House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Housing and Assistant Treasurer, the Hon. Michael Sukkar MP)

Chapter 4 GST estimates and director penalties

Outline of chapter

4.1 Schedule 3 to the Bill allows the Commissioner to collect estimates of anticipated GST liabilities and make company directors personally liable for their company's GST liabilities in certain circumstances.

4.2 Schedule 3 also applies to LCT and WET as these taxes are jointly administered with the GST.

Context of amendments

The estimates regime

4.3 The estimates regime (Division 268 in Schedule 1 to the TAA 1953) enables the Commissioner to estimate unpaid amounts of PAYG withholding and superannuation guarantee charge, and to recover the amount of those estimates from taxpayers.

4.4 The estimates regime is a valuable compliance tool available to the Commissioner where a taxpayer has failed to report information. A taxpayer becomes liable to pay an estimate when the Commissioner provides a notice of the estimate (section 268-20).

4.5 The estimate liability is distinct from the underlying liability of the taxpayer to pay the withholding amount or superannuation guarantee charge. However, the discharge of one liability through a payment or a credit arising under the law discharges the other liability to the same extent.

4.6 The Commissioner may reduce or revoke an estimate (section 268-35) or the taxpayer may cause the estimate to be reduced or revoked by providing a sworn statement - a statutory declaration or an affidavit - that the underlying liability (if any) is lower than estimated (section 268-40). Reductions (and revocations) take effect as if the estimate was always of the reduced amount (or did not exist) (section 268-55).

4.7 The GIC applies to PAYG estimates that remain unpaid after 7 days of the notice being provided (section 268-75). This liability is also distinct from the GIC applying to the underlying liability under section 16-80, although discharging one liability discharges the other (and similar interest liabilities) (section 268-80).

4.8 The GIC does not accrue on superannuation guarantee charge estimates (paragraph 268-75(1)(b)), although it does accrue on the underlying charge under section 49 of the Superannuation Guarantee (Administration) Act 1992 .

Director penalties

4.9 The director penalty regime (Division 269 in Schedule 1 to the TAA 1953) makes directors of a company personally liable for specified taxation liabilities of the company in certain circumstances of non-payment by the company.

4.10 Under section 269-10, the director penalty regime applies to a company's liabilities to pay to the Commissioner:

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PAYG withholding amounts;

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superannuation guarantee charges; and

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estimates of PAYG withholding liabilities and superannuation guarantee charges.

4.11 Directors are under a general obligation to ensure the company either satisfies the above liabilities, or recognising the company may be insolvent, goes into administration or is wound up (section 269-15). The obligation begins on an initial day specified in relation to each category of underlying company liability. The obligation continues to apply to directors that cease to be directors after the initial day.

4.12 Directors are subject to a penalty if their obligation is unfulfilled by the due date. New directors that are appointed after the due date, become subject to the penalty if the obligation remains unsatisfied for a further 30 days (section 269-20).

4.13 Directors are subject to a penalty equal to the amount of the company's unpaid obligations but the penalty may not be collected before the Commissioner issues a director penalty notice and a further 21 days elapse (section 269-25). Payment of either the penalty or the company's underlying liability satisfies both obligations (section 269-40). Directors may also seek to recover any penalty they have paid under a right of indemnity (section 269-40).

Remission of penalties

4.14 A penalty is generally remitted if the director complies with their obligation before or within the 21-day notice period (section 269-30) by virtue of the company being placed under voluntary administration or beginning to be wound up. This remission is subject to a number of different conditions in subsection 269 30(2). Where the conditions are not satisfied, the penalty is said to be 'locked down'.

4.15 The table in subsection 269-30(2) specifies a date (the lockdown date in column 2) before which the director may avoid the full penalty. If the company enters administration or begins to be wound up after this date, the extent to which the director's penalty is remitted is limited or abolished. The extent to which the penalty is locked down in this way is specified in column 3 of the table.

4.16 For example, where the director's obligation in respect of a PAYG withholding estimate is satisfied because the company is placed into administration or wound up (rather than the company paying the liability), the director will still be subject to a penalty if the administration or winding up commenced more than three months after the due date for the payment of the company's underlying liability.

Defences

4.17 A number of defences against the penalty exist in section 269-35 and are based on the reasonableness of the conduct of the director and, in some cases, the company.

