Senate

Explanatory Memorandum

(Circulated by the authority of the Treasurer,the Hon John Dawkins, M.P.)

PART A INCOME TAX ASSESSMENT ACT 1936 Chapter 1 Removal of Commissioner's priority

Summary of proposed amendments

Purpose of amendment: To remove the Commissioner's priority in respect of debts for certain unremitted amounts. Those debts currently have priority over all other debts of a person or company in a bankruptcy or an insolvency, irrespective of whether the other debts are preferential, secured or unsecured.

Date of Effect: The amendments will apply to unremitted amounts which become payable after 30 June 1993.

Background to the legislation

Sections 221P, 221YHJ, 221YHZD and 221YU of the Income Tax Assessment Act 1936 (Assessment Act) currently give the Commissioner priority over all other creditors (whether preferential, secured or unsecured) of a person, including a company, in the recovery of certain unremitted amounts when the person becomes a bankrupt or when a company is placed into liquidation or receivership.

The main debts are those which arise when

•

tax instalment deductions, made from salary or wages under the pay as you earn (PAYE) arrangements; or

•

deductions, made from prescribed payments under the prescribed payments system (PPS);

are not remitted to the Commissioner in accordance with the Assessment Act.

The Commissioner also has priority for debts which arise when deductions from natural resource payments, unattributed income and deductions of withholding tax are not remitted.

The priority does not extend to properly incurred costs and charges of a trustee in bankruptcy or a liquidator. These costs include expenses incurred by a trustee or a liquidator (including fees) and the costs of the application for bankruptcy or winding up.

The Commissioner's priority for unremitted amounts is covered by the following provisions in the Assessment Act:

In their joint Press Release on 2 December 1992, the Treasurer and the Attorney-General announced that the Commissioner's priority was to be abolished.

As a result of the amendments proposed, debts due to the Commissioner, arising as a result of a failure to remit amounts deducted, will be treated in a similar manner to debts payable to other unsecured creditors.

Explanation of proposed amendments

Application of the removal of the Commissioner's priority

Clause 7 provides that the amendments to remove the Commissioner's priority will apply to debts for unremitted amounts which become payable after 30 June 1993 [New subsection 221P(1A)] .

Will the Commissioner's priority continue to apply?

Yes. The Commissioner's priority will continue in respect of unremitted amounts which become payable before 1 July 1993.

Current framework for the Commissioner's priority

The sections in the Assessment Act which enable the priority to operate are summarised in the above table. The purpose of those provisions is twofold.

First, the provisions [subsections 221P(1), 221YHJ(3), 221YHZD(3) and 221YU(1)] operate to transfer the liability for the unremitted amounts to a trustee in specific situations. Those situations are where all of the property of the person who deducted the amounts becomes vested in, or the control of that person's property passes to, a trustee. This would occur when a company becomes insolvent and is placed in liquidation.

Second, the remaining priority provisions [subsections 221P(2) & (3), 221YHJ(4) & (5), 221YHZD(4) & (5), and 221YU(2) & (3)] have the effect of giving the debts for the unremitted amounts priority over other debts payable by the trustee. As the Commissioner's priority is being removed, the priority provisions will have no application in respect of unremitted amounts which become payable after 30 June 1993 [Clauses 7, 9, 11 and 15] .

Application to amounts which become payable after 30 June 1993 is achieved through a reference to specific deductions made. For example, to achieve the correct application for PAYE unremitted amounts, it is necessary to refer to deductions made after 14 June 1993 for early remitting group employers and deductions made after 31 May 1993 for other employers [Clause 7] .

Tax stamps

Section 221P(1) also makes employers liable when they fail to remit deductions under section 221F or purchase tax stamps as required under section 221G. The liability for employers when deductions are not remitted also arises through the application of section 221F.

However, with section 221P(1) having no application for amounts payable after 30 June 1993, the liability on employers for failing or refusing to purchase tax stamps has been relocated from subsection 221P(1) to new subsection 221G(2D) [Clause 6] .

Liquidators, receivers and certain agents

Section 215 of the Assessment Act places requirements on trustees (as defined in subsection 215(1)) after their appointment. For example, subsection 215(1) requires the trustee to notify the Commissioner within 14 days of appointment. The Commissioner then notifies the trustee of the amount of tax which is payable and will become payable.

Tax for section 215 purposes does not currently extend to unremitted amounts. This situation is consistent with the existence of a priority in respect of those amounts. With the priority being removed, Clause 4 will amend section 215 to make it clear that "tax" for section 215 purposes will include the unpaid amount of a liability under a remittance provision or the unpaid amount of an estimate together with any late payment penalties in respect of those amounts. The new unpaid amounts are explained in new section 222AFC .

Clause 5 amends section 218 in a similar manner to the amendments to section 215. Section 218 currently enables the Commissioner to require a person who holds money in respect of another person to pay him, out of the money held, an amount sufficient to cover the tax due by the other person.

The amendment proposed in clause 5 will extend the term "tax" in section 218 to cover unremitted amounts not currently included as well as the unpaid amounts and associated penalties referred to above. The term "taxpayer" in section 218 will also be extended to include a person liable to pay amounts to the Commissioner under Divisions 3B and 4 and new Divisions 8 and 9.

Consequential amendments to other Acts

To ensure the Commissioner's priority for unremitted amounts operates with other debts which also rank above unsecured creditors, the priority provisions in the Assessment Act are referred to in other Commonwealth Acts.

The Acts affected are the Bankruptcy Act 1966, the Child Support (Registration and Collection) Act 1988, the Crimes (Taxation Offences) Act 1980, the Crown Debts (Priority) Act 1981, and the Life Insurance Policy Holders' Protection Levies Collection Act 1991.

The Schedule [Clause 29] to this amending Act proposes to amend those Acts to remove the priority references in respect of unremitted amounts which become payable after 30 June 1993.