Senate

Explanatory Memorandum

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

Chapter 2 Estimation of unremitted amounts

Summary of proposed amendments

Purpose of amendment: To allow the Commissioner to estimate the unremitted amounts which become payable after 30 June 1993 and to commence recovery action on the basis of that estimate.

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

Background to the legislation

The Commissioner is currently required to establish the precise amount of the unremitted amount before he can take any legal action to recover the amount. This often frustrates the efficient and timely recovery of the unremitted deductions because of the necessary delay between non-remittance and ascertainment of the unpaid amount.

While the priority currently enables the recovery of unremitted amounts in an insolvency (either in the bankruptcy of an individual or in the winding up of a company), it does not assist the Commissioner to recover in his day to day dealings with employers and payers who do not remit amounts deducted.

The amendments proposed in the Bill seek to overcome the difficulties created by the need to establish the precise amount of the debt by introducing a new recovery regime. The features of the new regime parallel those for recovery arrangements in other countries such as the United Kingdom where an estimate of an unremitted amount is made and recovery action commences on the basis of that estimate.

A key feature of the new regime will enable the Commissioner to make an estimate of unremitted amounts when the time for payment has passed. He can then take action to recover that estimate if he is not advised of the actual amount. As the Commissioner is only interested in collecting the actual unremitted amounts, a person will be given an opportunity to inform the Commissioner of the actual amounts deducted.

Explanation of proposed amendments

The amendments proposed in new Division 8 are to be inserted into Part VI of the Assessment Act. They enable the Commissioner to take prompt and effective action to recover amounts not remitted as required under Divisions 2, 3A, 3B and 4 of Part VI [New section 222AFA] .

Terms used in explanation

New section 222AFB explains the new terms to be introduced in new Division 8. Some of the terms are described below:

"Person" includes:

a)

an employer for PAYE purposes as defined in subsection 221A(1) of the Assessment Act; and

b)

a person as that term is defined for the PPS arrangements in subsection 221YHA(1) of the Assessment Act; and

c)

an investment body as defined in section 202D of the Assessment Act; and

d)

a person who is taken to be the investment body in relation to an investment because of subsection 221YHZA(4) of the Assessment Act; and

e)

a company within the meaning of Division 4 of the Assessment Act in relation to distributions by a liquidator (see for example subsection 221YK(2)); and

f) & g)

a government body and a partnership.

"Statutory demand" and "Statutory minimum" have the same meaning as in the Corporations Law.

"Trustee" means a trustee (as defined in section 6 of the Assessment Act) in whom a person's property is vested, or who has control of that person's property. Where the person is a partnership, the term trustee extends to a trustee of any of the partners.

"Underlying liability" in relation to an estimate is the actual liability to which an estimate relates.

New section 222AFC explains the meaning of the new terms unpaid amount of a liability and unpaid amount of an estimate. The terms reflect the extent to which the liabilities (based on either actual or estimated deductions) remain undischarged.

When the Commissioner may make an estimate

Under the amendments proposed, where the Commissioner has reason to suspect that a person has not remitted amounts deducted from payments made during a period, he may make an estimate of that person's liability without ascertaining the actual amount deducted [New subsection 222AGA(1)] . The Commissioner may then commence recovery action on the basis of that estimate .

Basis for the Commissioner's estimate

In making the estimate, the Commissioner will have regard to any relevant information which is available [New subsection 222AGA(2)] . Such information would include, for example, in the case of unremitted PAYE or PPS amounts, the employer's [subsection 221A(1)] or eligible paying authority's [subsection 221YHA(4)], records of past deductions.

Notice to person liable

When the Commissioner makes an estimate of an unremitted amount, he must send a written notice of the estimate to the person who made the deduction and failed to remit that amount. It is envisaged that the notice could contain more than one estimate where, for example, there are unremitted PAYE or PPS deductions in respect of more than one period. The notice will also state that the estimate of the unremitted amount is due and payable immediately [New section 222AGB] .

Can the estimate of the unremitted amount be reduced or revoked?

The Commissioner's notice will also advise that the estimate

•

will be reduced if the person provides a statutory declaration specifying the amount of the underlying liability and the unpaid amount of the underlying liability [New paragraph 222AGB(2)(e) and sections 222AGC and 222AGF] ; or

•

will be revoked if the payer declares that no deductions were made in the period or periods covered in the notice [New paragraph 222AGB(2)(e) and section 222AGD] .

For a reduction or revocation to occur, the statutory declaration must be a statutory declaration made under the Statutory Declarations Act 1959 and must be given to the Commissioner within 7 days (or such longer period allowed by the Commissioner) after the Commissioner sends notice of the estimate to the person [New section 222AGF].

The Commissioner may reduce or revoke an estimate at any time, but is not obliged to consider whether or not to do so [New subsections 222AGC(2) & 222AGD(2)] . New paragraphs 222AGE (a) to (d) specify the matters to be considered by the Commissioner in reducing or revoking an estimate. For example, the fact that the estimate is of the unpaid amount of a liability and the purpose of the reduction is to bring the estimated amount closer to the actual unpaid amount are two factors to be taken into account. Also, any reductions in the unpaid amount which occurred after the estimate was made would also be relevant.