Other changes to the director penalty regime

4.18 The Government recently passed two amendments to the director penalty regime through the Parliament. The amendments in Schedule 5 to the Treasury Laws Amendment (2018 Measures No. 4) Act 2019 provide:

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that a director's obligations in relation to ensuring their company pays an estimate of superannuation guarantee charge or withholding liability commences at the same time as their obligations in relation to ensuring the company pays the underlying liability to which the estimate relates (rather than the date the company is given notice of the estimate); and

•

for the removal of the three-month rule which applies before director penalties with respect to unpaid superannuation guarantee charge liabilities (and estimates of these liabilities) become 'locked down' and can no longer be remitted (subsection 269-30(2)). The three-month rule will be retained for PAYG withholding liabilities and associated estimates.

Collection of GST and other liabilities

4.19 An entity's liability to pay GST (or entitlement to a refund) is linked to the entity's assessed net amount for a tax period (Divisions 33 and 35 of the GST Act). An entity's net amount for a tax period is the amount of GST imposed on the entity's taxable supplies less the entity's input tax credits, taking into account any adjustments (sections 17-5 and 17-10 of the GST Act).

4.20 A net amount includes any applicable LCT and WET (section 17-5(2) of the GST Act). The provisions under Subdivision 21-A of the A New Tax System (Wine Equalisation Tax) Act 1999 and Subdivision 13-A of the A New Tax System (Luxury Car Tax) Act 1999 allow for those taxes (and associated credits and adjustments) to be administered by the GST system.

4.21 An entity is only liable to pay a net amount to the Commissioner when the net amount is assessed (becoming an 'assessed net amount'). GST operates under a full self-assessment system - an entity is deemed to have received an assessment when it lodges its return for a tax period (section 155-15 in Schedule 1 to the TAA 1953). Entities must lodge returns in accordance with Division 31 of the GST Act.

4.22 In addition, certain small businesses and not-for-profit entities are entitled to elect to pay GST by instalments. If an entity elects to pay GST by instalments, the instalment liabilities are subtracted from the entity's net amount for the relevant tax period.

4.23 Non-compliant entities are able to undercut prices knowing that they do not intend to pay the GST collected, giving them a competitive advantage over compliant companies. Ensuring GST liabilities are collected is necessary to level the playing-field in the market and to help build confidence in the competitive process.

4.24 Illegal phoenix activity poses a particular risk to the integrity of the GST's input tax credit system through claiming excess input tax credits, resulting in an excessive refund. When the excess is discovered, the Commissioner must amend the relevant GST assessment and pursue the excess as a debt (see subsection 35-5(2) of the GST Act). The collection of this debt - as with GST debts more generally - may be obstructed by illegal phoenix activity.

Summary of new law

4.25 Schedule 3 to the Bill extends the estimates and director penalty regimes to GST liabilities, including LCT and WET. This will address illegal phoenix behaviour, including the non-payment of GST liabilities.

Comparison of key features of new law and current law

Detailed explanation of new law

Estimates

4.26 The scope of the estimates regime in Division 268 in Schedule 1 to the TAA 1953 is expanded to allow the Commissioner to make estimates of an entity's net amount under the GST Act. [Schedule 3, item 6, paragraph 268-10(1)(c) in Schedule 1 to the TAA 1953]

4.27 Any estimate of a net amount will necessarily include any applicable LCT and WET (see paragraph 4.20).

4.28 If the Commissioner makes an estimate of an entity's net amount, the entity is liable to pay the amount of the estimate to the Commissioner.

4.29 Because an entity is not under an obligation to pay a net amount until it has been assessed, an amendment is made to Division 268 to deem net amounts to be payable in these circumstances. This deeming rule only applies for the purposes of Division 268 and does not otherwise allow the Commissioner to collect an amount without a valid assessment being made.

4.30 The deeming rule allows the provisions of the estimates regime that operate with respect to an underlying liability - PAYG withholding and superannuation guarantee charge liabilities in the current law - to apply to net amounts in a similar way. [Schedule 3, item 7, paragraphs 268-10(1B)(a) and (d) in Schedule 1 to the TAA 1953]

4.31 For example, subsections 268-30(1) and (2) provide that a liability to pay an estimate is provable in bankruptcy if the relevant underlying liability is also provable. By deeming the net amount to have arisen and to be payable on the GST lodgement due date, the estimate will be provable in bankruptcy if that date is prior to the date of bankruptcy (see subsection 82(1) of the Bankruptcy Act 1966 ).

4.32 The net amount is deemed to arise and be payable on the day the entity was required to lodge its GST return. [Schedule 3, item 7, paragraphs 268-10(1B)(b) and (c) in Schedule 1 to the TAA 1953]

Paying an estimate (or an assessed net amount)

4.33 The nature of the net amount is also relevant for the purposes of section 268-20, which provides that discharging a liability to pay an estimate discharges the underlying liability to the same extent, and vice versa.

