Federal Register of Legislation - Australian Government

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A Bill for an Act to amend the law relating to corporations and taxation, and for related purposes
Administered by: Treasury
For authoritative information on the progress of bills and on amendments proposed to them, please see the House of Representatives Votes and Proceedings, and the Journals of the Senate as available on the Parliament House website.
Registered 14 Feb 2019
Introduced HR 13 Feb 2019
Table of contents.

2016-2017-2018-2019

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

(Circulated by authority of the

Assistant Treasurer, the Hon. Stuart Robert MP)

 

 


Table of contents

Glossary............................................................................................................. 1

General outline and financial impact........................................................... 3

Chapter 1........... Combating illegal phoenix activity................................... 5

Chapter 2........... Phoenixing offences and property transfers to defeat creditors    11

Chapter 3........... Improving the accountability of resigning directors.... 41

Chapter 4........... GST estimates and director penalties........................... 47

Chapter 5........... Retention of tax refunds................................................. 61

Chapter 6........... Statement of Compatibility with Human Rights.......... 67

 

 


The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

ASIC

Australian Securities and Investments Commission

ATO

Australian Taxation Office

BAS

Business Activity Statement

Bill

Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019

Commissioner

Commissioner of Taxation

Criminal Code

The Schedule to the Criminal Code Act 1995

GIC

General Interest Charge

GST

Goods and Services Tax

GST Act

A New Tax System (Goods and Services Tax) Act 1999

ICCPR

International Covenant on Civil and Political Rights

LCT

Luxury Car Tax

PAYG

Pay-as-you-go

PRRT

Petroleum Resource Rent Tax

RBA

Running Balance Account

TAA 1953

Taxation Administration Act 1953

WET

Wine Equalisation Tax

 


Phoenixing offences and property transfers to defeat creditors

Schedule 1 to the Bill introduces new phoenixing offences to prohibit creditor-defeating dispositions of company property, penalise those who engage in or facilitate such dispositions, and allow liquidators and ASIC to recover such property.

Date of effectThe day after Royal Assent.

Proposal announcedThis Schedule partially implements the measure Reforms to combat illegal phoenixing from the 2018-19 Budget.

Financial impactNil

Human rights implications:  This Schedule engages human rights issues. See Statement of Compatibility with Human Rights — Chapter 6, paragraphs 6.1 to 6.24.

Compliance cost impactMinor

Improving the accountability of resigning directors

Schedule 2 to the Bill ensures directors are held accountable for misconduct by preventing directors from improperly backdating resignations or ceasing to be a director when this would leave the company with no directors. This will reduce the incidence of illegal phoenix activity and its effect on employees, creditors and government revenue.

Date of effectThe day 12 months after Royal Assent.

Proposal announcedThis Schedule partially implements the measure Reforms to combat illegal phoenixing from the 2018-19 Budget.

Financial impactNil

Human rights implications:  This Schedule engages human rights issues. See Statement of Compatibility with Human Rights — Chapter 6, paragraphs 6.25 to 6.34.

Compliance cost impactMinor

GST estimates and director penalties

Schedule 3 to the Bill allows the Commissioner to collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities in certain circumstances.

Date of effectThe first day of the quarter following Royal Assent, subject to the passage of the Treasury Laws Amendment (2018 Measures No. 4) Bill 2018.

Proposal announcedThis Schedule partially implements the measure Reforms to combat illegal phoenixing from the 2018-19 Budget.

Financial impact:  As at the 2018-19 Budget, the measure is estimated to result in the following cost to budget over the forward estimates period:

2018-19

2019-20

2020-21

2021-22

-

-$5.0m

-$15.0m

-$20.0m

Human rights implications:  This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 6, paragraphs 6.35 to 6.39.

Compliance cost impactMinor

Retention of tax refunds

Schedule 4 to the Bill authorises the Commissioner to retain tax refunds where a taxpayer has failed to lodge a return or provide other information to the Commissioner that may affect the amount the Commissioner refunds. This ensures taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.

Date of effectThe first day of the quarter following Royal Assent.

Proposal announcedThis Schedule partially implements the measure Reforms to combat illegal phoenixing from the 2018-19 Budget.

Financial impactAs at the 2018-19 Budget, the measure is estimated result in a small but unquantifiable gain to revenue to revenue over the forward estimates period.

Human rights implications:  This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 6, paragraphs 6.40 to 6.43.

Compliance cost impactMinor

 


Chapter 1         
Combating illegal phoenix activity

Introduction

1.1                  This Chapter outlines the issues associated with illegal phoenix activity and its impact on creditors, employees, government revenue and the broader economy. This Chapter also outlines the Government’s response to illegal phoenix activity, including the amendments contained in the Bill.

Illegal phoenix activity

1.2                  Phoenix activity is not defined in legislation and can encompass both legitimate business rescue activities and the use of serial deliberate insolvency as a business model to avoid paying company debts.

1.3                  While the scale of illegal phoenix activity ranges from the opportunistic to the systemic, a common characteristic is the stripping and transfer of assets from a company to another entity. Such transactions are carried out by a company’s directors or other controlling minds with the intention of defeating the interests of the first company’s creditors in that company’s assets. Such transactions are also facilitated by others, including unscrupulous pre-insolvency advisers, accountants, lawyers or other business advisers, who advise companies on how to engage in illegal phoenix activity.

1.4                  Illegal phoenix activity was a significant issue explored in the Senate Economics Reference Committee’s 2015 inquiry into Insolvency in the Australian construction industry. A July 2018 report by PricewaterhouseCoopers, prepared for the Phoenix Taskforce, estimated the annual direct cost to businesses, employees and government as a result of potential illegal phoenix activity to be between $2.85 billion and $5.13 billion in 2015-16.

1.5                  Those affected by illegal phoenix activity include employees of the original failed company, other businesses and contractors who are owed money because they have supplied goods and services, and statutory bodies such as the ATO. It also gives phoenix companies an unfair advantage over their competitors, damaging the competitive process.

The Government response

1.6                  The Australian Government has committed to ongoing reform of Australia’s corporate insolvency regime. The Bill contains a package of measures aimed at countering illegal phoenix activity and marks the Government’s third tranche of insolvency law reforms.

1.7                  The first tranche, contained in the Insolvency Law Reform Act 2016, modernised the corporate reorganisation framework around the registration, remuneration and regulation of insolvency practitioners to improve confidence in the corporate insolvency regime and reduce associated costs.

1.8                  The second tranche, introduced as part of the National Innovation and Science Agenda, focussed on supporting honest business restructuring. The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) 2017 Act introduced a safe harbour for directors from personal liability for insolvent trading if the company is undertaking a restructure outside formal insolvency. From 1 July 2018, it also made ipso facto clauses (that allow contracting parties to immediately terminate agreements with a company when an insolvency event occurs) unenforceable if the company is undertaking a formal restructure.

1.9                  The Bill implements four measures to combat illegal phoenix activity that were announced in the 2018-19 Budget:

       Schedule 1 introduces new phoenix offences to prohibit creditor-defeating dispositions of company property, penalise those who engage in or facilitate such dispositions, and allow liquidators and ASIC to recover such property (see Chapter 2);

       Schedule 2 ensures directors are held accountable for misconduct by preventing directors from improperly backdating resignations or ceasing to be a director when this would leave the company with no directors (see Chapter 3);

       Schedule 3 allows the Commissioner to collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities in certain circumstances (see Chapter 4); and

       Schedule 4 authorises the Commissioner to retain tax refunds where a taxpayer has failed to lodge a return or provide other information that may affect the amount the Commissioner refunds. This ensures taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund (see Chapter 5).

1.10              The fifth and final element of the Budget package prevents related creditors facilitating illegal phoenix activity by unduly influencing voting at creditor’s meetings in an external administration. This is implemented through the Insolvency Practice Rules (Corporations) Amendment (Restricting Related Creditor Voting Rights) Rules 2018, which commenced on 7 December 2018.

1.11              The measures in the Bill build on other actions taken by the Government to combat crime and fraud occurring in the economy, including:

       instituting the Black Economy, Serious Financial Crime and Phoenix Taskforces;

       establishing a dedicated team to drive implementation of the extensive work program arising from the Government’s response to the Black Economy Taskforce Final Report;

       establishing a Black Economy Advisory Board made up of private and public sector members who will provide strategic advice on trends and risks in the black economy;

       introducing a stronger penalty framework to protect consumers from corporate and financial sector misconduct;

       initiatives to curb the excessive drain on the taxpayer funded Fair Entitlement Guarantee scheme, which covers employees’ entitlements left outstanding as a result of failed business enterprises;

       the package of reforms in Schedule 5 to the Treasury Laws Amendment (2018 Measures No. 4) Bill 2018 that targets employers who fail to meet their superannuation guarantee obligations;

       legislating to enable information sharing between key regulatory agencies;

       improving the collection of GST on new residential premises and residential subdivision transactions and introducing a reverse charge to prevent GST fraud in the precious metals industries ;

       phasing in near real time reporting by employers of payroll and superannuation information to the ATO through the single touch payroll reporting framework;

       the prohibition of the manufacture, distribution, possession, use or sale of electronic point of sale sales suppression technology and software;

       consulting on improving the transparency of beneficial ownership information of companies, and making the information available to key regulators for enforcement purposes; and

       developing and improving legislation to encourage and protect whistleblowers.

Government taskforces

1.12              In order to develop an effective, whole-of-government response to the illegal phoenix problem, the Government established a number of taskforces to facilitate cross-agency co-operation and enforcement.

1.13              The Government established the Phoenix Taskforce in 2014, and the Serious Financial Crime and Black Economy Taskforces in 2015 and 2016 respectively. The Taskforces have each focussed on combating illegal phoenix activity and have provided extensive advice to Government.

Phoenix Taskforce

1.14              The Government’s on-going Phoenix Taskforce comprises 32 Federal, State and Territory government agencies and provides a whole-of-government approach to combating illegal phoenix activity.

1.15              The Phoenix Taskforce is a crucial player in countering illegal phoenix activity, and has reported to the Government that the detection, deterrence and disruption activities undertaken by Phoenix Taskforce agencies are starting to have an impact on the problem. The Phoenix Taskforce has also contributed to the development of law reform proposals, including the reforms in this Bill.

Serious Financial Crime Taskforce

1.16              The Serious Financial Crime Taskforce is part of the Australian Federal Police-led Fraud and Anti-Corruption Centre. The Taskforce, which includes ASIC, the Australian Transaction Reports and Analysis Centre, the ATO and other Commonwealth agencies, is responsible for investigations and prosecutions for serious and complex financial crimes including illegal phoenix activity.

Black Economy Taskforce

1.17              The Government established the Black Economy Taskforce to develop an innovative, forward-looking and whole-of-government policy response to combat the black economy in Australia.

1.18              The Government released the final report of the Black Economy Taskforce and the Government’s response on 8 May 2018. The final report highlighted the harm the black economy causes to honest businesses and the community, penalising honest taxpayers, undermining the integrity of Australia’s tax and welfare systems and creating an uneven playing field for the majority of compliant small businesses.

1.19              In the 2018-19 Budget, the Government announced a package of reforms to address the black economy, including:

       Consulting on modernising and strengthening the Australian Business Number system;

       a comprehensive strategy to combat illicit tobacco;

       the introduction of an economy-wide $10,000 cash payment limit;

       restricting government procurements over $4 million to businesses that have satisfactory tax records;

       $318.5 million in additional funding to the ATO to implement a new and enhanced enforcement strategy to combat the black economy;

       a further expansion of the taxable payments reporting system and consultation about extending similar reporting to the sharing economy; and

       removing the tax deductibility of non-compliant payments.


Chapter 2         
Phoenixing offences and property transfers to defeat creditors

Outline of chapter

2.1                  Schedule 1 to the Bill introduces new phoenixing offences to prohibit creditor-defeating dispositions of company property, penalise those who engage in or facilitate such dispositions, and allow liquidators and ASIC to recover such property.

Context of amendments

2.2                  Australia’s corporate insolvency laws aim to balance the freedom of companies to engage in commercial risk-taking against the legitimate interests and expectations of creditors, including company employees. The Government has made a number of reforms to the law in recent years to ensure this balance is appropriate and to ensure that misconduct can be addressed quickly and efficiently.

2.3                  The Corporations Act 2001 imposes duties on directors and other officers to act in the best interests of the company generally, and specific duties that protect the interests of the company’s creditors. The most serious breaches of these duties are subject to criminal offences in addition to civil remedies: for example, officers acting for an improper purpose (section 184) or failing to prevent the company from trading while insolvent (section 588G).