Where the Commissioner reduces or revokes the estimate for any reason other than as a result of the receipt of a statutory declaration, he will be required to notify the person liable that:

•

he has reduced the estimate and advise the reduced amount of the estimate; or

•

the estimate has been revoked.

The reduction or revocation takes effect when the notice is sent [New subsections 222AGC(3) and 222AGD(3)] .

Who can make a statutory declaration?

Proposed new section 222AGF also outlines the requirements for a statutory declaration including the form of the declaration and who is to make the declaration. The declaration will specify information such as the unpaid amount of liability to which the estimate relates, the deductions made during the period in question and how much of those deductions were paid to the Commissioner [New subsections 222AGF(4) to (6)] .

New subsection 222AGF(7) provides that the declaration must be made by:

a)

if the person is a company that has directors, a secretary or both - a director or the secretary; or

b)

if the person is an individual - the person; or

c)

if the person is a government body - a prescribed person; or

d)

if the person consists of two or more persons including one or more individuals and is neither a company nor a government body (for example, a partnership) - that individual or one of those individuals; or

e)

in any case - the person's trustee.

Decisions about estimates not reviewable

The Bill also proposes that the Commissioner's decision:

•

about whether to make, reduce or revoke an estimate; and

•

to determine the amount of an estimate or reduced amount of an estimate;

will not be reviewable under the Administrative Decisions (Judicial Review) Act 1977 (the ADJR Act) [Part 3 of the Bill] .

The reason why these decisions will not be reviewable is that a person who becomes liable to an estimate has the absolute right to vary the amount of the estimate by completing a statutory declaration.

This proposed amendment will be achieved by including the Commissioner's decision

•

about whether to make, reduce or revoke an estimate; and

•

to determine the amount of an estimate or reduced amount of an estimate

in Schedule 1 of the ADJR Act.

Can the Commissioner make more than one estimate in respect of the same liability?

The Commissioner cannot make a new estimate in relation to the same liability while an estimate is in force. An estimate is in force if the Commissioner has given notice of it to a person and the estimate has not been revoked and the person's liability to pay the estimate has not been discharged [New section 222AGG] .

Nature of the liability created by notice

The liability to pay an estimate will be separate and distinct from the underlying liability. To avoid a "double recovery" situation, of both the underlying liability and the estimate, the amendments provide that the underlying liability and the estimated liability are "parallel liabilities". When one liability is discharged in part or in full, the other liability will be discharged to the same extent [New section 222AHA] .

Also, the operation of new section 222AHA(1) will make the liability for the estimate due and payable immediately. This is consistent with the fact that the actual liability to which the estimate relates (the underlying liability) would have been due and payable on a date prior to the estimate being notified.

What happens when the estimate is too low or too high?

In practice it will be most unusual for the Commissioner to estimate precisely the actual unremitted amounts. Of course the estimate could be reduced to the actual unremitted amount when the person liable, upon being notified of the estimate by the Commissioner, declares what the actual unremitted amount was. The operation of new section 222AGC will then result in the actual amount being recovered as at present.

However, adjustments, either in favour of the Commissioner or the person liable, will be required when:

•

after notification of the estimate, no statutory declaration setting out the actual unremitted amount is received; and

•

the Commissioner recovers the estimated liability from the person liable, either directly or through court proceedings; and

•

it is proved that the actual unremitted amount was different to the estimated liability.

The prime objective of the amendments involving the estimation of unremitted amounts is to enable the Commissioner to recover the actual amount which was deducted and not remitted. Accordingly, the proposed amendments contain provisions which will allow for adjustments to be made to the estimate which will facilitate collection of the actual amount.

New section 222AHB provides that when the estimated liability is paid and it is found to exceed the unpaid amount of the actual liability, the Commissioner must refund the excess or apply it against any other liabilities of the person to the Commonwealth under laws administered by the Commissioner and then refund any excess.

On the other hand if the estimated liability is paid and is found to be less than the unpaid amount of the actual liability, the Commissioner will be able to take recovery proceedings to recover the balance of the actual liability.

If there is more than one estimate not paid, in the case of PAYE deductions, and a person pays an amount that does not equal the total of the outstanding estimates, the Commissioner will be able to apply the payment to discharge any estimate he thinks appropriate, irrespective of any direction from the person making the payment about how the payment should be allocated [New subsection 221R(1B)] . New subsection 221YHN(1A) which is inserted by Clause 10 , provides comparable recovery arrangements for estimates and penalties in relation to PPS deductions under the Prescribed Payments System (PPS).

Will a person have the right to defend proceedings brought by the Commissioner to recover an estimate on the basis that the Commissioner's estimate is higher than the actual liability?

Yes, new section 222AHC provides that the Commissioner is not entitled to recover if the defendant proves by affidavit that:

a)

the underlying liability never existed; or

b)

the underlying liability has been discharged; or

c)

the underlying liability is less than the estimate.

In the case of (c), the Commissioner will be entitled to judgment only for the unpaid amount of the underlying liability.