4.34 The amendments ensure that a payment towards an estimate of a net amount is also applied to a liability to pay an assessed net amount, whether that assessment has been made or not. Similarly, if an assessment has been made of a net amount and a liability arises, a payment towards that liability (including a payment of a director penalty) is also applied to the estimate liability. [Schedule 3, item 9, subsection 268-20(4A) in Schedule 1 to the TAA 1953]

Example 4.1 Estimate liability paid - no assessed net amount

Peter has failed to lodge his GST return in relation to a tax period. The Commissioner makes an estimate of Peter's net amount in the amount of $20,000.

Peter pays $10,000 to partially discharge the estimate liability. The estimate liability is reduced to $10,000. Peter does not have a liability to pay an assessed net amount. The $10,000 Peter has paid towards his estimate liability is held-over until Peter lodges his GST return.

After making the initial $10,000 payment Peter lodges his outstanding GST return. Based on the information in the return, Peter is assessed as having an assessed net amount of $25,000 owing to the Commissioner. The held-over $10,000 is applied to the liability to pay the assessed net amount, the balance of which is reduced to $15,000.

Example 4.2 Estimate liability paid - assessment issued

Further to Example 4.1, Peter makes an additional payment of $5,000 towards the estimate liability. The estimate liability is reduced to $5,000. The balance of the liability to pay the assessed net amount is reduced to $10,000.

Example 4.3 Assessed net amount liability paid

Further to Example 4.2, Peter pays $10,000 to fully discharge the liability to pay the assessed net amount.

This amount is applied to Peter's estimate liability but, because the amount is greater than that liability, only the amount of outstanding estimate liability ($5,000) is applied (subsection 268-20(5)), reducing the balance of liability to nil. Peter has now satisfied his obligations.

4.35 The examples above do not take into account the impact of the GIC on either liability. GIC applies to an estimate of a net amount if it remains undischarged after seven days following the entity's receipt of the estimate notice. Where GIC applies, it accrues from the day the GST return was due (section 268-75). Payments of GIC follow the same principle in that they are also applied against any GIC attached to an underlying assessed net amount liability. [Schedule 3, item 11, subsection 268-80(1A) in Schedule 1 to the TAA 1953]

Reducing an estimate

4.36 An entity may reduce the amount of an estimate by making a sworn statement that the entity's net amount for the tax period is less than the estimate (or that it did not have a net amount) (section 268-40).

4.37 The sworn statement must set out the following facts in relation to the tax period:

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the entity's net amount;

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the entity's taxable supplies - including taxable supplies of luxury cars - and creditable acquisitions (within the meaning of the GST Act);

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the entity's assessable dealings and wine tax credit entitlements (if any, within the meaning of the A New Tax System (Wine Equalisation Tax) Act 1999 );

•

the steps the entity took to comply with its obligations under Division 31 and 33 of the GST Act.

[Schedule 3, item 12, subsection 268-90(2B) in Schedule 1 to the TAA 1953]

Director penalties

4.38 The scope of the director penalty regime in Division 269 in Schedule 1 to the TAA 1953 is expanded to allow the Commissioner to recover director penalties in relation to companies' unsatisfied liabilities to pay assessed net amounts and GST instalments under the GST Act. [Schedule 3, item 15, items 6 and 7 of the table in subsection 269-10(1) in Schedule 1 to the TAA 1953]

4.39 Any assessed net amount or GST instalment will necessarily include any applicable LCT and WET (see paragraph 4.20).

4.40 Company directors are under an obligation to ensure their company complies with its obligation to pay an assessed net amount or GST instalment liability (or, recognising the company may be insolvent, goes into administration or begins to be wound up) (section 269-15).

4.41 In relation to assessed net amounts, the obligation on the directors begins on the day the relevant tax period ends (the initial day). In relation to GST instalments, the initial day is the end of the GST instalment quarter. Directors that cease to be directors after the initial day are subject to the obligation, even if they cease to be directors before the payment due date.

4.42 As with the other categories of director penalties, the penalty arises when the director's obligation is unsatisfied on the due date, in this case, the day the company is required to pay the assessed net amount or GST instalment (or 30 days after the appointment of a director appointed after that day) (section 269-20).

4.43 However, the penalty is only recoverable following a period of 21 days beginning when the Commissioner issues a director penalty notice to a director (section 269-25).

4.44 The amount of the penalty is the company's unpaid liability to pay the assessed net amount or GST instalment (subsection 269-20(5)).