2.4                  Part 5.7B of the Corporations Act 2001 enables company liquidators to recover – on behalf of insolvent companies and their creditors – compensation from directors that fail to prevent insolvent trading (Division 4) and to seek court orders voiding certain transactions, including insolvent transactions and uncommercial transactions (Division 2). This allows liquidators and insolvent companies to better meet the legitimate demands of creditors affected by the insolvency.

2.5                  The prohibition against insolvent trading (and associated compensation mechanisms) is subject to an important defence known as the safe harbour (section 588GA). Introduced as part of the Government’s National Innovation and Science Agenda, the safe harbour encourages companies in legitimate financial difficulty to undertake a restructure in certain circumstances.

2.6                  The safe harbour is intended to drive cultural change among company directors by encouraging them to engage early with financial hardship, keep control of their company and take reasonable risks to facilitate the company’s recovery, rather than prematurely placing the company into voluntary administration. The safe harbour is subject to a number of limitations that make it unattractive to dishonest directors who may want to illegally phoenix their company.

Summary of new law

2.7                  Schedule 1 to the Bill amends the Corporations Act 2001 to improve the mechanisms available to combat illegal phoenix activity, specifically creditor-defeating dispositions: transfers of company assets for less than market value (or the best price reasonably obtainable) that prevent, hinder or significantly delay creditors’ access to the company’s assets in liquidation.

2.8                  The amendments introduce new criminal offences and civil penalty provisions for:

       company officers that fail to prevent the company from making creditor-defeating dispositions; and

       other persons that facilitate a company making a creditor-defeating disposition.

2.9                  These offences are subject to a number of important safe-guards to ensure the amendments do not affect legitimate businesses and commercial transactions. This includes maintaining the safe harbour for legitimate business restructures and respecting transactions made with creditor or court approval (as appropriate) under a deed of company arrangement or scheme of arrangement.

2.10              To protect creditors, these amendments make a number of refinements to the law to allow for the efficient recovery of assets and, where necessary, the provision of compensation. In particular, the amendments provide that:

       liquidators can seek to recover the assets or other consideration through the courts for the benefit of the company’s creditors;

       ASIC can make orders to recover assets for the company’s creditors; and

       liquidators – and in some cases creditors – can recover compensation from a company’s officers and other persons responsible for a company making a creditor-defeating disposition.

Comparison of key features of new law and current law

New law

Current law

Creditor-defeating dispositions

A disposition of company property for less than its market value (or the best price reasonably obtainable) that has the effect of preventing, hindering or significantly delaying the property becoming available to meet the demands of the company’s creditors in winding-up is a creditor-defeating disposition.

No equivalent.

Recovery of voidable creditor-defeating dispositions

A transaction may be voidable if it is a creditor-defeating disposition and is made when the company is insolvent, or, because of the disposition, the company immediately becomes insolvent or enters external administration within the following 12 months.

Exceptions apply.

No equivalent.

Liquidators may also apply to a court for an order in relation to a voidable creditor-defeating disposition.

Liquidators may apply to a court for an order in relation to a voidable transaction.

ASIC has specific powers to make orders to recover – for the benefit of a company’s creditors – company property disposed of or benefits received under a voidable creditor-defeating disposition.

Liquidators may apply to ASIC seeking an order.

No equivalent.

Prohibitions on creditor-defeating dispositions

A creditor-defeating disposition is prohibited if it is made at a time when the company is insolvent, or, because of the disposition, the company

       immediately becomes insolvent;

       enters external administration within the following 12 months; or

       ceases to carry on business altogether within the following 12 months.

Exceptions apply.

No equivalent.

It is a criminal offence for officers to engage in conduct that results in a company making a prohibited creditor-defeating disposition.

The central mental element of the offence is recklessness.

No equivalent.

A civil penalty provision applies to officers that engage in conduct that results in a company making a disposition where a reasonable person would have known the disposition was a prohibited creditor-defeating disposition.

No equivalent.

It is a criminal offence for a person to procure, incite, induce or encourage a company to make a prohibited creditor-defeating disposition.

The central mental element of the offence is recklessness.

No equivalent.

A civil penalty provision applies to a person that procures, incites, induces or encourages a company to enter into a disposition where a reasonable person would have known the disposition was a prohibited creditor-defeating disposition.

No equivalent.

The safe harbour is also available to officers and other persons as a defence against an alleged contravention of the creditor-defeating disposition prohibitions.

The safe harbour is available to directors as a defence against an alleged contravention of the insolvent trading prohibition.

Compensation for contravention

Liquidators – and in some cases creditors – may also recover compensation from a person that breaches the creditor-defeating disposition prohibition.

Liquidators – and in some cases creditors – may recover compensation from a person that breaches the insolvent trading prohibition.

Detailed explanation of new law

Creditor-defeating dispositions

2.11              The concept of a creditor-defeating disposition is central to the amendments in Schedule 1 to the Bill. A creditor-defeating disposition may be a voidable transaction recoverable by the liquidator on application to ASIC or the Court. An officer or other person responsible for a company making a creditor-defeating disposition may be subject to criminal charges, civil penalties and compensation orders.

2.12              A creditor-defeating disposition is a disposition of company property for less than its market value (or the best price reasonably obtainable) that has the effect of preventing, hindering or significantly delaying the property becoming available to meet the demands of the company’s creditors in winding-up. [Schedule 1, items 1 and 18, subsection 588FDB(1) and section 9 (definition of ‘creditor-defeating disposition’) of the Corporations Act 2001]

2.13              The creation by the company of a right or other interest in property in favour of another person is taken to be a disposition of the right or other interest in property and may constitute a creditor-defeating disposition. [Schedule 1, item 18, subsection 588FDB(2) of the Corporations Act 2001]

2.14              In some circumstances, there is an extension to the concept of a disposition to reflect the economic substance of a transaction. Where a company disposes of property to one person and that person pays some or all of the consideration to a third party, the company is taken to have made:

       a disposition of the property actually transferred; and

       a disposition of the consideration paid to the third party.

2.15              The extended concept of a disposition ensures the outcome is the same as if the company received all of the consideration itself and then provided that consideration to the third party. [Schedule 1, item 18, subsection 588FDB(3) of the Corporations Act 2001]

Example 2.1 Creditor-defeating disposition of a company

On 24 February 2020, LTV Commercial Pty Ltd sells a commercial property to Alexia who wants to set up a dancing studio. LTV Commercial and Alexia agreed that the purchase price for the property is $500,000. The property was the company’s major asset.

During the transaction, LTV Commercial instructed Alexia to pay the amount of $500,000 to RGV Dance Pty Ltd. Ronie is both the sole director and company secretary of LTV Commercial and RGV Dance.

On 24 August 2020, a liquidator is appointed in the winding up of LTV Commercial. The company has insufficient assets to meet the demands of its creditors.

LTV Commercial has made two dispositions. The first is of its commercial property to Alexia. The second is of $500,000 to RGV Dance.

If the $500,000 reflects the market value of the property, the transfer of the property is not a creditor-defeating disposition. However, the deemed transfer of the $500,000 to RGV Dance is a creditor-defeating disposition because it is for no consideration.

Market value consideration

2.16              A particular asset of the company not being available for division among creditors on winding up is not in and of itself a creditor-defeating disposition. It is also necessary to establish the company received consideration that was less than the market value of the property disposed of and less than the best price reasonably obtainable for the disposition. [Schedule 1, item 18, paragraph 588FDB(1)(a) of the Corporations Act 2001]

2.17              The test is applied at the time the relevant agreement for the disposition is entered into or – if there is no agreement for the disposition – at the time of the disposition.

2.18              In this context, market value means the price that would be paid in a hypothetical transaction between a knowledgeable and willing, but not anxious, seller to a knowledgeable and willing, but not anxious, buyer, who transact at arm’s length. [Schedule 1, item 18, subparagraph 588FDB(1)(a)(i) of the Corporations Act 2001]

2.19              The alternative test of ‘the best price reasonably obtainable’ recognises there will be legitimate situations where a company may need to realise assets at less than market value. This is particularly the case for companies in legitimate financial difficulty that have urgent cash flow needs. The legitimate urgency with which these companies may seek to realise the value of assets means their actual disposal of assets may not realise the same market value price as the hypothetical not anxious seller. [Schedule 1, item 18, subparagraph 588FDB(1)(a)(ii) of the Corporations Act 2001]

2.20              In these cases, the circumstances of the disposition – including the financial circumstances of the company – and the reasonableness of the steps the company took or should have taken to realise the value of the asset will be relevant to determining whether the disposition is a creditor-defeating disposition. For example, a company that sells property through a reasonable process such as a public auction designed to obtain the best price available will not make a creditor-defeating disposition.

2.21              Where an asset’s market value is reasonably obtainable, the best price reasonably obtainable in the circumstances is not less than the asset’s market value. In such cases, establishing that the consideration the company received was less than the asset’s market value will also establish that it was less than the best price reasonably obtainable.

Example 2.2 Market value and the best price reasonably obtainable

Contrast Industries Pty Ltd is a building supply company. In June 2019, the company is in financial difficulty but is solvent and continuing to trade.

Contrast Industries enters into a contract with Kurt Developments Pty Ltd for the supply of building materials with a market value of $55,000. The contract is negotiated on an arms’ length basis but Contrast Industries is not in a strong negotiating position because of its financial position.

Recognising its advantage, Kurt Developments shrewdly offers a below-market price of $50,000 for the materials. Contrast Industries, in urgent need of a sale and fearing any worsening of its financial position will further reduce the price it can obtain, accepts the offer.

In September 2019, the financial position of Contrast Industries has worsened. Contrast Industries enters into a second contract for the supply of a similar quantity of building supplies to Glee Homes Pty Ltd. However, this contract is for $10,000. The directors of the two companies are former business associates.

In January 2020, Contrast Industries goes into liquidation with insufficient funds to pay its employees or other creditors.

The sale to Kurt Developments is not a creditor-defeating disposition because the price obtained was the best price reasonably available in the circumstances even if it was not able to achieve a market value sale.

The sale to Glee Homes is a creditor-defeating disposition because the value of the contract far exceeds the $10,000 paid in consideration and a better price could have been obtained if Contrast Industries took reasonable steps to realise the value of the goods.

Presumption of insufficient consideration

2.22              It is presumed that a disposition is not for market value or the best price reasonably obtainable where the company did not maintain adequate records relating to the disposition. However, this presumption does not apply in criminal proceedings. [Schedule 1, items 2, 3 and 9, section 111Q and subsection 588E(4A) of the Corporations Act 2001]

2.23              This presumption is necessary to ensure that company officers engaging in illegal phoenix activity cannot avoid the voiding of transactions by committing further breaches of the law to obscure the details of an improper transaction.

2.24              The presumption does not apply to minor or technical failures to maintain records. [Schedule 1, item 10, subsection 588E(5) of the Corporations Act 2001]

2.25              The presumption does not affect a third party if the records were destroyed, concealed or removed by a person and the third party was not in any way responsible for the destruction, concealment or removal of the records. [Schedule 1, item 11, subsection 588E(6) of the Corporations Act 2001]

Voiding the transaction

2.26              A transaction is voidable if it is a creditor-defeating disposition made by a company at a time when the company is insolvent, or, because of the disposition, the company immediately becomes insolvent or enters external administration within the following 12 months. [Schedule 1, items 19 and 20, paragraphs 588FE(1)(c), (6B)(a) and (b) of the Corporations Act 2001]

2.27              Describing a transaction as voidable allows a court, on the application of a company’s liquidator, to make a range of orders to void the transaction and to restore the parties to the position they would have been in but for the transaction (section 588FF). A liquidator can apply to a court before the later of:

       3 years after the relation-back day (see section 91 for the definition of relation-back day); or

       12 months after the liquidator was first appointed.

Where a company is insolvent or becomes insolvent

2.28              Establishing that a company was insolvent (or became insolvent as a result of a disposition) is the primary method for voiding a creditor-defeating disposition. Dispositions made outside of this period and the 12 months prior to entering external administration are more likely to be undertaken for legitimate commercial reasons. Losses experienced outside this period may reflect the ordinary course of entrepreneurial risk-taking, which is not the target of these amendments.

2.29              Dispositions made while a company is insolvent or in the period before the company enters external administration warrant a higher degree of scrutiny. This ensures the interests of creditors are protected and company officers are acting properly.

2.30              A disposition made when the company is insolvent or becomes insolvent is only voidable if it is also made during the 12 months ending on the relation-back day or both after that day and on or before the day the winding up began. [Schedule 1, item 20, subparagraphs 588FE(6B)(b)(i) and (ii) of the Corporations Act 2001]

2.31              Section 588E applies a presumption of insolvency where a company has failed to keep or maintain financial records in accordance with section 286. This presumption is necessary to ensure that company officers engaging in illegal phoenix activity cannot avoid the voiding of transactions by committing further breaches of the law to obscure a company’s financial position. This presumption applies to voidable transactions generally.