New section 222AHE stipulates that the affidavit must be filed with the court by the person liable. A copy must also be served on the Commissioner within 14 days of the person taking a procedural step, for example, entering an appearance, as a party to the proceedings (if the Court does not extend this time). The section also sets out what facts the affidavit must verify and who can swear the affidavit (the same persons who can make a statutory declaration).

Insolvency proceedings

What is the effect of a statutory demand served on a company when the estimate the Commissioner is seeking to recover is either reduced or revoked?

If the Commissioner chooses to recover an estimate by serving a statutory demand on a company and the estimate is subsequently reduced or revoked, new section 222AIA has the effect of either:

•

changing the statutory demand to reflect the reduced amount of the estimate (in this event, the changed statutory demand will have the same effect as if it had originally specified the reduced amount); or

•

setting aside the statutory demand (when the estimate is revoked).

If an estimate has been reduced to an amount below the statutory minimum, can a court still order the winding-up of a company?

New section 222AIB provides that a court is not to presume that a company is insolvent simply because it has not paid the amount/s of an estimate/s if the underlying liability/ies is below the statutory minimum of $2,000.

In winding up proceedings, where an estimate is shown to exceed the underlying liability by an affidavit, the amount of the estimate is to be reduced by the excess [New section 222AIC] . Further, proposed new section 222AID contains the requirements necessary for an affidavit for the purposes of a defence on a winding up application under new section 222AIB .

Is the amount of an estimate provable in bankruptcy or winding up?

Yes, unless the liability to which the estimate relates has already been admitted to proof and the proof has not been set aside. However, the Commissioner can prove for that part of the underlying liability that exceeds the amount of the estimate that has been admitted to proof [New section 222AIF] .

New section 222AIG allows the trustee to reject, in full or in part, a proof of debt based on an estimate of liability if he or she files a statutory declaration in a court that has jurisdiction over the trustee's administration. The declaration must prove that the underlying liability never existed or has been paid or is less than the estimated liability.

The Commissioner can apply to that court to have the trustee's decision reversed. If the Commissioner does not apply to the court, or does apply, but the court does not reverse the decision, the estimate is either revoked or reduced.

New section 222AIH sets out the requirement for a statutory declaration to be used by a trustee in support of this rejection of a proof of debt based on an estimate.

Do these provisions conflict with the Corporations Law?

New section 222AII makes it clear that Subdivision D will prevail if there is any conflict between them and the Corporations Law provisions.

Penalty for late payment of estimate

A late payment penalty regime, similar to that for late payment of PAYE deductions in subsection 221F(12) and other unremitted amounts, is proposed where an estimate remains undischarged at the end of 7 days after the Commissioner sends the notice of estimate to the person liable [New section 222AJA] .

How is the late payment penalty calculated?

The late payment penalty will be calculated from the due date of the underlying liability referred to in new paragraph 222AGA(1)(b) . That is the date on which the unremitted amounts, on which the estimated liability was based, were payable to the Commissioner.

As with late payment of PAYE deductions, the penalty amounts for a non government body will be a flat penalty equal to 20% of the unpaid amount of the estimate plus 16% per annum on the unpaid amount of the estimate and on the unpaid amount of the flat penalty [New subsection 222AJA(3)] .

Nature of penalty and consequences of payment

Running parallel with this late payment penalty would be a penalty for the underlying liability, i.e., the actual amounts deducted and not remitted. New section 222AJB provides that the penalties for the estimated and underlying liabilities are parallel liabilities in the same way as the estimate and underlying liability are parallel liabilities in new section 222AHA .

Can the late payment penalty be remitted?

Yes, the amendments provide the Commissioner with similar powers to remit penalties as are currently available under the remittance provisions [New section 222AJC] .

Recovery of late payment penalty

New subsection 221R(1B) , in the case of late payment of PAYE deductions, provides the mechanism for the Commissioner to recover the late payment penalty in respect of an estimate. For example, new section 222AJA in conjunction with other relevant provisions (see for example section 221R) in the other Divisions in Part VI will result in the penalty being a debt due to the Commonwealth and payable to the Commissioner. The section also enables the Commissioner, on recovering a penalty, to apply the amount (the debt payment) in respect of the debt in question or other debts arising from liabilities under other remittance provisions.

What is the effect on liabilities under Division 8 and other Divisions if an estimate is reduced or revoked?

New section 222AKA provides that the liabilities are to be adjusted with effect from when they arose. For example, if a late payment penalty was calculated under new section 222AJA in respect of an estimate and that estimate was subsequently reduced by the Commissioner, the penalty so calculated would be adjusted as if the original estimate had not been made. Any penalty will still be calculated from the due date of the underlying liability.

The new section also covers the situation where the reduction or revocation occurs after the penalty, as calculated on the original estimate, is paid. In this situation, the Commissioner must refund any excess amounts recovered or apply that excess against any liability of the person to the Commonwealth and refund so much as is not so applied.

What is the effect of a reduction or revocation on the Commissioner's rights in relation to the underlying liability?

To enable recovery of the actual amount deducted, new section 222AKB provides that an estimate being reduced or revoked will not prejudice the Commissioner's rights in relation to the actual underlying liability.