04 Jun Revenue Recovery and Levelling the Playing Field
It’s common knowledge that the Australian Taxation Office (ATO) is often one of the last creditors to be paid and is used by businesses and taxpayers intentionally or unintentionally as the “Bank of Last Resort”.
In recent years there has been a lot of talk on phoenix activity, tax avoidance etc. and its effect on the Australian economy.
Phoenix activity is described as being when a new company is created to continue the business of an existing company that has been liquidated to avoid paying taxes, creditors and employee entitlements. The effect of phoenix activity is far-reaching in terms of its impact on the business community, employees, contractors and the government, including:
- non-payment of wages, superannuation and accrued employee entitlements;
- receiving an unfair competitive advantage over other businesses;
- non-payment of suppliers;
- loss of government revenue and increased monitoring and enforcement costs; and
- avoidance of regulatory obligations.
More than $3 billion dollars is estimated to be lost every year from phoenix activities in terms of unpaid salaries, superannuation, GST and other payments intended for Federal and State governments, councils, employers, suppliers and other businesses.
As tax is one of the main sources of revenue for the government, our governments both Federal and State have become increasingly more focused on closing the loopholes often abused by taxpayers in a drive to become more effective at both identifying tax liabilities sooner and collecting outstanding taxes in order to protect the government revenue stream and create an even playing field for all businesses and individual taxpayers.
In order to combat these abuses, we have seen a number of reforms to taxation and corporations laws aimed at ‘levelling the playing field’ in recent times.
At a glance some of the reforms include, but are not limited to, the following:
Proposed Widening the existing Director Penalty Regime to cover Goods and Services Tax
Under the existing Director Penalty Regime, the ATO has specific powers to make directors personally liable (in certain instances) for unpaid PAYG and Superannuation.
Under the current regime:
- if a company has failed to fulfil its PAYG or Superannuation Guarantee Charge (SGC) obligations, the ATO may serve the director of the company with a Director Penalty Notice outlining the unpaid amounts and any remission options available to them;
- the penalty will be equal to the unpaid amount of the company’s PAYG or SGC liability.
The government’s proposal to extend the regime to unpaid GST, if implemented, will also enable the ATO to recover unpaid GST amounts personally from the directors of a company. In other words, the directors of a company would be liable to pay to the ATO as a penalty an amount equal to the amount of GST that the company has failed to pay. Directors will be able to discharge their liability for unpaid GST in the same way as payments of outstanding PAYG and SCG contributions.
This proposal makes the provision for the payment of GST by companies in addition to PAYG and SCG contributions as important as ever.
Creation of the Phoenix Taskforce
A ‘whole-of-government’ approach has resulted in the joining of forces of regulators such as the ATO, Australian Securities and Investments Commission (ASIC), Department of Jobs and Small Business (formerly known as the “Department of Employment”), and the Fair Work Ombudsman to share data and intelligence to pinpoint phoenix activity that is otherwise difficult to track.
For example, there has been an increase in scrutiny of businesses paying below award wages, non-payment of superannuation and cash payments of undeclared wages, especially in the hospitality and franchise sectors.
Creation of the Black Economy Taskforce
In December 2016, the Black Economy Taskforce (BET) was established to develop an innovative, forward-looking, multi-pronged policy response to combat the black economy in Australia. The black economy generally refers to activities which take place outside the tax and regulatory system such as;
- Demanding or paying for work performed via cash in hand to avoid reporting and payment obligations;
- Not reporting or under-reporting income; and/or
- Underpayment of wages.
The black economy is estimated to cost taxpayers at least $25 billion a year.
In October 2017, the BET issued their final report to the government, which presented their findings on the black economy, the drivers and risks underpinning it, and provided recommendations to assist the government in implementing measures for tackling it.
In response to the recommendations of the BET’s Final Report, the government has announced a ‘whole-of-government’ blueprint for tackling the black economy including a series of measures announced in the 2017-18 and 2018-19 budgets and measures that the government will continue to develop and consult on.
Summarised below are some of the initiatives adopted by the government in response to the recommendations made in the BET’s Final Report:
- extension of the ATO audit and compliance programs;
- strengthening business identity verification, through:
- consideration of reforms to the Australian Business Number (ABN) system, which will include issues such as regular renewals of an ABN, when an ABN should be revoked and the potential for a registration and renewal fee; and
- new requirements for company directors to hold a unique Director Identification Number.
- Introduction of the Single Touch Payroll (STP) system, being:
- a streamlined process for sending employees’ payroll and superannuation information to the ATO from a company’s payroll each payday.
- STP will commence for employers with 20 or more employees from 1 July 2018 and will be extended to all employers from 1 July 2019.
- Imposition of a cash payment limit of $10,000 on payments made to businesses:
- this will not cover individual-to-individual transactions.
- the cash limit is aimed at (amongst other things) reducing opportunities for businesses to hide transactions to reduce their tax liabilities.
- The creation of a Small Business Digital Taskforce to assist small businesses to adopt digital technologies. Digital transaction systems offer distinct advantages in terms of lowering the risk of theft and quicker, more streamlined record keeping and reporting. Small businesses that adopt (or have already adopted) entirely non-cash business models may receive incentives such as instalment timing relief.
- Preparation of a detailed business case to modernise and combine the business registers administered by ASIC and the Australian Business Register.
Taxpayers will continue to be scrutinised by the ATO and other government agencies and the availability of real-time digital data (relating to wage payments, superannuation, tax obligations and financial transaction information) will allow them a more efficient means of doing so. This comes off the back of the government’s commitment to levelling the playing field for businesses and individuals that do the right thing.
In particular, as the STP system is upon medium-size businesses from 1 July 2018 and everyone else from 1 July 2019, it is important to ensure directors implement adequate internal reporting, audit and due diligence processes to monitor the company’s compliance with its obligations, such as the payment and treatment of employees. Procedures for avoiding breaches of a company’s obligations under workplace laws should also be put in place to minimise the risk of directors being held personally liable for the company’s actions.
If you or your clients have been affected by a company’s phoenix activity and require assistance from one of our specialist advisors contact your local SV Partners Director on 1800 246 801.
Article written by Lauren Graham Manager SV Partners Melbourne