2.32              However, the presumption does not affect a third party if the records were destroyed, concealed or removed by a person and the third party was not in any way responsible for the destruction, concealment or removal of the records (subsections 588E(4) and (6)).

Where a company enters external administration after disposition

2.33              The extension of the period in which a creditor-defeating disposition may be voidable to the 12 months prior to the company entering external administration is an important amendment to ensure liquidators can effectively challenge illegal phoenix activity. It is necessary for liquidators to demonstrate that the disposition contributed – directly or indirectly – to the company entering external administration within the 12-month period. [Schedule 1, item 20, subparagraph 588FE(6B)(b)(iii) of the Corporations Act 2001]

2.34              A company enters external administration:

       on a day an administrator of the company is appointed under section 436A, 436B or 436C;

       on the day a deed of company arrangement is executed;

       on a day the winding up of the company is taken to have begun under section 513A or 513B; and

       on a day a provisional liquidator is appointed.

2.35              Placing a company into administration shortly after it makes a voidable transaction is a common illegal phoenix activity. A persistent issue in the practical operation of the corporate insolvency law is the cost and uncertainty associated with establishing that a company was insolvent at a particular time. This cost can make it impractical for liquidators to pursue many recovery actions, frustrating the intention of the law.

2.36              Together with the presumption of insolvency where financial records are not maintained, this amendment is intended to significantly ease the burden on liquidators pursuing illegal phoenix activity and recovering assets for the benefit of company creditors.

Good faith

2.37              Subsection 588FG(1) prevents a court making an order in relation to a voidable transaction if the order is prejudicial to the rights of a person who is not a party to the transaction – for example a subsequent purchaser – who has acquired the property in good faith without notice of the company’s insolvency.

2.38              Subsection 588FG(2) prevents a court making an order which is prejudicial to the rights of a party to the transaction who became a party in good faith and is a purchaser for value, without notice of company’s insolvency.

2.39              Subsections 588FG(1) and (2) do not apply in relation to an order based solely on the transaction being a creditor-defeating disposition because the disposition caused the company to enter external administration. This reflects that it is unnecessary to establish the company was insolvent if the company enters external administration within 12 months of the disposition. [Schedule 1, item 24, subsection 588FG(7) of the Corporations Act 2001]

2.40              Subsections 588FG(1) and (2) will continue to apply if an order would also be based on the transaction being made while the company was insolvent, the transaction causing the company to become insolvent or the transaction being voidable on some other ground.

2.41              A general good faith test applies to subsequent purchasers of property that was the subject of a creditor-defeating disposition (regardless of whether the initial company was insolvent at the time). Where an initial creditor-defeating disposition is voidable, a subsequent purchaser’s title to property is protected provided the subsequent purchaser acquired the property in good faith. The subsequent purchaser’s claim to the property will be voidable if that person acted in bad faith, for example because they knew the initial transfer was voidable or were wilfully blind to the likelihood that the initial transfer was voidable. [Schedule 1, item 24, subsection 588FG(9) of the Corporations Act 2001]

Example 2.3 Good faith test for subsequent purchasers

Further to Example 2.2, Daniel, the sole director of Glee Homes learns the liquidator of Contrast Industries is investigating its purchase of building materials. Glee Homes transfers the building materials to Laundry Solutions Pty Ltd in January 2020.

The liquidator learns that Daniel is also the sole director of Laundry Solutions. The liquidator can seek a court order to void Laundry Solutions’ claim to the property because it is clear it had knowledge that the original transfer was voidable and acquired the property in bad faith.

Where a disposition is not voidable

2.42              A creditor-defeating disposition is not voidable (or is not subject to court orders under section 588FF) if the disposition:

       was made under a deed of company arrangement or scheme of arrangement;

       was made by the company’s administrator or liquidator; or

       was made in connection with a course of action that satisfies the safe harbour in the corporations law.

Deeds of company arrangement and schemes of arrangement

2.43              A deed of company arrangement is a binding arrangement between a company and its creditors governing how the company’s affairs will be dealt with, which may be agreed to as a result of the company entering voluntary administration. It aims to maximise the chances of the company, or as much as possible of its business, continuing, or to provide a better return for creditors than an immediate winding up of the company, or both (see section 435A).

2.44              Similarly, schemes of arrangement under Part 5.1 may be used to affect a legitimate restructure. These schemes are subject to creditor or member approval, and ASIC and judicial oversight.

2.45              A creditor-defeating disposition does not form part of a voidable transaction if it is made under a deed of company arrangement or scheme of arrangement. Due to the oversight of creditors, ASIC and the Court (as appropriate), it is inappropriate to void a transaction entered into under the terms of these arrangements. [Schedule 1, item 20, subparagraphs 588FE(6B)(c)(i) and (ii) of the Corporations Act 2001]

Administrator and liquidator transactions

2.46              The amendments do not apply to transactions made by a liquidator, provisional liquidator or external administrator appointed by the company exercising their duties in the course of the administration or winding-up of the company. This is consistent with the operation of the existing voidable transaction provisions. [Schedule 1, item 20, subparagraphs 588FE(6B)(c)(iii), (iv) and (v) of the Corporations Act 2001]

2.47              Liquidators and administrators are officers of the company and are subject to a number of obligations under the Corporations Act 2001, including the duty to act in the best interests of the company. The Government’s 2016 reforms to the regulation of external administrators provide a sufficient safeguard against misconduct (see Schedule 2 to the Corporations Act 2001) and appropriate remedies if misconduct does occur.

2.48              Company administrators may still be liable for any contravention of the prohibition on creditor-defeating dispositions (see paragraphs 2.65 and 2.83). External administration is a preliminary form of administration, where realising company assets that are restricting a business can be critical to the ability of the company to continue trading in the future. It is important that dispositions undertaken during external administration (other than those undertaken as part of an arrangement with creditors) are scrutinised and improper dispositions penalised. This ensures external administrators acting recklessly or unreasonably, and those that are complicit in illegal phoenix activity, are subject to the criminal and civil penalty provisions.

2.49              Liquidators and provisional liquidators are not subject to criminal liability or the civil penalty provisions. This reflects that liquidation is a final form of administration, which involves the orderly winding-up a company’s affairs.

The safe harbour

2.50              The safe harbour in section 588GA currently protects directors from liability for debts incurred by an insolvent company in connection with a course of action that is reasonably likely to lead to a better outcome for the company than the immediate appointment of an administrator.

2.51              The amendments extend the operation of the safe harbour so it applies to dispositions of property, in addition to a company’s incurring of a debt, where a company is undertaking a restructure. A court cannot make an order under section 588FF for a voidable creditor-defeating disposition if section 588GA would apply to an officer of the company in relation to the disposition (see paragraphs 2.91 to 2.94). This limitation does not prevent the transaction being described as voidable in the law but does prevent a court from actually voiding the transaction. [Schedule 1, item 24, subsection 588FG(8) of the Corporations Act 2001]

Recovery by ASIC

2.52              The amendments ensure ASIC has power to take effective action against illegal phoenix activity and protect the interests of legitimate creditors. This will:

       overcome difficulties faced by liquidators where the company has insufficient funds to cover the cost of court action; and

       allow ASIC to intervene where a liquidator is not fulfilling its obligations to recover company property, for example because the liquidator is complicit in the illegal phoenix activity of a company director.

2.53              The amendments grant ASIC specific powers to make administrative orders to recover property the subject of voidable creditor-defeating dispositions. ASIC may use these powers to recover property for a company in liquidation on its own initiative or on the application of a liquidator. A liquidator may apply to ASIC in the same timeframes it may apply to a court under section 588FF (see paragraph 2.27). [Schedule 1, item 25, subsections 588FGAA (1) and (2) of the Corporations Act 2001]

Making the administrative order

2.54              ASIC’s powers are directed to the entities that receive the benefit of a voidable creditor-defeating disposition. This may include subsequent beneficiaries where the property has been transferred subsequent to the initial creditor-defeating disposition.

2.55              ASIC may require a person to:

       return the property to the company for distribution to its creditors;

       pay an amount equal to the benefit the person received from the creditor-defeating disposition; or

       transfer property that was purchased with the proceeds of sale of a creditor-defeating disposition (or similar dealings).

[Schedule 1, item 25, subsection 588FGAA(3) of the Corporations Act 2001]

2.56              ASIC may not make an administrative order if the safe harbour would apply to the disposition or the initial disposition was for market value. Further, ASIC may not issue an administrative order against a good faith purchaser in circumstances where a court could not make an order under section 588FF. [Schedule 1, item 25, subsection 588FGAA(4) of the Corporations Act 2001]

2.57              Before ASIC may make an administrative order, it must consider the conduct of the company, its officers, any relationships between the company and the person who received the disposed property, and the circumstances, nature and terms of the disposition. [Schedule 1, item 25, subsection 588FGAA(5) of the Corporations Act 2001]

2.58              If ASIC is satisfied that an administrative order should be made, it must give copies of the order and the written reasons for the order to the person subject to the order and to the company’s liquidator. If the administrative order requires the payment of an amount to the company, the order may set a time for the payment. [Schedule 1, item 25, section 588FGAB of the Corporations Act 2001]

2.59              ASIC may revoke an administrative order at any time. If it revokes an administrative order, ASIC must notify the person subject to the order. [Schedule 1, item 25, subsection 588FGAA(6) of the Corporations Act 2001]

Compliance with administrative orders

2.60              A person subject to an administrative order must comply with its terms. Conduct in contravention of an administrative order or a failure to do something required by the order is an offence. ‘Conduct’ is defined in section 9 of the Corporations Act 2001 as both acts and omissions. A contravention is subject to a penalty of up to 60 penalty units. [Schedule 1, items 25, 106 and 109, section 588FGAC and Schedule 3 to the Corporations Act 2001]

2.61              If the administrative order relates to the payment of money, the company may recover the amount as a debt. If ASIC commences proceedings in relation to a person’s failure to comply with an administrative order, the court may order the person to pay the amount to the company (in addition to paying the penalty to ASIC for non-compliance with the administrative order). [Schedule 1, item 25, subsections 588FGAD(1) and (2) of the Corporations Act 2001]

Example 2.4 Non-compliance with administrative orders

Super Lightspeed Pty Ltd disposes and sells its commercial unit to Nicholas in April 2019. Nicholas pays the purchase price of $980,000 to Super Lightspeed. The commercial unit’s market value is $1,180,000. Super Lightspeed and Nicholas are unrelated parties.

On 1 September 2019, a liquidator is appointed for Super Lightspeed. Upon winding up of Super Lightspeed, the liquidator discovers that Nicholas has purchased the commercial unit below its market value. In the circumstances, the liquidator believes the company could have obtained market value for the sale of the unit. The liquidator makes an application to ASIC to make administrative orders against Nicholas for the amount of $200,000.

On 28 September 2019, Nicholas receives an administrative order from ASIC ordering him to pay the amount of $100,000 by 28 October 2019 and $100,000 to Super Lightspeed by 28 January 2020. Nicholas fails to pay the amounts within the periods specified in the administrative order.

In February 2020, ASIC begins Court proceedings to enforce the order. The Court makes a judgment in ASIC’s favour and orders Nicholas to transfer the $200,000 to Super Lightspeed.

Nicholas may also face civil penalties.

2.62              A person ordered to pay a company the present value of any property may instead transfer the property to the company. This applies where ASIC orders a person to return the benefit they obtained directly or indirectly from a voidable transaction, which may include property other than the property that was the subject of the initial creditor-defeating disposition. [Schedule 1, item 25, subsection 588FGAD(3) of the Corporations Act 2001]

Applications to set aside administrative orders

2.63              A person may apply to the Court to have an administrative order set aside if the person believes the order has been made in error. Applications must be made within 60 days of the applicant receiving the notice or becoming aware of the administrative order. [Schedule 1, item 25, section 588FGAE of the Corporations Act 2001]

2.64              A person may also apply to the Administrative Appeals Tribunal in relation to ASIC’s decision to issue an administrative order (section 1317B).

Offences and civil penalty provisions

2.65              The amendments in Schedule 1 to the Bill make it an offence for a company officer or a facilitator such as a pre-insolvency adviser to cause a company to make a creditor-defeating disposition. The object of the new offences is to target asset stripping behaviour designed to avoid a company paying creditors’ entitlements. The asset stripping behaviour targeted by these amendments is a common characteristic of illegal phoenixing. [Schedule 1, item 33, section 588GAA of the Corporations Act 2001]

2.66              The elements of the offences and the defences available largely mirror the elements that apply to making a creditor-defeating disposition voidable. Differences include additional specific elements and defences that focus on the conduct of the officer or facilitator alleged to be responsible for the company making the disposition.

