House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer and Minister for Financial Services, the Hon Stephen Jones MP)

Chapter 1: Assisting businesses to meet their record-keeping obligations

Outline of chapter

1.1 Schedule 1 to the Bill amends Schedule 1 to the TAA 1953 to empower the Commissioner to direct an entity to complete an approved record-keeping course where the Commissioner reasonably believes the entity has failed to comply with its tax-related record keeping obligations as an alternative to existing financial penalties.

Context of amendments

Record-keeping

1.2 In the normal course of carrying on a business, entities are required to keep and retain records of the transactions they enter into. The scope of these record keeping obligations depends on the nature, size, and the structure of a business.

1.3 These record-keeping obligations span across different Commonwealth taxation laws. In general, the record-keeping provisions under taxation law require entities carrying on a business or subject to indirect tax obligations to keep records that record and explain transactions, and other acts related to their tax affairs; which enable their tax liability to be readily ascertained. These records must be in English or must be readily accessible and easily convertible into English.

1.4 Generally, these records must be kept for 5 years after they are prepared or obtained, or 5 years after the completion of the transaction or acts to which they relate to (whichever is later).

1.5 Currently, where an entity is required to keep or retain records under a taxation law and fails to keep or retain records in the manner required by that law, they will be liable to an administrative penalty under section 288-25 in Schedule 1 to the TAA 1953. However, this administrative penalty does not apply to record-keeping obligations under certain taxation laws:

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Part X of the FBTAA 1986 - includes record-keeping obligations related to retention of statutory evidentiary documents; and

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Division 900 of the ITAA 1997 - includes record-keeping obligations related to keeping and retaining documents required to substantiate expenses.

1.6 Under section 298-20 in Schedule 1 to the TAA 1953, the Commissioner may remit all or part of an administrative penalty including record keeping penalties imposed by section 288-25 in Schedule 1 to the TAA 1953.

The Taskforce

1.7 The Taskforce was established in 2016 to develop a policy response to combat the shadow economy in Australia, recognising that these issues cannot be tackled by traditional law enforcement measures alone.

1.8 The Taskforce's Final Report found that some entities carrying on businesses have difficulty complying with their record-keeping obligations. This results in omitted income being added to the shadow economy. The Taskforce's Final Report recommended that the requirements for tax-related record-keeping obligations should be clear and simple for entities carrying on businesses, and penalties for breaches of these rules should be designed so that the ATO has a range of administrative sanctions available at its discretion.

1.9 In response to the Taskforce's Report, it was agreed that the requirements for tax record-keeping should be clear and simple, and that entities carrying on businesses should adhere to strong record-keeping practices. The measure Black Economy - assisting businesses to meet their reporting obligations was announced in the 2019-20 MYEFO.

Summary of new law

1.10 The amendments empower the Commissioner to issue a tax-records education direction requiring an entity to complete an approved record-keeping course where the Commissioner reasonably believes that there has been a failure to comply with one or more specified record-keeping obligations under a taxation law.

1.11 The tax-records education direction seeks to directly address the knowledge gaps and reduce cases of non-compliance with record keeping obligations by helping entities better understand their tax-related record-keeping obligations.

1.12 The key features of the tax-records education direction are as follows:

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The Commissioner can issue a direction to an entity if the Commissioner reasonably believes the entity has failed to comply with one or more of its record-keeping obligations under a taxation law, excluding certain exempt obligations.

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An entity that has received a tax-records education direction must complete or arrange for an appropriate person to complete the approved course of education and provide proof of completion to the Commissioner.

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The tax-records education direction operates as an alternative to the administrative penalties that apply where an entity has failed to meet its record-keeping obligations under a taxation law.

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If the entity complies with the tax-records education direction, they will not be liable to the administrative penalty for failing to meet their record-keeping obligations.

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If the entity does not comply with the requirements of a tax-records education direction, they will be liable to the original administrative penalty.

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The Commissioner may only issue a direction to an entity which the Commissioner reasonably believes is not disengaged or deliberately avoiding their record-keeping obligations.

Comparison of key features of new law and current law

Detailed explanation of new law

1.13 The tax-records education direction will be implemented as part of the existing education direction framework as set out in Division 384 in Schedule 1 to the TAA 1953.

Tax-records education direction

1.14 The Commissioner may issue a tax-records education direction to an entity if the Commissioner reasonably believes that the entity has failed to comply with one or more of its record-keeping obligations under a taxation law as an alternative to an administrative penalty. The tax-records education direction requires the recipient to undertake (or arrange for an appropriate person within the entity to undertake) an approved course of education specified by the Commissioner and provide the Commissioner with evidence of completion of the course. [Schedule 1, items 9 and 16, section 384-12 in Schedule 1 to the TAA 1953, and definition of 'tax-records education direction' in section 995-1(1) of the ITAA 1997]

1.15 An entity's failure to keep appropriate records can occur for a variety of reasons including unintentional mistakes, knowledge gaps, or variations in levels of digital literacy. The purpose of the tax-records education direction is to address these knowledge gaps and reduce cases of non-compliance through the use of an approved course of education which will help entities better understand their tax-related record-keeping obligations.

