable steps for the directors to take for both obligations.

5.40 If a director raises any defences against liability for the director penalty with respect to an obligation to pay an estimate, these defences will only be applicable from the 'initial day', and not the day the estimate was given to the company.

Application and transitional provisions

5.41 The amendments apply in relation to an estimate made under Division 268 in Schedule 1 on or after 1 July 2018 (regardless of whether the underlying liability to which the estimate relates arose before, on or after 1 July 2018). [Schedule 5, item 6]

Circumstances where a director penalty is remitted

5.42 These amendments remove the 3 month period before a director penalty is 'locked down' and cannot be remitted if a company is placed into voluntary administration or insolvency. This change is restricted to superannuation guarantee charges and estimates of superannuation guarantee charge. [Schedule 5, item 11, item 4 to the table in subsection 269-30(2) in Schedule 1]

5.43 Under the new law, a director penalty cannot be remitted if a company is placed into voluntary administration or insolvency where the company has an obligation to pay a superannuation guarantee charge and the company does not report the superannuation guarantee liability to the Commissioner on or before the due date.

5.44 Generally, an employer is required to remit superannuation contributions within 28 days of the end of the quarter. Where the superannuation contribution is not paid and there is a superannuation guarantee shortfall, the employer is subject to obligations to lodge the superannuation guarantee statement and pay the superannuation guarantee charge to the Commissioner. The liability for a superannuation guarantee charge arises 1 month and 28 days after the end of a quarter.

5.45 The elimination of the 3 month time period shortens the timeframe so that director penalties are 'locked down' earlier and cannot be remitted after the due date provided that a superannuation guarantee statement has not be lodged on or before the due date. For superannuation guarantee liabilities the due date for the purposes of Division 269 in Schedule 1 is 1 month and 28 days after the end of the quarter. Prior to these amendments, directors would ordinarily have 4 months and 28 days from the end of the quarter to place their company into voluntary administration or insolvency before 'lock down' of the director penalties would occur. The amendments ensure the timing of the 'lock down' rule mirrors the timing of the obligations which the company and the director have to ensure that their superannuation guarantee liabilities are met.

5.46 With respect to estimates of superannuation guarantee charge liabilities, the due date is the date the company was obliged to pay the underlying liability (to which the estimate relates). Prior to these amendments, directors would ordinarily have 3 months from the due date of the underlying liability to place their company into voluntary administration or insolvency before the 'lock down' of the director penalty for the estimate would occur. These amendments ensure the timing of the 'lock down' rule mirrors the timing of the obligations which the company and directors have to ensure an estimate of superannuation guarantee charge liability is complied with.

Example 5.3 - lock down of director penalties

Susie is the director of a company, M & E Pty Ltd. M & E Pty Ltd is an employer of 10 individuals and is subject to superannuation guarantee obligations. M & E Pty Ltd fails to pay superannuation contributions for its employees for the quarter ended 31 March 2019. M & E Pty Ltd fails to lodge the superannuation guarantee statement and fails to pay the superannuation guarantee charge by the due date, being 28 May 2019. M & E Pty Ltd subsequently lodges the superannuation guarantee statement for the March 2017 quarter on 30 June 2019.

On 15 August 2019, M & E Pty Ltd is placed into voluntary administration. As a director, Susie has failed to ensure that M & E Pty Ltd meets it obligations in respect of the superannuation guarantee charge within the required timeframes.

On 30 August 2019, the Commissioner issues Susie with a director penalty notice for the outstanding superannuation guarantee charge liability. The director penalty notice issued to Susie is not capable of being remitted, despite the company being placed into voluntary administration because it took place more than 1 month and 28 days after the end of the relevant quarter for payment of superannuation guarantee charge (which is the due date for superannuation guarantee charge for the purposes of Division 269 in Schedule 1) and for M & E Pty Ltd to lodge the superannuation guarantee statement.

5.47 The amendments do not apply to PAYG withholding liabilities and estimates of PAYG withholding liabilities. This is because companies are obliged to report and pay PAYG withholding liabilities to the Commissioner occur at the same time. The due date for reporting and payment of PAYG withholding amounts are within 1 week for large withholders and generally within 28 days of the month/quarter end for medium and small withholders.