2.67              In addition, the amendments create civil penalty provisions equivalent to each of the offence provisions. This results in four provisions providing penalties for prohibited creditor-defeating dispositions:

       a criminal offence that applies to officers that engage in conduct that results in the company making a prohibited creditor-defeating disposition. The central mental element of the offence is recklessness;

       a civil penalty provision that applies to officers that engage in conduct that results in a company making a disposition where a reasonable person would have known the disposition was a prohibited creditor-defeating disposition;

       a criminal offence that applies to persons that procure, incite, induce or encourage a company to make a prohibited creditor-defeating disposition. The central mental element of the offence is recklessness; and

       a civil penalty provision that applies to a person that procures, incites, induces or encourages a company to enter into a disposition where a reasonable person would have known the disposition was a prohibited creditor-defeating disposition.

Officer’s duty to prevent prohibited creditor-defeating dispositions

Criminal offence

2.68              An officer’s culpability is assessed according to the conduct they intentionally engage in. This includes acts and omissions of the officer (section 9 of the Corporations Act 2001). [Schedule 1, item 33, subsection 588GAB(1) of the Corporations Act 2001]

Recklessness as to creditor harm

2.69              To be held criminally responsible, the officer must be reckless as to the result of their conduct: the result being the company making a creditor-defeating disposition. A person is reckless with respect to a result if they are aware of a substantial risk that the result will occur and, having regard to the circumstances known to them, it is unjustifiable to take the risk, or they know the result will occur (section 5.4 of the Criminal Code). The question of whether taking a risk is unjustifiable is one of fact. [Schedule 1, item 33, subsection 588GAB(1) of the Corporations Act 2001]

Disposition made at particular time

2.70              In addition, it is necessary to establish the creditor-defeating disposition was made at a particular time. A creditor-defeating disposition is prohibited if it is made:

       when the company is insolvent (or becomes insolvent because of the disposition);

       within the 12 months prior to the company entering external administration (if the disposition contributed to the company entering external administration); or

       within the 12 months prior to the company ceasing to carry on business altogether (if the disposition contributed to the company ceasing to carry on business altogether).

[Schedule 1, item 33, paragraphs 588GAB(1)(a), (b), (c) and (d) of the Corporations Act 2001]

2.71              The times at which a creditor-defeating disposition is prohibited broadly reflect the voidable transaction amendments (see paragraph 2.26). Further to the voidable transaction amendments, a creditor-defeating disposition is also prohibited if it is made within the 12 months prior to the company ceasing to carry on business altogether. This rule only applies where the company has permanently ceased to carry on all business activities. It does not apply merely because a company ceases one of a number of businesses it carries on, changes businesses or is not carrying on any business for a limited time. [Schedule 1, item 33, paragraph 588GAB(1)(d) of the Corporations Act 2001]

2.72              This will help address the common situation where directors involved in phoenix activity strip a company’s assets and abandon the company without taking steps to appoint an administrator or a liquidator to wind-up the company. It may be easier in some instances to establish that a company ceased to carry on business altogether shortly after a disposition took place than to establish insolvency.

2.73              It is necessary to establish the defendant was reckless as to the existence of this circumstance (i.e. present insolvency) or the risk of the result (i.e. becoming insolvent, entering external administration or ceasing to carry on business), or had knowledge of it.

2.74              A person is reckless with respect to a circumstance if they are aware of a substantial risk that the circumstance exists or will exist and having regard to the circumstances known to him or her, it is unjustifiable to take the risk (section 5.4 of the Criminal Code; for reckless as to a result, see paragraph 2.69).

Civil penalty

2.75              The civil penalty provision applies generally in the same terms as the offence. However, the recklessness fault element that applies to the criminal offence is not required for the equivalent civil penalty provision.

2.76              To establish a contravention of a civil penalty provision, it is sufficient to establish a reasonable person would know the result of their conduct would be the company making a creditor-defeating disposition that prevents, hinders or significantly delays the disposed property becoming available to creditors. This is a negligence standard. [Schedule 1, item 33, subsection 588GAB(2) of the Corporations Act 2001]

2.77              In addition, the presumptions of insolvency and insufficient consideration apply if the company failed to keep adequate financial records. However, these presumptions do not affect an officer if the records were destroyed, concealed or removed by another person and the officer was not in any way responsible. [Schedule 1, items 8 to 11, subsection 588E(1) (paragraph (ea) of the definition of ‘recovery proceeding’), and subsections 588E(4A), (5) and (6) of the Corporations Act 2001]

2.78              If a presumption applies, the defendant will need to prove matter that is the subject of the presumption: the solvency of the company or that sufficient consideration was provided to the company for the disposition. The reversal of the onus of proof is appropriate because companies are under an obligation to maintain financial records and it is unreasonable for ASIC to be required to prove a fact that has been intentionally concealed by the defendant.

2.79              Defences to the offence and the civil penalty provision are discussed in paragraphs 2.83 to 2.104.

Facilitators procuring creditor-defeating disposition

2.80              The offence and civil penalty provisions for procuring a company to make a creditor-defeating disposition mirror the prohibition on conduct by officers. The difference is that a broader range of persons – both natural persons and legal persons – may be involved in a contravention. In addition, the basis for a person’s culpability is specific conduct to procure, incite, induce or encourage the company to make the disposition. [Schedule 1, item 33, subsections 588GAC(1) and (2) of the Corporations Act 2001]

2.81              The purpose of this prohibition is to address the actions of unscrupulous facilitators and pre-insolvency advisers, and other entities that, while not formally responsible for the management of a particular company, are responsible for designing and implementing illegal phoenix schemes.

2.82              A body corporate may engage in conduct that results in a contravention of the offence provision. This requires establishing that an individual procured, incited, induced or encouraged a company to make a prohibited creditor-defeating disposition and that individual did so within the actual or apparent scope of his or her employment, or within his or her actual or apparent authority of the body corporate (section 12.2 of the Criminal Code). Under section 12.3 of the Criminal Code, it is also necessary to establish:

       the board of the body corporate or a high managerial agent knowingly or recklessly carried out the relevant conduct, or expressly, tacitly or impliedly authorised or permitted the commission of the offence; or

       a corporate culture existed within the body corporate that directed, encouraged, tolerated or led to non-compliance.

Defences

2.83              The following defences apply uniformly to the criminal offence and the civil penalty provisions for both officers and other persons:

       the disposition was made under a deed of company arrangement or scheme of arrangement (see paragraphs 2.43 to 2.45); [Schedule 1, item 33, paragraphs 588GAB(3)(a) and (b), and 588GAC(3)(a) and (b) of the Corporations Act 2001]

       the disposition was made by the company liquidator (see paragraphs 2.46 and 2.47); [Schedule 1, item 33, paragraphs 588GAB(3)(c) and (d), and 588GAC(3)(c) and (d) of the Corporations Act 2001]

       the disposition was made in connection with a course of action and the safe harbour applies to the defendant.

2.84              In addition, it is a defence to a contravention of the new civil penalty provisions if:

       the defendant had reasonable grounds to expect the company was solvent at the time of the disposition (except where the company enters external administration or ceases to carry on business altogether because of the disposition within 12 months);

       the defendant took all reasonable steps to prevent the company making the disposition; or

       in the case of a defendant that is a director – because of illness of some other good reason, the defendant did not take part in the management of the company at the relevant time.

2.85              These lists do not exclude other defences of general application available under the Criminal Code.

2.86              The first two defences – liquidator transactions and dispositions under a deed of company arrangement or scheme of arrangement – apply to the nature of the disposition and are discussed earlier in this Chapter. The other defences relate specifically to the conduct of the defendant and are discussed below.

2.87              Defendants bear an evidential burden in relation to each of the defences. An evidential burden means the burden of adducing or pointing to evidence that suggests a reasonable possibility that the matter exists or does not exist (subsection 13.3(6) of the Criminal Code). If a defendant satisfies an evidential burden, the prosecution in a criminal matter may disprove the existence of the defence by establishing its non-existence beyond reasonable doubt (subsections 13.1(2) and 13.2(1) of the Criminal Code).

2.88              This evidential burden is appropriate as these matters are peculiarly in the mind of a defendant. In the case of defendants that are company officers, these matters also relate to matters that the officer ought to have considered in fulfilling their duties to the company.

2.89              For example, a company officer or other person relying on the safe harbour defence will be required to point to evidence that suggests that they started to develop a course of action reasonably likely to lead to a better outcome for the company after starting to suspect the company was insolvent.

2.90              It is appropriate for this evidential burden to apply to a person wishing to rely on safe harbour because:

       details about the courses of action developed are peculiarly within the person’s knowledge; and

       it would be significantly more difficult and costly for the prosecution to disprove the possibility that the person developed a course of action reasonably likely to lead to the better outcome for the company.

The safe harbour

2.91              The safe harbour is an important defence available if the disposition is made in connection with a course of action that is reasonably likely to lead to a better outcome for the company than proceeding immediately to voluntary administration or winding up. The defence is a personal defence and depends on the actions the specific defendant took to develop the company’s course of action, and their other conduct. [Schedule 1, items 34 and 35, subsection 588GA(1) of the Corporations Act 2001]

2.92              There are circumstances that make the safe harbour unavailable. The first is where a company is failing to pay the entitlements of its employees by the time they fall due. The second is where a company has not complied or is not complying with its taxation reporting obligations. In both these cases, a person will not be eligible for the safe harbour defence. [Schedule 1, items 37 and 38, subsection 588GA(4) of the Corporations Act 2001]

2.93              The safe harbour is not available if the person fails to substantially comply with their obligations to assist a liquidator or controller (or an administrator – see paragraph 2.131) in a formal insolvency. [Schedule 1, items 39 and 40, subsection 588GA(5) of the Corporations Act 2001]

2.94              Similarly, subsections 588GB(1) and (2) prevent a director from relying on books or information as evidence for the application of the safe harbour where these materials have not been provided to a liquidator, administrator or controller as required. [Schedule 1, item 44, subsection 588GB(7) (paragraph (a) of the definition of ‘relevant proceeding’) of the Corporations Act 2001]

2.95              As with the other defences, a defendant bears an evidential burden in relation to the safe harbour. [Schedule 1, item 36, subsection 588GA(3) of the Corporations Act 2001]

Expectation of solvency on reasonable grounds

2.96              A defence is available for a civil penalty contravention if a defendant had reasonable grounds to expect, and did expect, the company was solvent and would remain solvent despite making the disposition. [Schedule 1, items 45, 46 and 47, subsections 588H(1) and (2) of the Corporations Act 2001]

2.97              An expectation of solvency must be supported by facts that point to a high degree of certainty. A mere hope, possibility or suspicion that the company is solvent is insufficient. A person who is unaware whether the company is solvent – particularly a person who, because of their position, could not know – cannot rely on the defence.

2.98              A defendant may rely on a competent and reliable person responsible for providing information to the defendant about the company’s solvency. The defendant must have reasonable grounds to believe the person is competent and reliable. [Schedule 1, items 48 and 49, subsection 588H(3), of the Corporations Act 2001]

2.99              The defence does not apply where the company entered external administration or ceased carrying on business altogether because of the disposition within 12 months of the disposition. [Schedule 1, item 50, subsection 588H(3A) of the Corporations Act 2001]

Reasonable steps defence

2.100          A defence is available for a civil penalty contravention to a person that takes all reasonable steps to prevent the company making the creditor-defeating disposition. This may include a non-executive director voting unsuccessfully against the disposition or, in the case of a company that is insolvent, attempting to place the company into administration or liquidation. [Schedule 1, items 45 and 53, subsections 588H(1) and (5) of the Corporations Act 2001]

2.101          The elaboration of this defence in subsection 588H(6) relates specifically to insolvent trading cases and does not necessarily apply to contraventions of the creditor-defeating disposition prohibitions. [Schedule 1, item 54, subsection 588H(6) of the Corporations Act 2001]

Illness or other good reason

2.102          A defence is available to a director for a civil penalty contravention if, for a good reason, the director did not take part in the management of the company at the relevant time. [Schedule 1, items 45 and 51, subsections 588H(1) and (4) of the Corporations Act 2001]

2.103          The primary scenario covered by this defence is illness where the director is temporarily absent from their duty to participate in the management of the company. Other examples are where an administrator or receiver has assumed control of the company’s affairs.

2.104          The defence does not otherwise excuse the responsibility of a passive director to prevent the company making a creditor-defeating disposition. The defence does not displace the duty of every director to take an active part in the affairs of the company, and guide and monitor its management. This duty is implicit in the statutory duty of care and diligence.