1.16 The tax-records education direction will operate as an alternative to the existing administrative penalty that applies where an entity has failed to meet its record-keeping obligations under a taxation law. This supports the recommendation outlined in the Taskforce's Report for the ATO to have a range of administrative sanctions at its discretion. [Schedule 1, items 1 and 2, section 288-25(2)(c) in Schedule 1 to the TAA 1953]

1.17 This means where an entity undertakes or, if the entity is not an individual, arranges for a person involved in the significant decision-making processes of the entity to undertake, the approved course of education and provides evidence of completion of the course to the Commissioner, the entity will not be liable to pay the administrative penalty under section 288-25 in Schedule 1 to the TAA 1953.

1.18 In this way, the tax-records education direction provides an alternative for the entity that allows the entity to avoid administrative penalties. The administrative penalty will not apply if the approved course of education is completed before the end of the specified period and if evidence of completion is provided to the Commissioner. This will encourage entities to undertake the education course and gain a better understanding of their record keeping obligations.

Recipients of the tax-records education direction

1.19 The tax-records education direction is intended to address the knowledge gaps and reduce cases of non-compliance by helping entities better understand their tax-related record-keeping obligations. It is expected that the tax-records education direction will principally be exercised in the context of entities carrying on a business, and in particular small business entities.

1.20 As such, the Commissioner may issue the tax-records education direction to an entity that is carrying on a business. For example, the tax records education direction may be issued to a sole trader where the Commissioner reasonably believes the sole trader has failed to comply with one or more of its record-keeping obligations under a taxation law.

1.18 As an entity other than an individual cannot complete the course of education, the law requires that an individual undertakes the course of education. In the case of a sole trader, the individual acting as the sole trader should complete the course of education. In all other cases, the entity must ensure an individual who makes or participates in making decisions that affect the whole or a substantial part of their activities undertakes the approved course of education. [Schedule 1, item 10, section 384-15 in Schedule 1 to the TAA 1953]

1.22 The tax-records education direction is not available to entities that are disengaged from the tax system or those who deliberately avoid their record keeping obligations under a taxation law. As the purpose of the tax-records education direction is to facilitate a better understanding of record keeping obligations, financial penalties and, in cases of serious non-compliance, other criminal sanctions, are the appropriate penalty for those disengaged from the tax system or those that deliberately avoid their record keeping obligations. [Schedule 1, item 9, section 384-12(2) in Schedule 1 to the TAA 1953]

1.23 However, the Commissioner will issue a tax-records education direction to an entity where the Commissioner reasonably believes that the entity has made a reasonable and genuine attempt to comply with, or believed they were complying with their record-keeping obligations.

Circumstances when a tax-records education direction may be given

1.24 The tax-records education direction can be given where an entity has failed to comply with one or more of its record-keeping obligations under a taxation law, with some exclusions. The education direction will specify these record keeping failures and the time or period of the failure. [Schedule 1, item 9, section 384-12(1) in Schedule 1 to the TAA 1953]

1.25 The tax-records education direction cannot be issued for record-keeping obligations under a taxation law where non-compliance with those obligations is excluded from giving rise to an administrative penalty under section 288-25 in Schedule 1 to the TAA 1953 (see above). [Schedule 1, item 9, section 384-12(1) in Schedule 1 to the TAA 1953]

1.26 Specifically, a tax-records education direction cannot be issued in relation to a failure to comply with a record-keeping obligation under:

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Part X of the FBTAA 1986; or

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Division 900 of the ITAA 1997.

1.27 As these record-keeping obligations do not give rise to an administrative penalty, the tax-records education direction cannot be used as an alternative to the administrative penalty in this instance.

1.28 Further, the tax-records education direction cannot be issued to an entity that has failed to comply with its record-keeping obligations under the Superannuation Guarantee (Administration) Act 1992. This is because a failure to comply with an obligation to keep records under that Act is separately covered by the superannuation guarantee education direction. [Schedule 1, items 9 and 16, section 384-12(1) in Schedule 1 to the TAA 1953, and definition of 'superannuation guarantee education direction' in section 995-1(1) of the ITAA 1997]

1.29 The superannuation guarantee education direction is centred on broader compliance with an employer's obligations under the Superannuation Guarantee (Administration) Act 1992. It also has different requirements to the tax-records education direction. A key distinguishing feature of the superannuation guarantee education direction is that a failure to comply with superannuation guarantee education direction is an absolute liability offence under section 8C of the TAA 1953. Further, a failure to comply with the superannuation guarantee education direction results in an administrative liability of 5 penalty units.

1.30 Conversely, a failure to comply with the tax-records education direction does not constitute an offence under section 8C of the TAA 1953. Rather, where an entity fails to comply with the requirements of a tax-records education direction, they will be liable to the original administrative penalty set out in section 288-25 in Schedule 1 to the TAA 1953 (see below). That is, there are no additional penalties applied if an entity does not comply with a tax-records education direction.