Application and transitional provisions

5.48 The amendments apply in relation to PAYG withholding liabilities and superannuation guarantee charge liabilities that first become payable on or after 1 July 2018. [Schedule 5, subitem 13(a)]

5.49 The amendments apply in relation to estimates of superannuation guarantee charge liabilities and PAYG withholding liabilities made on or after 1 July 2018 (regardless of whether the underlying liability to which the estimate relates arose before, on or after 1 July 2018). [Schedule 5, subitem 13(b)]

Order to provide security

5.50 These amendments allow the Commissioner to apply to the Federal Court to order an entity to comply with a requirement to give a security. The Commissioner must have given a notice of the requirement to provide a security deposit. [Schedule 5, item 14, subsection 255-115(1) in Schedule 1]

5.51 Enabling the Commissioner to make these applications and for the Court to make these orders addresses the instances of non-compliance with the security deposit rules. Non-compliance predominantly arises where the value of the security deposit (which reflects the value of the tax related liability) exceeds the penalty for failing to provide the security deposit. Entities who fail to comply with a Court order risk committing a criminal offence resulting in criminal penalties. These consequences are designed to drive taxpayer behaviour into complying with the Court order and providing the security deposit to the Commissioner.

5.52 The Court may also choose to place other orders on an entity to ensure the requirement to provide the security is met effectively. The Court may require that the requirement be complied with by a specified day in the order. [Schedule 5, item 14, subsections 255-115(2) and (3) in Schedule 1]

5.53 The Court has the flexibility to place ancillary orders on an entity. For example, the Court may order the provision of a different security requirement over a different asset or allow a different time period or time extension to comply with the order. These ancillary orders are consistent with the orders that can already be made by a Court under section 8G in relation to other requirements under taxation law. The consequences of failing to comply with a Court order are serious which justifies the Court's power to alter the existing requirement and imposing new orders. This can help the entity comply with the Court order and avoid committing an offence.

5.54 If an entity is not given a Court order under this section orally, then the proper officer of the Court must serve a copy of the order on the entity in accordance with the methods specified by the Court procedural rules or, alternatively, service must be conducted as otherwise ordered by the Court. [Schedule 5, item 14, subsection 255-115(4) in Schedule 1]

5.55 An entity who fails to comply with the order commits an offence and is liable to a penalty of 50 penalty units or imprisonment for 12 months, or both. [Schedule 5, item 14, subsection 255-120(1) in Schedule 1]

5.56 This offence is an offence of strict liability. [Schedule 5, item 14, subsection 255-120(2) in Schedule 1]

5.57 This penalty ensures that appropriate consequences apply to entities that refuse to comply with an order that has been made against them by the Court. The amount of the penalty and the application of strict liability is the same as the offence for refusing to comply with other Court orders and the associated penalty that are already imposed under sections 8G and 8H. Applying the same consequences in respect of security deposits ensures a consistent outcome between the two sets of rules and is appropriate as they both deal with failures to comply with Court orders.

5.58 An entity does not commit an offence to the extent they are not capable of complying with the order. [Schedule 5, item 14, subsection 255-120(3) in Schedule 1]

5.59 This defence is consistent with the defence set out in section 8H. The defence covers situations where an entity has entered into voluntary administration or insolvency. This ensures that an entity will not commit an offence where an entity no longer controls or manages the business and the business assets and are not capable of complying with the order.

5.60 The defence is framed as an offence-specific defence, which means that the evidential burden for proving that they are not capable of complying with the order is placed on the defendant. This approach is justified on the basis that the financial position and capability of an entity to comply with order are peculiarly within the knowledge of the defendant and would be significantly more difficult and costly for the prosecution to disprove than for the defendant to establish.

5.61 A similar approach is adopted in subsection 8C(1B), which provides that a failure to comply with a requirement under the taxation law does not amount to an offence under subsection 8C(1) to the extent that a person is not capable of complying with the relevant obligation.

Application and transitional provisions

5.62 The amendments apply in relation to a requirement to give security in relation to a tax-related liability if the Commissioner provides the notice of the requirement on or after 1 July 2018. [Schedule 5, item 15]

Consequential amendments

5.63 Schedule 5 makes consequential amendments to remove item 4 to the table in subsection 269-10(1) in Schedule 1 and the note which are no longer required. Schedule 5 also makes consequential amendments to include a note under the existing reasonably arguable position defence contained in section 269-35(3A) which clarifies that the defence may be available to times before the notice of an estimate of a superannuation guarantee charge liability is given. [Schedule 5, items 1 and 2, item 4 in table 4 of subsection 269-10(1) in Schedule 1, the note in subsection 269-10(1) in Schedule 1, the note in subsection 269-35(3A) in Schedule 1]

5.64 Schedule 5 makes consequential amendments to remove the reference to the 3 month rule in respect of superannuation guarantee liabilities and estimates. The amendments retain the 3 month rule in respect of PAYG withholding liabilities and estimates. [Schedule 5, items 7 to 10 and 12, heading to column 2, item 1 in column 2 to the table, item 2 in column 1 to the table, item 2 in column 2 to the table in subsection 269-30(2) in Schedule 1, subsection 269-30(3) in Schedule 1]