Penalties

2.105          Penalties for a contravention of the new offence provisions are:

       4,500 penalty units or three times the benefit obtained (and detriment avoided), or imprisonment for 10 years, or both (for an individual); and

       45,000 penalty units or three times the benefit obtained (and detriment avoided) or 10 per cent of the annual turnover of the entity (for a body corporate).

[Schedule 1, items 107 and 110, Schedule 3 to the Corporations Act 2001]

2.106          Once a declaration has been made that a person has breached a civil penalty provision, ASIC can seek a pecuniary penalty order (section 1317G) of up to $200,000 or a disqualification order (section 206C) for individuals. The maximum pecuniary penalty order that may be imposed on a body corporate is $1 million. [Schedule 1, item 105, items 6A and 6B of the table in subsection 1317E(1) of the Corporations Act 2001]

2.107          Following the commencement of the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018, these civil penalties will increase to:

       for an individual – 5,000 penalty units or three times the benefit obtained and detriment avoided; or

       for a body corporate – 50,000 penalty units, three times the benefit derived and detriment avoided, or 10 per cent of the body corporate’s annual turnover (up to 1 million penalty units).

[Schedule 1, item 108, subsection 1317E(3) of the Corporations Act 2001, and item 6 of the table in subclause 2(1) of the Bill]

Compensation for breach of offence and civil penalty provisions

2.108          Amendments are made to Division 4 in Part 5.7B of the Corporations Act 2001 to allow liquidators – and in some cases creditors – to recover compensation from officers and facilitators who have contravened a creditor-defeating disposition offence or civil penalty provision.

2.109          Compensation may be sought against a person who has been found to have contravened a civil penalty provision or committed an offence in relation to a creditor-defeating disposition. Compensation is available for damage suffered by the company’s creditors and may be awarded in the same proceedings that determined the offence or civil penalty. [Schedule 1, items 55 to 59, sections 588J and 588K of the Corporations Act 2001]

2.110          Compensation may also be sought against a person that has contravened an offence or civil penalty provision but has not been convicted or been subject to a civil penalty order. In these cases, proceedings must be brought within six years of the start of the company’s winding up. [Schedule 1, item 60, subsection 588M(1A) of the Corporations Act 2001]

2.111          A declaration, conviction or finding made by a court in relation to a person’s contravention of the offence or civil penalty provisions may be relied on in proceedings for compensation from the same person. [Schedule 1, item 64, subparagraphs 588Q(b)(iv) to (vi) of the Corporations Act 2001]

Preventing double recovery

2.112          Amendments are made to ensure creditors cannot obtain compensation to the extent compensation is obtained under another provision of the Corporations Act 2001 such as Part 5.8A. Part 5.8A protects employee entitlements and allows for compensation to be paid by persons who enter agreements or transactions to avoid companies paying employee entitlements. [Schedule 1, items 61, 62, 63 and 74, section 588N and paragraph 596AD(b) of the Corporations Act 2001]

2.113          To the same end, contingent amendments are made to take into account the changes being progressed as part of the Corporations Amendment (Strengthening Protections for Employee Entitlements) Bill 2018, which was introduced into the Parliament on 20 September 2018. Contingent amendments commence differently (or not at all) depending on the sequence in which Bills pass the Parliament.

2.114          Parallel amendments are intended to be made to the definition of the term ‘linked’. This Bill makes two amendments to the term, one that amends the existing definition for the purpose outlined in paragraph 2.112 and another amendment that incorporates both the first amendment and the amendment made by the other Bill. If the other Bill has commenced first, the second amendment in this Bill applies. If this Bill commences first, the first amendment applies immediately and the second and final amendment applies on the commencement of the other Bill, incorporating both amendments. [Schedule 1, items 97 and 101, section 9 (definition of ‘linked’) of the Corporations Act 2001, and items 3 and 4 of the table in subclause 2(1) of the Bill]

2.115          Amendments are made to subsection 596AI(1), which will be repealed under the other Bill. These amendments are unnecessary and do not commence at all if that Bill commences first. [Schedule 1, items 99 and 100, subsection 596AI(1) of the Corporations Act 2001, and item 3 of the table in subclause 2(1) of the Bill]

2.116          An amendment is made to insert a provision into section 596AB that becomes unnecessary when the other Bill commences. Another amendment is made repealing that provision when the other Bill commences. If the other Bill commences first, the provision is inserted and repealed instantly and does not operate. [Schedule 1, items 98 and 102, subsection 596AB(5) of the Corporations Act 2001, and items 3 and 4 of the table in subclause 2(1) of the Bill]

2.117          Other amendments are made to provisions inserted by the other Bill. These amendments are only necessary and only commence after both Bills have otherwise commenced. [Schedule 1, items 103 and 104, subsection 596AC(10A), and subparagraphs 596AF(3)(c)(iii) to (vi) of the Corporations Act 2001, and item 4 of the table in subclause 2(1) of the Bill]

Proceedings by creditors for compensation

2.118          Creditors generally require the consent of a liquidator to bring their own proceedings for compensation. [Schedule 1, items 65 and 66, section 588R of the Corporations Act 2001]

2.119          A creditor may give a liquidator notice of their intention to bring proceedings and seek the liquidator’s consent. This must be done at least six months after the winding up began. [Schedule 1, items 67 and 68, section 588S of the Corporations Act 2001]

2.120          The liquidator may refuse to grant the consent within three months of receiving the creditor’s notice. The liquidator must provide a written statement of their reasons for the refusal.

2.121          After the end of the three-month period, the creditor may seek leave of a court to commence proceedings without the liquidator’s consent. If the liquidator has provided a statement of reasons, the creditor must file the reasons with the court. [Schedule 1, item 69, subsection 588T(2) of the Corporations Act 2001]

2.122          In any event, a creditor cannot commence proceedings for compensation for a creditor-defeating disposition if:

       the liquidator has sought a court order under section 588FF for the disposition;

       ASIC has issued an order for the disposition;

       the liquidator has applied to ASIC for an order in relation to the disposition; or

       the liquidator has intervened in an application for a civil penalty order against a person for the disposition.

[Schedule 1, items 70 to 73, subsection 588U(1) of the Corporations Act 2001]

Technical and consequential amendments

Presumptions in civil proceedings

2.123          An amendment is made to allow a set of general presumptions to apply when ASIC considers making an order to recover property, and in court proceedings to set aside an ASIC order. This includes the existing presumption of insolvency and the new presumption of insufficient consideration where adequate financial records have not been maintained. [Schedule 1, item 7, subsection 588E(1) (paragraphs (aa) and (ab)of the definition of ‘recovery proceeding’) of the Corporations Act 2001]

2.124          Amendments are made to ensure findings made in one civil proceeding can be relied on in another civil proceeding where appropriate, including in relation to the new types of proceedings created in these amendments. These presumptions do not apply to criminal proceedings. [Schedule 1, items 12 to 16, paragraphs 588E(8)(a), (aa), (b), (da) and (8A)(a) of the Corporations Act 2001]

Commissioner of Taxation’s indemnity

2.125          Section 588FGA grants the Commissioner of Taxation an indemnity against the directors of a company if a court makes an order under section 588FF against the Commissioner for the payment of certain tax liabilities by the company. An amendment is made to grant the same indemnity if an equivalent order is made by ASIC. [Schedule 1, items 26, subsection 588FGA(1) of the Corporations Act 2001]

2.126          Section 588FGB provides defences against an indemnity granted under section 588FGA. An amendment is made to align the expectation of solvency defence with the same defence that applies to contraventions of the creditor-defeating disposition civil penalty provision (see paragraph 2.96) in cases where the indemnity relates to a creditor-defeating disposition. [Schedule 1, items 27, subsection 588FGB(4A) of the Corporations Act 2001]

Other recovery provisions

2.127          Section 588FH allows a liquidator to recover from a related entity of a company a debt that the entity owed that is discharged because of certain voidable transactions of the company. A court must take any amount recovered under this section into account when making orders under section 588FF. An amendment is made to require ASIC to also take any recovery into account when making its orders. [Schedule 1, item 28 and 29, subsection 588FH(3) of the Corporations Act 2001]

2.128          Section 588FI prevents the double recovery of an unfair preference where the preferred creditor has put the company in the same position as if the unfair preference had not been entered into. Subsection 588FI(2) prevents a court from making an order under section 588FF prejudicing the right or interest of the creditor. An amendment is made to prevent ASIC from making a similar order. [Schedule 1, items 30 and 31, paragraph 588FI(1)(b) and subsection 588FI(2A) of the Corporations Act 2001]

Headings

2.129          The amendments in Schedule 1 add a number of new provisions to the existing insolvency law. To assist users of the law, a number of new headings are inserted for both the new provisions and for existing provisions. [Schedule 1, items 17, 18, 21 to 25, 32, 33, 45, 50 and 52, headings to Division 3, Subdivisions A, B, C, D and E in Division 2, and Subdivisions A, B and C in Division 3 of Part 5.7B, and the headings to subsections 588FG(1), (2), (7) 588H(1), (2), (4) and (5) of the Corporations Act 2001]

Technical amendments to National Innovation and Science Agenda reforms

2.130          Additional amendments are made to the National Innovation and Science Agenda reforms to ensure the safe harbour defence operates as intended in the context of these amendments in the Bill and the existing prohibition on insolvent trading.

2.131          As noted in paragraph 2.93, the safe harbour is not available to a person who fails to substantially comply with their obligations to assist a liquidator or controller in a formal insolvency. An equivalent obligation exists to assist a company administrator appointed to the company (subsection 438B). An amendment is made to prevent a person accessing the safe harbour where they have not complied with this additional obligation. [Schedule 1, item 41, paragraph 588GA(5)(a) of the Corporations Act 2001]

2.132          As noted in paragraph 2.94, subsections 588GB(1) and (2) prevent a director from relying on books or information as evidence for the application of the safe harbour where these materials have not been provided to a liquidator, administrator or controller as required.

2.133          Paragraph 588GB(2)(b) and subsection 588GB(5) currently refer to compliance with paragraph 429(2)(c). That paragraph requires the controller of a corporation to lodge and distribute copies of the information submitted by the corporation’s officers. Compliance with this provision is beyond an officer’s control and is not intended to affect an officer’s reliance on books or information. An amendment is made to remove the reference to paragraph 429(2)(c). [Schedule 1, items 42 and 43, paragraph 588GB(2)(b) and subsection 588GB(5) of the Corporations Act 2001]

2.134          Further amendments are made to address issues arising following the implementation of the ipso facto reforms as part of the National Innovation and Science Agenda. Those reforms stay the enforcement of rights under a contract, arrangement or agreement on the occurrence of a ‘trigger event’ relating to a body making an application under section 411, the appointment or existence of a managing controller or the company’s entry into administration under Part 5.3A. The purpose of the stay is to increase the chance that businesses will be able to successfully recover from financial difficulties.

2.135          The stay provisions will not apply to certain rights, including rights contained in contracts, arrangements or agreements prescribed by the regulations. The regulation-making power is expanded to permit the exclusion of types of rights (as well as kinds of contracts, agreements and arrangements) from the operation of the stay. [Schedule 1, items 4, 5 and 6, paragraphs 415D(6)(c), 434J(5)(c) and 451E(5)(c) of the Corporations Act 2001]

Statutory and judicial managers of prudentially regulated entities

2.136          Amendments are made to other legislation to ensure that statutory and judicial managers appointed to a prudentially regulated entity are not subject to the new offences and their transactions are not voidable. This is consistent with the exemption these managers have from the insolvent trading prohibition and existing categories of voidable transactions. [Schedule 1, items 79, 80, 93, 94, 95 and 96, subparagraph 14CA(b)(iv) and subsection 14C(3) of the Banking Act 1959, subparagraph 62ZOL(b)(iv) and subsections 62ZM(3) and 62ZOK(3) of the Insurance Act 1973, and paragraph 179AL(b)(iv) and subsections 179(3) and 179AK(3) of the Life Insurance Act 1995]

Amendments to the Aged Care (Accommodation Payment Security) Act 2006

2.137          The Aged Care (Accommodation Payment Security) Act 2006 enables the Government to pay an aged care resident an amount equal to certain liabilities (an outstanding accommodation payment balance) owed to them by an aged care provider that has suffered an insolvency event. Outstanding accommodation payment balance amounts effectively include amounts that have been paid by providers to residents but are recoverable by the company under certain provisions of Part 5.7B of the Corporations Act 2001.