1.31 As the tax-records and the superannuation guarantee education directions have different requirements, it is appropriate for them to operate separately. As such, Schedule 1 to the Bill makes minor amendments to Division 384 in Schedule 1 to the TAA 1953 to effectively separate these education directions. [Schedule 1, items 4, 5, 6, 7 and 8, section 384-10 in Schedule 1 to the TAA 1953]

1.32 Schedule 1 to the Bill does not amend the existing operation of the superannuation guarantee education direction. Particularly, it does not amend how consequences for the failure to comply with the superannuation guarantee education direction operate and are treated under section 8C of the TAA 1953. These compliance provisions are now set out in section 384-17 in Schedule 1 to the TAA 1953. [Schedule 1, item 10, section 384-17 in Schedule 1 to the TAA 1953]

Consequences of not complying with the tax-records education direction

1.33 The entity that is given a tax-records education direction must complete or arrange for the completion of the approved course of education before the end of the specified period as set out in the written direction. Further, the entity must provide the Commissioner with evidence of completion of the course. [Schedule 1, item 10, section 384-15(3) in Schedule 1 to the TAA 1953]

1.34 If an entity fails to comply with these requirements of the tax-records education direction, they will be liable to the original administrative penalty as set out in section 288-25 in Schedule 1 to the TAA 1953. [Schedule 1, items 1 and 2, section 288-25(2)(c) in Schedule 1 to the TAA 1953]

1.35 This approach ensures that the tax-records education direction operates as an alternative to the administrative penalty and entities are encouraged to comply with the requirements of the tax-records education direction, without being further penalised if they choose not to undertake the course. This ensures that entities are encouraged to comply with the requirements of the tax-records education direction - which will help them better understand their record-keeping obligations, and by extension assist them with accurately reporting their tax-related liabilities.

Administration of the tax-records education direction

1.36 A tax-records education direction given by the Commissioner will not be a legislative instrument within the meaning of section 8 of the Legislation Act 2003.

1.37 Insofar as the tax-records education direction is intended to assist entities meet their record-keeping obligations, they are not intended to determine or alter the law and is therefore not of a legislative character. Further, this approach is consistent with the existing education direction framework administered as set out in Division 384 in Schedule 1 to the TAA 1953 where such directions are not legislative instruments either.

1.38 The tax-records education direction will be implemented through and administered in accordance with the existing operational rules that are set out in Division 384 in Schedule 1 to the TAA 1953. This includes operational rules related to:

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approval of courses of education;

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variation or revocation of an education direction on Commissioner's own initiative;

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variation of an education direction on a recipient's request; and

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a recipient's objection rights to an education direction.

[Schedule 1, items 11, 12, 13, 14, and 15, sections 384-20(1), 384-30, 384-25(1) and (7), and 384-40(a) in Schedule 1 to the TAA 1953]

1.39 As such, this means that a recipient of the tax-records education direction can object to the Commissioner's decision to issue a direction, vary a direction, or refuse to vary a direction on the recipient's request by making a request in accordance with Part IVC of the TAA 1953. [Schedule 1, item 15, section 384-40(a) in Schedule 1 to the TAA 1953]

1.40 The Commissioner's decision to issue or vary a tax-records education direction will be exempt from the operation of the Administrative Decisions (Judicial Review) Act 1977. This approach is consistent with how the Commissioner's decision to issue or vary superannuation guarantee education direction is treated under the Administrative Decisions (Judicial Review) Act 1997. This is appropriate as entities are provided with full review rights under Part IVC of the TAA 1953 which is a well-established and comprehensive review scheme for taxation decisions. Part IVC review is equally as accessible and effective as review under the Administrative Decisions (Judicial Review) Act 1977.

Consequential amendments

1.41 Part 2 of Schedule 1 to the Bill makes minor consequential amendments to the TAA 1953 to reflect that the compliance provisions with respect to superannuation guarantee education direction are now set out in section 384-17 in Schedule 1 to the TAA 1953.

[Schedule 1, items 17 and 18, section 8C(1)(fa) of the TAA 1953, and section 298-5(c) in Schedule 1 to the TAA 1953]

Application and transitional provisions

1.42 The Commissioner will be able to issue a tax-records education direction to an entity three months after the day the Bill receives Royal Assent.

[Schedule 1, item 19]

1.43 The amendments apply to failures to comply with record-keeping obligations under a taxation law that occur both before and after the Bill receives Royal Assent.

1.44 Providing the Commissioner with the ability to issue a tax-records education direction in relation to breaches of record keeping obligations that occurred before the commencement of the Bill is appropriate and wholly beneficial to businesses. This is because the amendments will allow entities to choose to complete the approved record-keeping education course as an alternative to paying the financial administrative penalties if they wish.

1.45 The transitional provision ensures that an education direction given in relation to a failure to comply with an obligation to keep records under the Superannuation Guarantee (Administration) Act 1992, before the commencement of Schedule 1 to the Bill, will continue in force (and will be dealt with) as if it had been given under the requirements of superannuation guarantee education direction, as amended by Part 1 of this Schedule.

[Schedule 1, item 20]