Senate

Explanatory Memorandum

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

Chapter 3 Penalty for directors in respect of unremitted amounts

Summary of proposed amendments

Purpose of amendment: To make company directors liable for deductions which are made by their company and not remitted to the Commissioner as required by the legislation.

Date of Effect: The amendment will apply to deductions which become payable after 30 June 1993 as the Commissioner's priority will no longer apply to those amounts.

Background to the legislation

Under the current law, the combined operation of section 8Y of the Taxation Administration Act 1953 and section 21B of the Crimes Act 1914 can result in company directors being convicted in relation to their company's non payment of amounts deducted. As mentioned in Chapter 1, the main deductions involved are those under the PAYE and PPS arrangements.

If convicted, company directors can be ordered by a court to pay reparation equal to the amount of the deductions unpaid. This recovery process results in extensive delays in recovering debts for unremitted tax amounts.

The joint Ministers' announcement of 2 December 1992 noted that the Commissioner's priority only operates when a business is put into some form of insolvency administration. As a result, the current operation of the priority puts no pressure on the persons liable to pay unremitted amounts when due. If company directors were made liable for unremitted amounts, which are currently subject to the priority, solvency problems would be confronted earlier and the escalation of debts in respect of those amounts could be prevented.

The proposed amendments will allow the Commissioner to take more effective recovery action for unremitted amounts and will remove the need to have a conviction as a prerequisite to recovery. This result will be consistent with the approach taken in several areas of directors' liability in the Corporations Law as amended by the Corporate Law Reform Act 1992.

Explanation of proposed amendments

Purpose of amendments:

Under the proposed amendments, it will no longer be necessary for directors to be convicted of failing to pay unremitted amounts before they become personally liable to pay those amounts.

The amendments proposed in new Division 9 of the Assessment Act will ensure that a company either meets its obligations under Division 2, 3A, 3B, 4 or 8, or goes into voluntary administration under Part 5.3A of the Corporations Law or into liquidation.

The Division imposes a duty on the directors to cause the company to do so. The duty is enforced by penalties equal to the unremitted amounts. However, a penalty can be recovered only if the Commissioner gives written notice to the person concerned. The penalty is automatically remitted if the company meets its obligations, or goes into voluntary administration or liquidation, within 14 days after the notice is given.

As explained in the outline to the amendments [New sections 222ANA and 222ANB] , directors will be liable for unremitted amounts (or an estimate thereof) when certain options to extinguish or avoid that liability are not taken. The options include:

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the liability for the unremitted amount being discharged;

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an administrator being appointed; or

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the company beginning to be wound up.

However, before the Commissioner can recover an unremitted amount (or estimate thereof) by way of penalty from directors, the Commissioner must notify the directors of their liability for the penalty. The directors will then have a further 14 days after being notified to have the penalty remitted. The penalty will be remitted if, at the end of the 14 days, one of the options referred to above is taken.

Framework of the provisions

The amendments explained in this Part of the Explanatory Memorandum are divided into the following three Subdivisions contained in the Bill:

Subdivision B [New sections 222AOA to 222AOJ] contains the consequences for a director who fails to ensure that a company under his or her directorship which makes deductions:

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remits those deductions to the Commissioner; or

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makes an agreement with the Commissioner to remit the deductions; or

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goes into voluntary administration; or

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goes into liquidation

before the due date for payment of those deductions.

Subdivision C [New sections 222APA to 222API] is similar in operation to Subdivision B except that it deals with the situation where a director fails to ensure the company exercises at least one of the above options when the company has become liable to pay an estimate of the deduction made.

Onus on directors to ensure payment arrangements are complied with

Subdivision D [New sections 222AQA to 222AQD] contains the consequences for directors when a company contravenes a payment agreement. The provisions enabling the Commissioner to enter into an agreement with a person liable are contained in new section 222ALA .

An explanation of new section 222ALA is contained at the conclusion to this Part.

Company failing to remit under Division 2, 3A, 3B or 4

Application of the provisions

The proposed amendments to penalise directors for unremitted amounts (or an estimate thereof) will operate only when a company, under their directorship, becomes liable to pay to the Commissioner an unremitted amount in respect of a deduction made and that liability remains unpaid. The amendments will apply to deductions which become payable after 30 June 1993 and to companies incorporated under the Corporations Law [New section 222AOA] .

Directors will be able to avoid being penalised if any one of four options is taken on or before the date on which the deductions made become due and payable to the Commissioner [New section 222AOB] .

If none of the options are taken by the due date each person, who was a director during the period from when the company became liable to remit (i.e., when the deduction in question was made) until the due date, will be liable to pay to the Commissioner, by way of penalty, an amount equal to the unremitted amount [New section 222AOC] . As explained earlier, the unremitted amount or unpaid amount of a liability represents the deductions made by the company and not remitted to the Commissioner.

Can new directors be penalised?