2.138          Amendments are made to the Aged Care (Accommodation Payment Security) Act 2006 to allow outstanding accommodation payment balances to include any amounts that are recoverable under the new voidable transaction provisions. [Schedule 1, items 75 to 78, subparagraphs 12(3)b)(i), 12(3)(b)(ii), 13A(3)(1)(i) and 13A(1)(d)(ii) of the Aged Care (Accommodation Payment Security) Act 2006]

Amendments to the Corporations (Aboriginal and Torres Strait Islander) Act 2006

2.139          The Corporations (Aboriginal and Torres Strait Islander) Act 2006 establishes the role of the Registrar of Indigenous Corporations and allows Aboriginal and Torres Strait Islander groups to form corporations. Sections 526-35 and 431-1 of the Act generally apply the provisions in Part 5.7B of the Corporations Act 2001 to Aboriginal and Torres Strait Islander corporations in a modified way.

2.140          The Act contains its own civil penalty provisions, which incorporate by reference the civil penalty provision that applies to insolvent trading under section 588G of the Corporations Act 2001. An amendment is made to also allow the Act’s civil penalty provisions to apply to contraventions of the new civil penalty provisions introduced by this Bill. [Schedule 1, item 81, paragraph 386-1(1)(d) of the Corporations (Aboriginal and Torres Strait Islander) Act 2006]

2.141          In the event of a conflict between the duty of a director to ensure an Aboriginal and Torres Strait Islander corporation complies with its Native Title legislation obligations and the director’s duty under section 588G of the Corporations Act 2001, the duty under section 588G prevails. Amendments are made so that a director’s duty to prevent a company making a creditor-defeating disposition similarly prevails. [Schedule 1, items 82 to 92, sections 482-1 and 531-1 and 531-5, section 700-1 (definitions of ‘Corporations Act insolvent trading and creditor-defeating disposition provisions’ and ‘Corporations Act insolvent trading provisions ‘), and the headings to Division 531 and Part 11-6, of the Corporations (Aboriginal and Torres Strait Islander) Act 2006]

Application provisions

2.142          The amendments in Schedule 1 to the Bill generally commence and apply from the day after Royal Assent. [Item 2 of the table in subclause 2(1) of the Bill]

2.143          Some contingent amendments designed to prevent the double recovery of compensation may commence at a later time or not at all (see paragraphs 2.113 to 2.117). Some contingent amendments setting penalty amounts may commence at a later time or not at all (see paragraphs 2.105 to 2.107). [Items 3 to 6 of the table in subclause 2(1) of the Bill]

2.144          The amendments to section 588H notionally affect the defences to the insolvent trading civil penalty provision. These amendments apply to debts incurred, and dispositions made, after commencement. [Schedule 2, item 4, subsection 1661(1) of the Corporations Act 2001]


Outline of chapter

3.1                  Schedule 2 to the Bill ensures directors are held accountable for misconduct by preventing directors from improperly backdating resignations or ceasing to be a director when this would leave the company with no directors. This will reduce the incidence of illegal phoenix activity and its effect on employees, creditors and government revenue.

Context of amendments

3.2                  Divisions 1 and 3 of Part 2D.3 of the Corporations Act 2001 regulate the appointment and removal of directors. These provisions also contain replaceable rules that may be replaced by provisions of a company’s constitution (section 135).

3.3                  A proprietary company must have one Australian-resident director over the age of 18 (sections 201A and 201B). A company may generally appoint a person as a director by a resolution passed in a general meeting (replaceable rule section 201G).

3.4                  A director may unilaterally resign in writing (replaceable rule section 203A). A company may also remove a director through a resolution (replaceable rule section 203C for proprietary companies).

3.5                  A director may also be removed by a resolution of members (section 203D in the case of public companies and replaceable rule section 203C in the case of proprietary companies).

3.6                  Under subsection 205B(5), a company must notify ASIC within 28 days if a person is appointed as a director or stops being a director. The company’s obligation to notify ASIC of a director’s resignation may be satisfied by the resigning director notifying ASIC themselves (section 205A and paragraph 205B(6)(b)).

3.7                  Contraventions of the reporting obligation in subsection 205B(5) are governed by the general penalty provisions in Division 2 of Part 9.4, the penalties in Schedule 3 (relevantly 60 penalty units or imprisonment for 1 year, or both) and Chapter 2 of the Criminal Code.

3.8                  Although the company is under the obligation to comply with subsection 205B(5), directors or a company secretary (as appropriate) are vicariously liable for a contravention (section 188). Contravention of section 188 is a civil penalty provision under section 1317E and is subject to penalties of up to $3,000.

3.9                  In addition, subsection 1308(2) makes it an offence to supply false or misleading information to ASIC.

Implications for illegal phoenix activity

3.10              Company directors engaging in illegal phoenix activity have opportunities to exploit deficiencies in these laws to obscure their role in company decisions and to shift accountability to other directors. In egregious cases, a phoenix operator may seek to shift accountability to a ‘straw director’ who has no real involvement in the company, may have little or no knowledge of their appointment and is often of limited financial means, frustrating recovery and enforcement efforts. ‘Straw directors’ may also be deceased persons or entirely fictitious.

3.11              The lodgement of a notice with ASIC that a director has resigned by necessity occurs after the fact, and a discrepancy can arise where a director alleges that a resignation notice was provided to the company, but the company has not communicated this to ASIC.

3.12              A former director may also cause the company to backdate the effective date of their resignation to implicate a new director in offending conduct.

3.13              Finally, in some instances, a company director may abandon a company by resigning without another director in place to provide oversight of the company. The abandoned company is unable to notify ASIC of the resignation or appoint a replacement director, and may continue to be registered for some time with unpaid debts before creditors or ASIC take steps to wind it up.

Summary of new law

3.14              Schedule 2 to the Bill prevents the backdating of resignation in breach of the 28-day rule in section 205B unless ASIC or the Court is satisfied the change took place on the purported date.

3.15              Abandonment of companies by a resigning director or directors, leaving the company without a natural person’s oversight, is also prevented.

Comparison of key features of new law and current law

New law

Current law

If the resignation of a director is reported to ASIC more than 28 days after the purported resignation, the resignation takes effect from the day it is reported to ASIC.

A company or a director may apply to ASIC or the Court to give effect to the resignation notwithstanding the delay in reporting the change to ASIC.

Directors may resign at any time in writing, subject to the company’s constitution.

The company (or the former director) must notify ASIC within 28 days of the resignation.

A director may not resign from a company if doing so would leave the company without a director (unless the company is being wound up).

A director may not be removed by a resolution of members of a proprietary company if doing so would leave the company without a director (unless the company is being wound up).

A director may be removed by a resolution of company members, subject to a proprietary company’s constitution.

Detailed explanation of new law

Preventing inappropriate backdating of director resignations

3.16              If a resignation of a director is reported to ASIC more than 28 days after the purported resignation, the resignation takes effect from the day it is reported to ASIC. [Schedule 2, item 2, subsection 203AA(1) of the Corporations Act 2001]

3.17              This amendment also applies to alternative directors who resign prior to the end of their term of appointment. [Schedule 2, item 2, Note 1 to subsection 203AA(1) of the Corporations Act 2001]

Example 3.1 Inappropriate backdating of director resignations

Bill is the sole director of Panorama Designs Pty Ltd, a building company that is insolvent. On 10 July 2019, Panorama Designs borrows $50,000 it claims is for the purpose of finalising the construction of a small apartment complex.

On 15 July, Panorama Designs transfers the $50,000 and other assets to another company, Panorama Designs (No. 2) Pty Ltd, of which Bill is also a director.

On 20 October 2019, the creditors of Panorama Designs commence proceedings to have a liquidator appointed to the company.

On 1 November 2019, Panorama Designs lodges a notice with ASIC that Bill resigned from the company and was replaced by Theo on 1 July 2019. Bill claims that he should not be held accountable for the misconduct that occurred in July 2019 as he was not a director.

However, Bill’s resignation is taken to be effective from 1 November 2019. Bill can be prosecuted for breaching his duty as a director to prevent the company from trading while insolvent and for causing the company to make a creditor-defeating disposition.

Applications to ASIC and the Court

3.18              Either the former director or the company may apply to ASIC or the Court to backdate a resignation that is lodged after the 28-day period. The applicant must satisfy ASIC or the Court (as appropriate) that the director did in fact resign on the purported date. [Schedule 2, item 2, subsection 203AA(2) of the Corporations Act 2001]

3.19              If the application is made to the Court, the applicant must satisfy the Court that it is just and equitable to make the order to backdate the resignation. [Schedule 2, item 2, subsection 203AA(3) of the Corporations Act 2001]

3.20              If the application is made to ASIC, ASIC must take into account the conduct and representations of the applicant, including the reasons for the delayed notification, when determining whether to allow the resignation to be backdated. [Schedule 2, item 2, subsection 203AA(4) of the Corporations Act 2001]

3.21              If the application is made to ASIC, it must be made within 56 days of the purported date of the director’s resignation. Applications to the Court can be made within 12 months of that date or at a later time allowed by the Court. [Schedule 2, item 2, subsection 203AA(5) of the Corporations Act 2001]

Example 3.2 Application to Court

Further to Example 3.1, Bill cannot apply to ASIC to backdate the effective date of his resignation because the company provided the notification to ASIC after the end of the 56-day period.

Bill applies to the Court to have the effective date of his resignation backdated. Bill cannot adduce clear evidence to substantiate his position that he resigned on 1 July 2019. ASIC responds to the application and adduces evidence that Bill was still involved in the management of the company during July 2019.

The Court refuses the application.

3.22              If the Court makes an order to backdate the effective date of a director’s resignation, the applicant must provide a copy of the order to ASIC within two business days. Non-compliance is a strict liability offence subject to 120 penalty units. This is consistent with the strict liability offence for failing to notify ASIC of the resignation on time under subsection 205B(5) (as amended by the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018). [Schedule 2, items 2, 5 and 6, subsections 203AA(6) and (7), and Schedule 3 to the Corporations Act 2001]

3.23              If the applicant is a company, its secretary or directors may be subject to a civil penalty for a failure of the company to provide a copy of a Court order to ASIC. It is a defence if the secretary or director (as appropriate) took all reasonable steps to ensure the company provided the copy of the Court order to ASIC. [Schedule 2, item 1, paragraph 188(1)(ea) of the Corporations Act 2001]

Preventing the abandonment of companies

3.24              A director may not resign if the resignation would leave the company without a director.[Schedule 2, item 2, subsections 203AA(8) and 203AB(1) of the Corporations Act 2001]

3.25              There are often circumstances where there will be a legal impediment under a company constitution to appointing a replacement director before the outgoing director can leave office. To accommodate temporary absences of a director, the amendment applies at the end of the day on which the director purports to resign. If another director is appointed the same day as the resignation, the resignation is effective.

3.26              The end of day test also applies in situations where multiple directors resign on the same day. In this case, all the resignations will be ineffective unless at least one director is appointed to the company at the end of the day.

3.27              Similar restrictions apply to the power of a proprietary company’s members to remove a director by resolution. This is necessary to address the potential for a single member proprietary company to resolve to remove the director. [Schedule 2, item 3, subsection 203CA(1) of the Corporations Act 2001]

3.28              A single director may resign or be removed if the company is being wound up at the time. Division 1A in Part 5.6 of the Corporations Act 2001 outlines the times when a winding up is taken to have begun. [Schedule 2, items 2 and 3, subsections 203AB(2) and 203CA(2) of the Corporations Act 2001]

3.29              These amendments do not prevent a sole director being removed because they are disqualified from being a director.

Application provisions

3.30              The amendments generally commence on the day following Royal Assent. [Item 7 of the table in subclause 2(1) of the Bill]

3.31              The amendments apply to director resignations and resolutions to remove directors taking effect on or after the day 12 months after Royal Assent. [Schedule 2, items 2, 3 and 4, subsections 1661(2) and (3), Note 2 to subsection 203AA(1), and the notes to subsections 203AB(1) and 203CA(1) of the Corporations Act 2001]

3.32              Amendments to introduce the penalty outlined in paragraph 3.22 apply in a contingent manner to deal with the potential sequencing of the commencement of this Bill and the commencement of the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018. This does not affect the operation of the penalty. [Schedule 2, items 5 and 6, Schedule 3 to the Corporations Act 2001, and items 8 and 9 of the table in subclause 2(1) of the Bill]


Chapter 4         
GST estimates and director penalties

Outline of chapter

4.1                  Schedule 3 to the Bill allows the Commissioner to collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities in certain circumstances.

4.2                  Schedule 3 also applies to LCT and WET as these taxes are jointly administered with the GST.

Context of amendments

The estimates regime

4.3                  The estimates regime (Division 268 in Schedule 1 to the TAA 1953) enables the Commissioner to estimate unpaid amounts of PAYG withholding and superannuation guarantee charge, and to recover the amount of those estimates from taxpayers.