Example 4.4 Director penalties

Emma and Julie are directors of Swift Supply Pty Ltd.

Swift Supply is required to pay and report GST on a quarterly basis under section 27-5 of the GST Act. Swift Supply is required to lodge its return for the quarter ending 30 June 2019 by the due date of 28 July 2019 (section 31-8 of the GST Act).

Swift Supply lodges its return more than three months late on 1 November 2019. The return gives rise to a liability for Swift Supply to pay an assessed net amount of $100,000. The due date for the payment is 28 July 2019 (section 33-3 of the GST Act).

Emma and Julie are under an obligation to ensure Swift Supply pays the liability, enters administration or begins to be wound up. The obligation begins on the initial day, the day the tax period ended (30 June 2019).

Julie resigns from Swift Supply on 20 July 2019. This does not affect her obligation in relation to the company's liability.

Swift Supply is never in a position to pay the liability. As such, both Emma and Julie were required to place the company into administration or begin winding it up. This does not happen on or before the due date of 28 July 2019 and the director penalties begin to apply from this date.

The Commissioner issues director penalty notices to Emma and Julie on 1 February 2020. The Commissioner may begin recovery proceedings on or after 23 February 2020.

Remission of penalty

4.45 The penalty may be remitted if the director complies with the obligation before the director penalty notice is issued or within 21 days of the day the notice is issued (subsection 269-30(1)).

4.46 However, if the director complies with their obligation in relation to an assessed net amount by placing the company into administration or beginning to wind up the company, the full amount of the penalty is only remitted if this is done within three months of the relevant due date. The end of the three-month period is the lockdown date for the penalty.

4.47 Where the company enters administration or begins to be wound up after the lockdown date, only the amount of the company's assessed net amount liability that was calculated by reference to information reported to the Commissioner before the end of the period three months after the due date is remitted. If the assessed net amount is based on a return lodged after the lockdown date, a default assessment or an amended assessment issued by the Commissioner, this may result in the penalty being locked down in whole or in part and not being remitted. [Schedule 3, item 17, item 5 of the table in subsection 269-30(2) in Schedule 1 to the TAA 1953]

4.48 If a director is appointed to the company during or after the three-month period, the full amount of the director's penalty can be remitted within three months of their appointment. [Schedule 3, item 19, subsection 269-30(3) in Schedule 1 to the TAA 1953]

Example 4.5 Remission of penalties

Further to Example 4.4, Kerrie is appointed as a director of Swift Supply on 15 November 2019 and is immediately under the obligation to ensure Swift Supply pays the liability, enters administration or is wound-up. The penalty arises for Kerrie after 30 days on 15 December 2019.

The Commissioner also issues a director penalty notice to Kerrie on 1 February 2020.

Emma and Kerrie place Swift Supply into administration on 10 February 2020.

The original directors, Emma and Julie, satisfy the first condition to have their penalties remitted because their obligation is satisfied on 10 February 2020, before the end of the 21-day period on 22 February. However, because Swift Supply entered administration more than three months after the company's due date of 28 July, the penalty is locked down. The entire amount of the penalty is locked down because the company's GST return for the June quarter was more than three months late.

As a new director, Kerrie is entitled to a full remission of the penalty because Swift Supply entered administration:

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within 21 days of the director penalty notice being issued to Kerrie; and

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within three months of Kerrie being appointed a director.

Example 4.6 Partial remission of penalty

Aaron is the sole director of Tangent Communications Pty Ltd.

Tangent Communications is required to pay and report GST on a quarterly basis under section 27-5 of the GST Act. Tangent Communications is required to lodge its return for the quarter ending 30 June 2019 by the due date of 28 July 2019 (section 31-8 of the GST Act).

Tangent Communications lodges its return on 23 July 2019. The return gives rise to a liability for Tangent Communications to pay an assessed net amount of $150,000. The due date for the payment is 28 July 2019 (section 33-3 of the GST Act).

Aaron is under an obligation to ensure the company pays the liability, enters administration or begins to be wound up. The obligation begins on the initial day, the day the tax period ended (30 June 2019).

Tangent Communications is never in a position to pay the liability. As such, Aaron was required to place the company into administration or begin winding it up. This does not happen on or before the due date of 28 July 2019 and the director penalty begins to apply from this date.

On 1 September 2019, Tangent Communications provides further information to the Commissioner to correct an error in the company's GST return and requests an amended assessment. The Commissioner agrees to issue an amended assessment to the company. Under this assessment, the company has an assessed net amount of $200,000. This does not affect the due date for the company to pay the amended assessed net amount (28 July 2019).

