Recent Developments in ATO Debt Collection Powers and Changes to Bankruptcy Law

Recent Developments in ATO Debt Collection Powers

1. Changes to ATO Director Penalty Notices
There have been recent amendments to the Income Tax Assessment Acts in regard to unpaid company taxes. The amendments have been consolidated under the Tax Laws Amendment (Transfer of Provisions) Act 2010 which came into effect on 1 July 2010.

The provisions governing Director Penalty Notices (“DPN”) contained within Sections 222AOA to 222API of the Income Tax Assessment Act, 1936 (“ITAA36”) have been repealed, and rewritten within Sections 269-10 to 269-55 of Schedule 1 of the Tax Administration Act 1953 (“TAA53”).

A DPN can be issued by the ATO to a director of a company for unpaid company PAYG tax withheld and can cause a director to become personally liable for the amount stated in the DPN.

A summary of the major changes affecting DPNs, as a result of the above amendments, are set out below:

• Section 269-25(4) provides that DPNs now take effect from the day they were posted rather than the day they were received by a director. This amendment came about as a result of a NSW Court of Appeal decision¹, which was highlighted in our November 2008 Newsletter;
• The period for a director to comply with a DPN has increased from 14 to 21 days before the Commissioner may take recovery proceedings against a director for the unpaid PAYG tax stated in the DPN²;
• For directors to avoid penalty, they need to within 21 days of issue of the DPN (not service):

a) Pay the debt;
b) Appoint an Administrator to the company; or
c) Appoint a Liquidator to the company.

• Entering into a payment arrangement, in respect to the unpaid PAYG tax stated in the DPN, will no longer enable avoidance of personal liability. However, Section 260-15(3) provides that the Commissioner must not commence proceedings in relation to a DPN if a payment arrangement is in force. (Whilst it is possible to enter into a payment arrangement during the 21 day compliance period, it is a risky option given that it is at the Commissioner’s discretion to accept the arrangement and the short timeframe involved).

Should there be a default in the terms of the payment arrangement, then the Commissioner may commence recovery action against the director for the balance of the debt;

• It is more difficult for a director to rely on the defence that a director did not take part in the management of the company due to illness or for some other good reason. These requirements now extend to proving that it would have been unreasonable to expect a director to have taken part in the management of the company at the time he or she was a director and the PAYG tax was withheld.

2. Anti Phoenix Activity Measures – Tightening Security Deposit Rules
There have also been amendments to the operation of the security deposit rules in relation to a company as a measure to increase “anti-phoenix” activity. Section 213 of the ITAA36, now repealed, allowed the Commissioner discretion to request a security deposit in relation to income tax only.

“Fraudulent phoenix activity” broadly refers to instances where the assets and business of a company are transferred to a new entity for little or no consideration, and the company is wound up with significant unpaid debts (generally taxes). The same business continues through a new company.

The changes, rewritten in Section 255-100 of Schedule 1 of TAA53, give the Commissioner the discretion to ask for a security deposit where the Commissioner believes there is a risk of a tax related liability not being paid. Section 255-100 provides that the Commissioner may require security to be given for the due payment of an existing or future tax related liability (namely the majority of Commonwealth taxes including SGC³), if the Commissioner has reason to believe that the taxpayer is intending to carry on that company for a limited time only or where the Commissioner reasonably believes the requirement for security is appropriate considering all the relevant circumstances.

The Commissioner may require the taxpayer to give security by way of a bond or deposit or by any other means that the Commissioner reasonably believes is appropriate⁴.

The explanatory memorandum to these recent amendments provide a number of examples of situations where the Commissioner may seek a security. Some of these examples are set out below:

a) Where the taxpayer, or directors of a corporate taxpayer, have a history of non-compliance;
b) Where the ATO is granting a taxpayer the benefit of a payment arrangement; and
c) To protect the integrity of the tax system against schemes such as “fraudulent phoenix activity”.

Changes to Bankruptcy Laws
The Bankruptcy Legislation Amendment Act (“BLAA”) 2010 received royal assent on 14 July 2010. The BLAA contains a range of amendments to the Bankruptcy Act 1966 (“the Act”). Below is a summary of the main changes:

Increase in the bankruptcy threshold
Commencing on 11 August 2010, the minimum debt has been increased from $2,000 to $5,000.

Defaulters have extra time to pay
There has been an increase in the time a debtor who has defaulted on a payment has to settle the debt before they can be declared bankrupt. The “stay” period that arises when a debtor files a declaration of intention to present a debtors petition has been extended from 7 to 21 days, giving the debtor more time to take advice and assess their options. This amendment will come into force on 1 October 2010.

Offence Provisions
A number of amendments have been made to the Offence Provisions including the following:

• Increased powers have been given to the Inspector - General in Bankruptcy:
  i. to investigate possible offences under the Act; and
  ii. to issue Notices requiring production of certain information requested by the Inspector – General. A penalty of 12 months imprisonment may be applied if the Notice is not complied within 14 days.
• Increased penalties have been imposed for some offences (particularly those involving fraud) reflecting the seriousness of the conduct which are consistent with penalties for similar offences in other Federal, State and Territory Legislation.

The amendments with respect to the Offence provisions will commence on a date fixed by proclamation, or if not, on 15 January 2011.

1 See Deputy Federal Commissioner of Taxation v Meredith (2007) ATC 5353; (2007) NSW CA 354

2 Pursuant to Section 269-25

3 Superannuation Guarantee Charge

4 Section 255-100(2)