4.4                  The estimates regime is a valuable compliance tool available to the Commissioner where a taxpayer has failed to report information. A taxpayer becomes liable to pay an estimate when the Commissioner provides a notice of the estimate (section 268-20).

4.5                  The estimate liability is distinct from the underlying liability of the taxpayer to pay the withholding amount or superannuation guarantee charge. However, the discharge of one liability through a payment or a credit arising under the law discharges the other liability to the same extent.

4.6                  The Commissioner may reduce or revoke an estimate (section 268-35) or the taxpayer may cause the estimate to be reduced or revoked by providing a sworn statement – a statutory declaration or an affidavit – that the underlying liability (if any) is lower than estimated (section 268-40). Reductions (and revocations) take effect as if the estimate was always of the reduced amount (or did not exist) (section 268‑55).

4.7                  The GIC applies to PAYG estimates that remain unpaid after 7 days of the notice being provided (section 268‑75). This liability is also distinct from the GIC applying to the underlying liability under section 16-80, although discharging one liability discharges the other (and similar interest liabilities) (section 268‑80).

4.8                  The GIC does not accrue on superannuation guarantee charge estimates (paragraph 268-75(1)(b)), although it does accrue on the underlying charge under section 49 of the Superannuation Guarantee (Administration) Act 1992.

Director penalties

4.9                  The director penalty regime (Division 269 in Schedule 1 to the TAA 1953) makes directors of a company personally liable for specified taxation liabilities of the company in certain circumstances of non-payment by the company.

4.10              Under section 269-10, the director penalty regime applies to a company’s liabilities to pay to the Commissioner:

       PAYG withholding amounts;

       superannuation guarantee charges; and

       estimates of PAYG withholding liabilities and superannuation guarantee charges.

4.11              Directors are under a general obligation to ensure the company either satisfies the above liabilities, or recognising the company may be insolvent, goes into administration or is wound up (section 269‑15). The obligation begins on an initial day specified in relation to each category of underlying company liability. The obligation continues to apply to directors that cease to be directors after the initial day.

4.12              Directors are subject to a penalty if their obligation is unfulfilled by the due date. New directors that are appointed after the due date, become subject to the penalty if the obligation remains unsatisfied for a further 30 days (section 269-20).

4.13              Directors are subject to a penalty equal to the amount of the company’s unpaid obligations but the penalty may not be collected before the Commissioner issues a director penalty notice and a further 21 days elapse (section 269‑25). Payment of either the penalty or the company’s underlying liability satisfies both obligations (section 269-40). Directors may also seek to recover any penalty they have paid under a right of indemnity (section 269-40).

Remission of penalties

4.14              A penalty is generally remitted if the director complies with their obligation before or within the 21-day notice period (section 269-30) by virtue of the company being placed under voluntary administration or beginning to be wound up. This remission is subject to a number of different conditions in subsection 269 30(2). Where the conditions are not satisfied, the penalty is said to be ‘locked down’.

4.15              The table in subsection 269-30(2) specifies a date (the lockdown date in column 2) before which the director may avoid the full penalty. If the company enters administration or begins to be wound up after this date, the extent to which the director’s penalty is remitted is limited or abolished. The extent to which the penalty is locked down in this way is specified in column 3 of the table.

4.16              For example, where the director’s obligation in respect of a PAYG withholding estimate is satisfied because the company is placed into administration or wound up (rather than the company paying the liability), the director will still be subject to a penalty if the administration or winding up commenced more than three months after the due date for the payment of the company’s underlying liability.

Defences

4.17              A number of defences against the penalty exist in section 269-35 and are based on the reasonableness of the conduct of the director and, in some cases, the company.

Other changes to the director penalty regime

4.18              The Government is progressing two amendments to the director penalty regime through the Parliament. The amendments in Schedule 5 to the Treasury Laws Amendment (2018 Measures No. 4) Bill 2018 would provide:

       that a director’s obligations in relation to ensuring their company pays an estimate of superannuation guarantee charge or withholding liability commences at the same time as their obligations in relation to ensuring the company pays the underlying liability to which the estimate relates (rather than the date the company is given notice of the estimate); and

       for the removal of the three-month rule which applies before director penalties with respect to unpaid superannuation guarantee charge liabilities (and estimates of these liabilities) become ‘locked down’ and can no longer be remitted (subsection 269-30(2)). The three-month rule will be retained for PAYG withholding liabilities and associated estimates.

Collection of GST and other liabilities

4.19              An entity’s liability to pay GST (or entitlement to a refund) is linked to the entity’s assessed net amount for a tax period (Divisions 33 and 35 of the GST Act). An entity’s net amount for a tax period is the amount of GST imposed on the entity’s taxable supplies less the entity’s input tax credits, taking into account any adjustments (sections 17-5 and 17-10 of the GST Act).

4.20              A net amount includes any applicable LCT and WET (section 17-5(2) of the GST Act). The provisions under Subdivision 21-A of the A New Tax System (Wine Equalisation Tax) Act 1999 and Subdivision 13-A of the A New Tax System (Luxury Car Tax) Act 1999 allow for those taxes (and associated credits and adjustments) to be administered by the GST system.

4.21              An entity is only liable to pay a net amount to the Commissioner when the net amount is assessed (becoming an ‘assessed net amount’). GST operates under a full self-assessment system – an entity is deemed to have received an assessment when it lodges its return for a tax period (section 155-15 in Schedule 1 to the TAA 1953). Entities must lodge returns in accordance with Division 31 of the GST Act.

4.22              In addition, certain small businesses and not-for-profit entities are entitled to elect to pay GST by instalments. If an entity elects to pay GST by instalments, the instalment liabilities are subtracted from the entity’s net amount for the relevant tax period.

4.23              Non-compliant entities are able to undercut prices knowing that they do not intend to pay the GST collected, giving them a competitive advantage over compliant companies. Ensuring GST liabilities are collected is necessary to level the playing-field in the market and to help build confidence in the competitive process.

4.24              Illegal phoenix activity poses a particular risk to the integrity of the GST’s input tax credit system through claiming excess input tax credits, resulting in an excessive refund. When the excess is discovered, the Commissioner must amend the relevant GST assessment and pursue the excess as a debt (see subsection 35‑5(2) of the GST Act). The collection of this debt – as with GST debts more generally – may be obstructed by illegal phoenix activity.

Summary of new law

4.25              Schedule 3 to the Bill extends the estimates and director penalty regimes to GST liabilities, including LCT and WET. This will address illegal phoenix behaviour, including the non-payment of GST liabilities.

Comparison of key features of new law and current law

New law

Current law

The Commissioner can also collect estimates of anticipated GST liabilities, including LCT and WET liabilities.

The Commissioner can collect estimates of PAYG withholding and superannuation guarantee charge liabilities.

The Commissioner can also recover director penalties from company directors to collect outstanding GST liabilities, including LCT and WET liabilities, and estimates of those liabilities.

The Commissioner can recover director penalties from company directors to collect outstanding PAYG withholding and superannuation guarantee liabilities, and estimates of those liabilities.

Detailed explanation of new law

Estimates

4.26              The scope of the estimates regime in Division 268 in Schedule 1 to the TAA 1953 is expanded to allow the Commissioner to make estimates of an entity’s net amount under the GST Act. [Schedule 3, item 6, paragraph 268-10(1)(c) in Schedule 1 to the TAA 1953]

4.27              Any estimate of a net amount will necessarily include any applicable LCT and WET (see paragraph 4.20).

4.28              If the Commissioner makes an estimate of an entity’s net amount, the entity is liable to pay the amount of the estimate to the Commissioner.

4.29              Because an entity is not under an obligation to pay a net amount until it has been assessed, an amendment is made to Division 268 to deem net amounts to be payable in these circumstances. This deeming rule only applies for the purposes of Division 268 and does not otherwise allow the Commissioner to collect an amount without a valid assessment being made.

4.30              The deeming rule allows the provisions of the estimates regime that operate with respect to an underlying liability – PAYG withholding and superannuation guarantee charge liabilities in the current law – to apply to net amounts in a similar way. [Schedule 3, item 7, paragraphs 268‑10(1B)(a) and (d) in Schedule 1 to the TAA 1953]

4.31              For example, subsections 268-30(1) and (2) provide that a liability to pay an estimate is provable in bankruptcy if the relevant underlying liability is also provable. By deeming the net amount to have arisen and to be payable on the GST lodgement due date, the estimate will be provable in bankruptcy if that date is prior to the date of bankruptcy (see subsection 82(1) of the Bankruptcy Act 1966).

4.32              The net amount is deemed to arise and be payable on the day the entity was required to lodge its GST return. [Schedule 3, item 7, paragraphs 268-10(1B)(b) and (c) in Schedule 1 to the TAA 1953]

Paying an estimate (or an assessed net amount)

4.33              The nature of the net amount is also relevant for the purposes of section 268-20, which provides that discharging a liability to pay an estimate discharges the underlying liability to the same extent, and vice versa.

4.34              The amendments ensure that a payment towards an estimate of a net amount is also applied to a liability to pay an assessed net amount, whether that assessment has been made or not. Similarly, if an assessment has been made of a net amount and a liability arises, a payment towards that liability (including a payment of a director penalty) is also applied to the estimate liability. [Schedule 3, item 9, subsection 268-20(4A) in Schedule 1 to the TAA 1953]

Example 4.1 Estimate liability paid – no assessed net amount

Peter has failed to lodge his GST return in relation to a tax period. The Commissioner makes an estimate of Peter’s net amount in the amount of $20,000.

Peter pays $10,000 to partially discharge the estimate liability. The estimate liability is reduced to $10,000. Peter does not have a liability to pay an assessed net amount. The $10,000 Peter has paid towards his estimate liability is held-over until Peter lodges his GST return.

After making the initial $10,000 payment Peter lodges his outstanding GST return. Based on the information in the return, Peter is assessed as having an assessed net amount of $25,000 owing to the Commissioner. The held-over $10,000 is applied to the liability to pay the assessed net amount, the balance of which is reduced to $15,000.

Example 4.2 Estimate liability paid – assessment issued

Further to Example 4.1, Peter makes an additional payment of $5,000 towards the estimate liability. The estimate liability is reduced to $5,000. The balance of the liability to pay the assessed net amount is reduced to $10,000.

Example 4.3 Assessed net amount liability paid

Further to Example 4.2, Peter pays $10,000 to fully discharge the liability to pay the assessed net amount.

This amount is applied to Peter’s estimate liability but, because the amount is greater than that liability, only the amount of outstanding estimate liability ($5,000) is applied (subsection 268-20(5)), reducing the balance of liability to nil. Peter has now satisfied his obligations.

4.35              The examples above do not take into account the impact of the GIC on either liability. GIC applies to an estimate of a net amount if it remains undischarged after seven days following the entity’s receipt of the estimate notice. Where GIC applies, it accrues from the day the GST return was due (section 268-75). Payments of GIC follow the same principle in that they are also applied against any GIC attached to an underlying assessed net amount liability. [Schedule 3, item 11, subsection 268‑80(1A) in Schedule 1 to the TAA 1953]

Reducing an estimate

4.36              An entity may reduce the amount of an estimate by making a sworn statement that the entity’s net amount for the tax period is less than the estimate (or that it did not have a net amount) (section 268-40).

4.37              The sworn statement must set out the following facts in relation to the tax period:

       the entity’s net amount;

       the entity’s taxable supplies – including taxable supplies of luxury cars – and creditable acquisitions (within the meaning of the GST Act);

       the entity’s assessable dealings and wine tax credit entitlements (if any, within the meaning of the A New Tax System (Wine Equalisation Tax) Act 1999);

       the steps the entity took to comply with its obligations under Division 31 and 33 of the GST Act.

[Schedule 3, item 12, subsection 268-90(2B) in Schedule 1 to the TAA 1953]

Director penalties

4.38              The scope of the director penalty regime in Division 269 in Schedule 1 to the TAA 1953 is expanded to allow the Commissioner to recover director penalties in relation to companies’ unsatisfied liabilities to pay assessed net amounts and GST instalments under the GST Act. [Schedule 3, item 15, items 6 and 7 of the table in subsection 269-10(1) in Schedule 1 to the TAA 1953]

4.39              Any assessed net amount or GST instalment will necessarily include any applicable LCT and WET (see paragraph 4.20).

4.40              Company directors are under an obligation to ensure their company complies with its obligation to pay an assessed net amount or GST instalment liability (or, recognising the company may be insolvent, goes into administration or begins to be wound up) (section 269-15).

4.41              In relation to assessed net amounts, the obligation on the directors begins on the day the relevant tax period ends (the initial day). In relation to GST instalments, the initial day is the end of the GST instalment quarter. Directors that cease to be directors after the initial day are subject to the obligation, even if they cease to be directors before the payment due date.