Yes. If a new director is appointed after the due date for a particular unremitted amount, the new director will be liable for that amount if none of the options in new section 222AOB are taken within 14 days after the director's appointment [New section 222AOD] . As with existing directors, new directors will have a further 14 days, from the time they are notified by the Commissioner that they are liable, to have the penalty remitted.

How can directors avoid being penalised?

Directors will avoid being penalised under the new arrangements if new section 222AOB is complied with before the due date for the deductions made. Compliance will occur if:

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the company pays the unremitted amount [New paragraph 222AOB(2)(a)]; or

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the Commissioner and the company enter into a payment agreement under new section 222ALA to pay the unremitted amount [New paragraph 222AOB(2)(b)] ; or

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the company has an administrator appointed under sections 436A, 436B or 436C of the Corporations law [New paragraph 222AOB(2)(c)] ; or

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the company begins to be wound up within the meaning of the Corporations Law [New paragraph 222AOB(2)(d)] .

New section 222AOB will be complied with even if the directors did not cause the event to happen. Where the section is not complied with by the due date, company directors will continue to be liable and under the obligations imposed by the new arrangements until compliance occurs [New subsection 222AOB(3)] .

When will the Commissioner recover the penalty under new sections 222AOC or 222AOD?

The proposed amendments will require company directors to be fully informed as to when they are liable for the unpaid amount of a company's liability under a remittance provision in respect of deductions made. However, directors will not be penalised automatically when the compliance options described above are not taken.

Before the Commissioner can recover a penalty equal to an unremitted amount from a director, the Commissioner must individually give to the director a written notice stating the amount involved and allow the director another 14 days to avoid the imposition of the penalty [New section 222AOE] .

When will the penalty be remitted?

New subparagraphs 222AOE(b)(i) to (iv) provide that the directors' penalty for unremitted amounts will be remitted if, at the end of 14 days after being notified:

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the unpaid liability in question is discharged [(i)] ; or

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an agreement is in force to discharge the liability [(ii)] ; or

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the company is under administration [(iii)] ; or

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the company is being wound up [(iv)] .

How will the notice be given?

The Commissioner's notice will be posted to the director's address as provided by the Australian Securities Commission in accordance with section 242 or 335 of the Corporations Law [New section 222AOF] . This section will ensure notices are sent to current addresses by requiring the Commissioner to send the notice to an address within 7 days of obtaining the address from the ASC.

What constitutes giving or sending a notice?

The amendments as explained in this Chapter and elsewhere [New section 222AGB] refer to the Commissioner giving or sending a notice. Section 29 of the Acts Interpretation Act 1901 clarifies the meaning of the expressions 'serve', 'give' or 'send'. Those terms are effected when the notice is delivered in the ordinary course of post.

What if compliance occurs within the 14 days from when the Commissioner's notice is given to individual directors?

In this event, new section 222AOG will operate so that the penalty in respect of the unremitted amounts will be remitted for those directors who were able to comply with the notice under new section 222AOE or who were not notified under that section.

For example, if compliance resulted because an administrator was appointed before the Commissioner could notify the directors under new section 222AOE , then the Commissioner would be prevented from recovering the liability for unremitted amounts from the company's directors.

A director who receives a notice which is not complied with within 14 days will not have the penalty remitted even though compliance with a subsequent notice to another director occurs.

Director's and company's liability generally

A company's liability and the penalties for directors (under [new sections 222AOC, 222AOD] for an unpaid amount will be parallel liabilities. When an amount is paid to discharge one of the liabilities each of the other liabilities is discharged to extent of the same amount [New section 222AOH] .

Director's rights of indemnity and contribution

New section 222AOI provides that a director is entitled to be indemnified by the company, or to obtain contribution from anyone else who the Commissioner could have sued, for payments he or she makes by way of penalty as a result of the company failing to remit amounts deducted.

Directors' defences in recovery proceedings

The proposed amendments contain defences for a director in recovery proceedings by the Commissioner for penalties payable under new sections 222AOC or 222AOD. It will be a defence if it can be proved that, because of illness or some other reason, a director did not take part in the company's management when new section 222AOB had to be complied with [New subsection 222AOJ(2)] .

It will also be a defence if a director can prove that she or he took all reasonable steps to ensure that the deductions made were paid to the Commissioner, or the company complied with one of the other requirements in new section 222AOB by the due date (or within 14 days of becoming a director in the case of new directors) or that there were no such steps that the director could take [New subsection 222AOJ(3)] .

New subsection 222AOJ(4) clarifies what is meant by "reasonable" steps in defence proceedings. In addition to all relevant circumstances, consideration is to be given to when and how long the director took part in the management of the company.

Company failing to pay estimate under Division 8

The objective of the amendments contained in the Bill is to enable the Commissioner to recover unremitted amounts which are due and payable after 30 June 1993. The amendments explained above involve making directors liable for the actual unpaid liability or unremitted amount.

Chapter 2 explained the proposed amendments which will enable the Commissioner to recover, the unpaid amount of liability on the basis of an estimate. Consistent with those amendments and the amendments to recover the actual unpaid liability from directors, the new arrangements will also extend to recovering an estimate of the unpaid amount of liability from directors.