On 15 January 2020, the Commissioner further amends the company's assessed net amount for the period ending 30 June 2019, increasing the assessed net amount to $220,000. This does not affect the due date for the company to pay the amended assessed net amount (28 July 2019).

On 1 February 2020, the Commissioner issues a director penalty notice to Aaron for the company's outstanding $220,000 liability. The Commissioner may begin recovery proceedings on or after 23 February 2020.

Aaron places Tangent Communications into administration on 10 February 2020, before the end of the 21-day period on 22 February.

Because Tangent Communications lodged a timely GST return for the relevant period, the entire penalty is not locked down. However, because the information the company provided to the Commissioner led to an understatement of the company's assessed net amount, the shortfall amount ($20,000) is locked down. The remaining director penalty amount of $200,000 is remitted.

4.49 If the director complies with their obligation in relation to a GST instalment by placing the company into administration or beginning to wind up the company within 21 days of the day the Commissioner issues the director penalty notice, the penalty is remitted in full (subsection 269-30(1)). [Schedule 3, item 18, Note 3 to subsection 269-30(2) in Schedule 1 to the TAA 1953]

4.50 If a director complies with their obligation because the company pays the outstanding assessed net amount or GST instalment liability, the penalty is remitted to the same extent, regardless of when this occurs.

Defences

4.51 The defences currently in Division 269 apply in relation to penalties for unpaid assessed net amounts and GST instalment liabilities (section 269-35). These include the defences that the director was unable to comply with the obligation due to illness or other good reason, or that the director took all reasonable steps to comply with the obligation.

4.52 An amendment is made to allow a director to claim a defence to the extent the penalty was due to the company adopting a reasonably arguable position and the company took reasonable care in connection with applying the GST Act. [Schedule 3, items 20 and 21, subsection 269-35(3A) in Schedule 1 to the TAA 1953]

Application to estimates of net amounts

4.53 Because of the amendments to the Division 268, Division 269 applies to estimates of net amounts.

4.54 The initial day for the directors' obligation in relation to the company's liability to pay an estimate of a net amount is the day the relevant tax period ended. This aligns with the initial day for assessed net amounts. [Schedule 3, item 16, paragraph 269-10(5)(ba) in Schedule 1 to the TAA 1953]

4.55 The entire amount of a penalty associated with an estimate of a net amount is locked down and cannot be remitted if the obligation is satisfied by the company entering administration or beginning to be wound up more than three months after the day the company was required to lodge its GST return. [Schedule 3, item 17, item 6 of the table in subsection 269-30(2) in Schedule 1 to the TAA 1953]

4.56 Other than the features described above, Division 269 applies to these estimates in the same way it applies to other company liabilities that are subject to the director penalty regime.

Consequential amendments

4.57 Consequential amendments are made to update the simplified outlines and objects provisions for Divisions 268 and 269, and the heading to Division 268. [Schedule 3, items 2, 3, 4, 5, 13 and 14, sections 268-1 and 269-1, paragraph 268-5(c), subparagraphs 269-5(a)(iii) and (iv), and the heading to Division 268 in Schedule 1 to the TAA 1953]

4.58 An amendment is made to an example in Division 268 to reflect the fact the Commissioner cannot initiate proceedings to recover a net amount (only an assessed net amount or an estimate of a net amount). [Schedule 3, item 8, the example to subsection 268-20(2) in Schedule 1 to the TAA 1953]

4.59 An amendment is made to section 268-30 to ensure that the liabilities admitted as proof in bankruptcy cannot be duplicated. In particular:

•

a liability to pay an estimate of a net amount cannot be admitted as proof if a liability to pay an assessed net amount for the same tax period has already been admitted as proof; and

•

if an estimate liability has been admitted as proof, the liability to pay an assessed net amount can only be admitted if it exceeds the outstanding estimate liability.

[Schedule 3, item 10, subsection 268-30(4A) in Schedule 1 to the TAA 1953]

4.60 An amendment is made to a note in the GST Act to highlight that a deemed assessed net amount that arises because an excessive GST refund is reduced (see paragraph 4.24) is subject to the amended estimates and director penalty regimes. [Schedule 3, item 1, the note to subsection 35-5(2) of the GST Act]

Application provisions

4.61 The amendments in Schedule 3 commence on the first day of the quarter following Royal Assent. [Item 3 of the table in subclause 2(1) of the Bill]

4.62 The amendments apply to tax periods that start on or after commencement. [Schedule 3, item 22]