House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon Wayne Swan MP)

Chapter 2 Amendments to assistance in collection provisions

Outline of chapter

2.1 Schedule 2 to the Bill amends the assistance in collection provisions found in Division 263 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). The amendments will overcome legal and administrative problems associated with deeming debts 'never to have been payable' in the event that claims are removed from the foreign claims register (Register) or otherwise reduced.

2.2 The amendments also expand the types of payments that the Commissioner of Taxation (Commissioner) can make to the foreign country to include certain funds that the Commissioner recovers in the course of legal proceedings (such as interest attributable to the debt and funds paid for in advance by the foreign country).

2.3 Finally, these amendments clarify that the role of the Register is to transform foreign tax debts into Australian tax debts, rather than acting as a day-to-day record of the debtor's liability.

Context of amendments

2.4 The current assistance in collection provisions were enacted by the International Tax Agreements Amendment Act (No. 1) 2006 to enable the Commissioner to meet Australia's existing and future treaty obligations for the mutual assistance in collection of tax debts. Specifically, these provisions enable the Commissioner to take action to collect or to conserve tax debts owed in another country where the debtor is resident in Australia or has assets in Australia.

2.5 Since these provisions have been enacted, however, two issues have been identified which may impact on the Commissioner's ability to effectively meet Australia's obligations under relevant international agreements.

2.6 The first issue arises because of the consequence of deeming a foreign tax debt as 'never to have been payable' when the debt is reduced under subsection 263-35(6). Debts can be reduced in circumstances such as where a debtor has made a part payment in the foreign country or where the debt is reduced in the foreign country as a result of an amendment to the debtor's liability. Deeming such debts as 'never to have been payable' in this way could significantly frustrate any proceedings that the Commissioner has commenced or finalised to collect the debt.

2.7 The second problem arises in relation to the types of payments that the Commissioner is able to make to the foreign country. Under the current law, section 263-40 permits only the principal amount and any general interest charge (GIC) referable to that amount that has been collected by the Commissioner to be paid to the foreign country. However, there may be circumstances where other amounts will need to be paid.

2.8 These amendments also provide an opportunity to clarify the role of the Register.

Comparison of key features of new law and current law

Detailed explanation of new law

2.9 These amendments address two issues with the existing assistance in collection provisions found in Division 263 of Schedule 1 to the TAA 1953. They also clarify the role of the Register.

Deeming amounts never to have been payable

Reducing claims

2.10 The first issue arises because of the consequence of deeming a foreign tax debt as 'never to have been payable' when the debt is reduced under subsection 263-35(6). Debts will be reduced in circumstances such as where a debtor has made a part payment in the foreign country or where the debt is reduced in the foreign country as a result of an amendment of the debtor's liability.

2.11 The problem of deeming foreign tax debts 'never to have been payable' in such circumstances arises where the Commissioner has already commenced legal proceedings to recover the debt. Treating a foreign tax debt in this way could result in any ongoing or completed proceedings to be frustrated. For instance, where a default judgment has been handed down in the Commissioner's favour, any subsequent reduction of the debt (which will result in the reduced amount being deemed 'never to have been payable') may provide the debtor with a strong argument that the judgment was entered in the wrong amount and should be set aside.

2.12 To overcome this issue, the amendments remove any reference to the amount of the foreign tax debt reduction as being deemed 'never to have been payable'. Instead, any amounts reduced will be treated as a credit for the purposes of Part IIB of the TAA 1953 (which deals with running balance accounts, credits and payments). [ Schedule 2, items 6 and 7 ]

2.13 This approach ensures any that 'reductions' that occur as a consequence of a foreign country's notification to the Commissioner (for instance of a part payment of the debt in the foreign country), are treated in the same manner as if the debtor made a part payment in Australia. That is, the amount will be applied against the liability of the debtor as reflected on its running balance account (if one has been created) or otherwise be applied against the debtor's liability if the amount has not been allocated to a running balance account (see sections 8AAZLA and 8AAZLB of the TAA 1953).

2.14 In contrast to the current provisions, one of the effects of this amendment is that the debtor will remain liable for any GIC that has accrued in relation to an amount that is reduced. However, as GIC acts as a replacement for any interest that would be accruing on the tax debt in the foreign country, it will be appropriate in some circumstances for the Commissioner to exercise his discretion to remit any GIC. This would include circumstances such as where the foreign tax debt is reduced as a result of an amendment to the debtor's liability in the foreign country.