New sections 222APB to 222API ,which propose penalties for directors equal to an estimate of the unremitted amount will operate in a manner similar to the provisions described above [New sections 222AOB to 222AOJ] which operate to recover the actual unremitted amount.

Directors will become liable for an estimate of the unremitted amount when certain options are not taken within 14 days after the Commissioner notifies the company of the estimate.

Why are similar provisions required for the actual and estimated liabilities?

The main reason is that particular features of an actual and estimated liability differ. For example, the point in time when a director becomes liable for the actual liability arises when the deduction that has been made is not remitted to the Commissioner as required under a remittance provision, or one of the other options available is not taken before the due date for paying the deduction [New section 222AOB].

A director will become liable for an estimate if, within 14 days of the company being notified of the estimate, the estimate is not paid or one of the options available is not taken [New section 222APB]. The company's liability for an estimate arises under new section 222AGB when the Commissioner notifies the company of the estimate of the unpaid liability.

Another difference is the due dates the actual and estimated liabilities are payable to the Commissioner. For example, subsection 221F(5) provides when PAYE deductions are payable to the Commissioner. For early remitting companies, August deductions made after 14 August 1993 are payable to the Commissioner no later than 7 September 1993. New section 222AGB provides that the liability for an estimate is due and payable on the day on which the estimate notice is sent to a person.

For ease of explanation, the comparable provisions to penalise directors for either the actual or estimated liabilities are as follows:

As with the actual liability for an unpaid amount, the new arrangements to recover the estimate from directors provide that the Commissioner must give directors 14 days notice before recovering the penalty equal to the estimate [New section 222APE] .

New section 222APE addresses the situations where the penalty notice is given to a director either within the 14 days after the Commissioner has given the company an estimate notice for unremitted deductions [New paragraph 222APE(1)(b)] or more than 14 days after the notice has been given to the company [New paragraph 222APE(1)(c)] .

In the first situation the penalty notice will state that unless the company's liability is discharged or one of the other options is taken within 14 days of the company receiving the notice of estimate, the director will become liable for a penalty equal to the unpaid amount. In the second situation, the penalty notice will state that the director is liable for the unremitted amount.

However, consistent with the arrangements for recovering the actual liability, the penalty notice will state the penalty will be remitted if the liability is discharged or one of the other options is taken within a further 14 days of the penalty notice being given [New paragraph 222APE(1)(d)] .

Company contravening payment agreement under Division 8

New section 222ALA which is introduced in Division 8 provides that the Commissioner may agree to accept payment of either the actual unremitted amount(s) or the estimate(s) over a period of time. In practice, it is envisaged that the majority of payment agreements will be made to recover the actual amount deducted and not remitted.

Where the Commissioner agrees to accept payment of an unremitted amount over a period of time, he is not altering the date the original liability was due and payable. Additional tax for late payment will continue to apply from the date the original debt became due and payable (for example, from the seventh day of the month following the month in which PAYE deductions were made).

If the Commissioner enters into a payment agreement and payments are not made on the days specified in the agreement or other conditions in the agreement are not complied with, the person contravenes the agreement.

Where a specified amount is not paid on a specified day, the balance of the amounts payable under the agreement becomes a liability due and payable [New subsection 222ALA(3)] .

[New subsection 222ALA(7)] makes it clear that the Commissioner is not obliged to enter into a payment agreement. His decision not to do so would be subject to judicial review under the ADJR Act.

Proposed new sections 222AQA to 222AQD provide a new penalty regime for those directors who are not liable for unremitted amounts or an estimate because of compliance with new paragraphs 222AOB(1)(b) or 222APB(1)(b) . This would occur, for example, when an agreement is made with the Commissioner under new section 222ALA to pay the company's liability for the unremitted amount or the estimate.

Where the Commissioner agrees to accept payment of the unremitted amount(s) from a company, the directors of the company must cause the company to comply with the agreement. If the company contravenes the agreement, the directors (when the agreement was made and new directors appointed before the contravention) will be liable to pay, by way of penalty, the balance payable under the agreement [New section 222AQA] . In this event, the Commissioner will be able to immediately recover the balance payable under the agreement from those directors.

Recovery provisions, such as new subsection 221R(1A) , in the case of PAYE deductions, would enable the Commissioner to apply the penalty recovered against one or more outstanding debts.

New sections 222AQB to 222AQD will operate in a similar manner to the comparable sections to those which impose a penalty on directors for the company's unremitted amount (in Subdivision B ) or the estimate (in Subdivision C ).

The sections provide for payment of the penalty or discharging the liability [New section 222AQB] , directors rights of indemnity and contribution [New section 222AQC] and for defences in recovery proceedings [New section 222AQD] .

For example, in the case of a director being penalised because a company contravened a payment agreement, it will be a defence if the director can prove that:

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because of illness, he or she did not take part in the management of the company; or

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all reasonable steps were taken to ensure the company complied with the agreement [New subsection 222AQD(2)] .