Removing claims from the Register

2.15 To ensure consistency in the assistance in collection provisions, similar amendments will also be made in relation to the removal of foreign tax debts from the Register. The removal of debts occurs in circumstances where the debt was registered in error or where the claim is otherwise withdrawn by the foreign country (and the Commissioner has the agreement of the foreign country to remove the debt from the Register) or where the debtor has applied to have the debt removed from the Register under subsection 263-35(3).

2.16 Under these amendments, when foreign tax debts are removed from the Register they will also no longer be considered 'never to have been payable' but will be treated as a credit and applied against the debtor's running balance account in accordance with Part IIB of the TAA 1953. In effect, the credits apply to extinguish any remaining foreign tax debt for which the debtor is liable. [ Schedule 2, item 5, paragraph 255-35(5 )( a )]

2.17 As this will occur in circumstances where the foreign tax debt should not have been registered or where it is otherwise withdrawn in its entirety, it is appropriate that the debtor also not be held liable for any GIC that may have accrued in relation to the debt. [ Schedule 2, item 5, paragraph 255-35(5 )( b )]

Clarifying the role of the Register

2.18 The Register provides a mechanism by which foreign tax debts are effectively 'transformed' into Australian tax liabilities, in relation to which the Commissioner may exercise his debt collection powers. This is reflected in the existing subsection 263-30(1) which notes that once the foreign tax debt is entered on the Register, the amount owed by the debtor becomes a pecuniary liability to the Commonwealth. The explanatory memorandum to the International Tax Agreements Amendment Bill (No. 1) 2006 (see paragraph 1.27) further notes that the role of the Register is only to record liabilities, with any payment or credits received by the Commissioner being applied against the debtor's running balance account.

2.19 To clarify that the role of the register is not to act as a 'day-to-day' record of the foreign tax debt owed by the debtor, these amendments introduce a specific provision to reflect this. [ Schedule 2, item 1 ]

2.20 Consistent with the treatment of 'reductions' as credits as proposed by these amendments, any such reductions will not require the Commissioner to amend the Register and the Register will continue to reflect the amount of the foreign tax debt as originally notified by the foreign country. [ Schedule 2, items 3 and 4 ]

2.21 However, notwithstanding that amounts 'removed' also give rise to credits under Part IIB of the TAA 1953, since a 'removal' occurs in circumstances where it is clear that the claim was placed on the Register in error or where the foreign country withdraws the claim, it is appropriate for a removal to also result in the Register being amended (to reflect that there is no longer any foreign tax debt which the Commissioner must pursue in Australia on behalf of the foreign country).

2.22 It should be noted that, though a 'removal' results in both the foreign tax debt being removed from the Register and the debtor being entitled to a credit, this does not effectively 'double count' the removal of the debtor's liability. The crediting removes the debtor's liability while the removal of the debt from the Register merely recognises that the role of the Register, in 'transforming' a foreign tax debt into an Australian tax liability, is no longer required.

2.23 To provide further clarification, the table below highlights the various events that can impact on the debtor's liability and/or the content of the Register.

Expanding the types of monies that can be paid to the foreign country

2.24 The final issue which these amendments address arises in relation to the types of payments that the Commissioner can make to the foreign country. Under the current law, section 263-40 permits only the principal amount and any GIC referable to that amount that has been collected by the Commissioner to be paid to the foreign country. However, there may be circumstances where other payments will need to be made.

2.25 This would include judgment interest, being interest awarded by the Court as part of obtaining judgment as well as interest that accrues on the judgment debt from the day after judgment is entered. Other amounts that should be paid to the foreign country also includes costs that the Commissioner recovers in the course of legal proceedings, where those costs had been paid for in advance by the foreign country. Whether the foreign country is required to make payments to the Commissioner for the recovery of the foreign tax debt is a matter determined by an agreement between the Commissioner and his foreign counterpart.

2.26 Accordingly, these amendments expand the types of payments that the Commissioner can make to the foreign country to include judgment interest and other costs recovered by the Commissioner in proceedings relating to the foreign tax debt where those costs had been paid for by the foreign country. [ Schedule 2, item 8 ]