4.42              As with the other categories of director penalties, the penalty arises when the director’s obligation is unsatisfied on the due date, in this case, the day the company is required to pay the assessed net amount or GST instalment (or 30 days after the appointment of a director appointed after that day) (section 269-20).

4.43              However, the penalty is only recoverable following a period of 21 days beginning when the Commissioner issues a director penalty notice to a director (section 269-25).

4.44              The amount of the penalty is the company’s unpaid liability to pay the assessed net amount or GST instalment (subsection 269-20(5)).

Example 4.4 Director penalties

Emma and Julie are directors of Swift Supply Pty Ltd.

Swift Supply is required to pay and report GST on a quarterly basis under section 27-5 of the GST Act. Swift Supply is required to lodge its return for the quarter ending 30 June 2019 by the due date of 28 July 2019 (section 31-8 of the GST Act).

Swift Supply lodges its return more than three months late on 1 November 2019. The return gives rise to a liability for Swift Supply to pay an assessed net amount of $100,000. The due date for the payment is 28 July 2019 (section 33-3 of the GST Act).

Emma and Julie are under an obligation to ensure Swift Supply pays the liability, enters administration or begins to be wound up. The obligation begins on the initial day, the day the tax period ended (30 June 2019).

Julie resigns from Swift Supply on 20 July 2019. This does not affect her obligation in relation to the company’s liability.

Swift Supply is never in a position to pay the liability. As such, both Emma and Julie were required to place the company into administration or begin winding it up. This does not happen on or before the due date of 28 July 2019 and the director penalties begin to apply from this date.

The Commissioner issues director penalty notices to Emma and Julie on 1 February 2020. The Commissioner may begin recovery proceedings on or after 23 February 2020.

Remission of penalty

4.45              The penalty may be remitted if the director complies with the obligation before the director penalty notice is issued or within 21 days of the day the notice is issued (subsection 269-30(1)).

4.46              However, if the director complies with their obligation in relation to an assessed net amount by placing the company into administration or beginning to wind up the company, the full amount of the penalty is only remitted if this is done within three months of the relevant due date. The end of the three-month period is the lockdown date for the penalty.

4.47              Where the company enters administration or begins to be wound up after the lockdown date, only the amount of the company’s assessed net amount liability that was calculated by reference to information reported to the Commissioner before the end of the period three months after the due date is remitted. If the assessed net amount is based on a return lodged after the lockdown date, a default assessment or an amended assessment issued by the Commissioner, this may result in the penalty being locked down in whole or in part and not being remitted. [Schedule 3, item 17, item 5 of the table in subsection 269-30(2) in Schedule 1 to the TAA 1953]

4.48              If a director is appointed to the company during or after the three-month period, the full amount of the director’s penalty can be remitted within three months of their appointment. [Schedule 3, item 19, subsection 269-30(3) in Schedule 1 to the TAA 1953]

Example 4.5 Remission of penalties

Further to Example 4.4, Kerrie is appointed as a director of Swift Supply on 15 November 2019 and is immediately under the obligation to ensure Swift Supply pays the liability, enters administration or is wound-up. The penalty arises for Kerrie after 30 days on 15 December 2019.

The Commissioner also issues a director penalty notice to Kerrie on 1 February 2020.

Emma and Kerrie place Swift Supply into administration on 10 February 2020.

The original directors, Emma and Julie, satisfy the first condition to have their penalties remitted because their obligation is satisfied on 10 February 2020, before the end of the 21‑day period on 22 February. However, because Swift Supply entered administration more than three months after the company’s due date of 28 July, the penalty is locked down. The entire amount of the penalty is locked down because the company’s GST return for the June quarter was more than three months late.

As a new director, Kerrie is entitled to a full remission of the penalty because Swift Supply entered administration:

       within 21 days of the director penalty notice being issued to Kerrie; and

       within three months of Kerrie being appointed a director.

Example 4.6 Partial remission of penalty

Aaron is the sole director of Tangent Communications Pty Ltd.

Tangent Communications is required to pay and report GST on a quarterly basis under section 27-5 of the GST Act. Tangent Communications is required to lodge its return for the quarter ending 30 June 2019 by the due date of 28 July 2019 (section 31-8 of the GST Act).

Tangent Communications lodges its return on 23 July 2019. The return gives rise to a liability for Tangent Communications to pay an assessed net amount of $150,000. The due date for the payment is 28 July 2019 (section 33-3 of the GST Act).

Aaron is under an obligation to ensure the company pays the liability, enters administration or begins to be wound up. The obligation begins on the initial day, the day the tax period ended (30 June 2019).

Tangent Communications is never in a position to pay the liability. As such, Aaron was required to place the company into administration or begin winding it up. This does not happen on or before the due date of 28 July 2019 and the director penalty begins to apply from this date.

On 1 September 2019, Tangent Communications provides further information to the Commissioner to correct an error in the company’s GST return and requests an amended assessment. The Commissioner agrees to issue an amended assessment to the company. Under this assessment, the company has an assessed net amount of $200,000. This does not affect the due date for the company to pay the amended assessed net amount (28 July 2019).

On 15 January 2020, the Commissioner further amends the company’s assessed net amount for the period ending 30 June 2019, increasing the assessed net amount to $220,000. This does not affect the due date for the company to pay the amended assessed net amount (28 July 2019).

On 1 February 2020, the Commissioner issues a director penalty notice to Aaron for the company’s outstanding $220,000 liability. The Commissioner may begin recovery proceedings on or after 23 February 2020.

Aaron places Tangent Communications into administration on 10 February 2020, before the end of the 21‑day period on 22 February.

Because Tangent Communications lodged a timely GST return for the relevant period, the entire penalty is not locked down. However, because the information the company provided to the Commissioner led to an understatement of the company’s assessed net amount, the shortfall amount ($20,000) is locked down. The remaining director penalty amount of $200,000 is remitted.

4.49              If the director complies with their obligation in relation to a GST instalment by placing the company into administration or beginning to wind up the company within 21 days of the day the Commissioner issues the director penalty notice, the penalty is remitted in full (subsection 269‑30(1)). [Schedule 3, item 18, Note 3 to subsection 269-30(2) in Schedule 1 to the TAA 1953]

4.50              If a director complies with their obligation because the company pays the outstanding assessed net amount or GST instalment liability, the penalty is remitted to the same extent, regardless of when this occurs.

Defences

4.51              The defences currently in Division 269 apply in relation to penalties for unpaid assessed net amounts and GST instalment liabilities (section 269-35). These include the defences that the director was unable to comply with the obligation due to illness or other good reason, or that the director took all reasonable steps to comply with the obligation.

4.52              An amendment is made to allow a director to claim a defence to the extent the penalty was due to the company adopting a reasonably arguable position and the company took reasonable care in connection with applying the GST Act. [Schedule 3, items 20 and 21, subsection 269-35(3A) in Schedule 1 to the TAA 1953]

Application to estimates of net amounts

4.53              Because of the amendments to the Division 268, Division 269 applies to estimates of net amounts.

4.54              The initial day for the directors’ obligation in relation to the company’s liability to pay an estimate of a net amount is the day the relevant tax period ended. This aligns with the initial day for assessed net amounts. [Schedule 3, item 16, paragraph 269-10(5)(ba) in Schedule 1 to the TAA 1953]

4.55              The entire amount of a penalty associated with an estimate of a net amount is locked down and cannot be remitted if the obligation is satisfied by the company entering administration or beginning to be wound up more than three months after the day the company was required to lodge its GST return. [Schedule 3, item 17, item 6 of the table in subsection 269‑30(2) in Schedule 1 to the TAA 1953]

4.56              Other than the features described above, Division 269 applies to these estimates in the same way it applies to other company liabilities that are subject to the director penalty regime.

Consequential amendments

4.57              Consequential amendments are made to update the simplified outlines and objects provisions for Divisions 268 and 269, and the heading to Division 268. [Schedule 3, items 2, 3, 4, 5, 13 and 14, sections 268-1 and 269-1, paragraph 268-5(c), subparagraphs 269-5(a)(iii) and (iv), and the heading to Division 268 in Schedule 1 to the TAA 1953]

4.58              An amendment is made to an example in Division 268 to reflect the fact the Commissioner cannot initiate proceedings to recover a net amount (only an assessed net amount or an estimate of a net amount). [Schedule 3, item 8, the example to subsection 268-20(2) in Schedule 1 to the TAA 1953]

4.59              An amendment is made to section 268-30 to ensure that the liabilities admitted as proof in bankruptcy cannot be duplicated. In particular:

       a liability to pay an estimate of a net amount cannot be admitted as proof if a liability to pay an assessed net amount for the same tax period has already been admitted as proof; and

       if an estimate liability has been admitted as proof, the liability to pay an assessed net amount can only be admitted if it exceeds the outstanding estimate liability.

[Schedule 3, item 10, subsection 268-30(4A) in Schedule 1 to the TAA 1953]

4.60              An amendment is made to a note in the GST Act to highlight that a deemed assessed net amount that arises because an excessive GST refund is reduced (see paragraph 4.24) is subject to the amended estimates and director penalty regimes. [Schedule 3, item 1, the note to subsection 35-5(2) of the GST Act]

Application provisions

4.61              The amendments in Schedule 3 commence on the later of:

       the first day of the quarter following Royal Assent; and

       the commencement of Schedule 5 to the Treasury Laws Amendment (2018 Measures No. 4) Bill 2018.

[Item 10 of the table in subclause 2(1) of the Bill]

4.62              The amendments outlined in this Chapter rely heavily on the framework for the director penalties as amended by the other Bill. It is not practical for these amendments to commence prior to that Bill.

4.63              The amendments apply to tax periods that start on or after commencement. [Schedule 3, item 22]


Chapter 5         
Retention of tax refunds

Outline of chapter

5.1                  Schedule 4 to the Bill authorises the Commissioner to retain tax refunds where a taxpayer has failed to lodge a return or provide other information to the Commissioner that may affect the amount the Commissioner refunds. This ensures taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.

Context of amendments

5.2                  Part IIB of the TAA 1953 provides for the treatment of money that is paid to the Commissioner, or is held by, or is owing to the Commissioner, in relation to taxpayers’ tax affairs. The provisions allow the Commissioner to apply money received against a taxpayer’s tax debts and require the Commissioner to pay refunds in certain circumstances.

5.3                  Subsection 8AAZC(1) provides the Commissioner with a broad discretion to establish ‘one or more systems of accounts for primary tax debts’, which are known as Running Balance Accounts (RBAs).

5.4                  Under the definition of a ‘primary tax debt’ (section 8AAZA), an RBA may include tax debts that are due but not yet payable to the Commonwealth, as well as debts that are due and payable to the Commonwealth.

5.5                  The Commissioner may also maintain other systems of account such as income tax accounts, which are not RBAs.

Application of payments and credits

5.6                  Division 3 of Part IIB contains two methods for the application of payments received by the Commissioner and credits arising under the tax laws. Method One (section 8AAZLA) allows the Commissioner to apply the amount to an RBA. Method Two (section 8AAZLB) applies in a similar way to non-RBA tax debts.

5.7                  Both methods apply the payment or credit to a particular debt or RBA. If the payment or credit is not exhausted after being applied to the particular debt or RBA, it gives rise to an ‘excess non-RBA credit’ (subsections 8AAZLA(3) and 8AAZLB(3)) and, in the case of an RBA, an equivalent RBA surplus (section 8AAZA).

5.8                  An excess non-RBA credit or RBA surplus is a credit the Commissioner must apply in accordance with the provisions in Division 3 (paragraphs 8AAZL(1)(b) and (c)). That is, the provisions may apply multiple times in relation to a particular credit amount until it is exhausted.

Payment of refunds

5.9                  Only when a credit (including an excess non-RBA credit or RBA surplus) is not able to be applied under Division 3 (because there are no remaining debts), is the Commissioner required to refund the amount to the taxpayer (section 8AAZLF). Following the Full Federal Court decision in Commissioner of Taxation v Multiflex Pty Ltd (2011) 82 ATR 153, this obligation must be performed 'within a time fixed by what is reasonably necessary to make that refund'. Of itself, this period does not allow the Commissioner to verify information or undertake other actions.

5.10              This obligation to pay refunds is subject to the Commissioner’s discretion to retain refunds in certain circumstances, including where the taxpayer has failed to provide certain information – including a BAS or PRRT notice (section 8AAZLG), or a Single Touch Payroll notification under Division 389 in Schedule 1 to the TAA 1953 (section 8AAZLGB), or where the Commissioner is verifying information provided by the taxpayer (section 8AAZLGA).

5.11              Under section 8AAZLG, the Commissioner may retain the refund until the taxpayer provides the relevant notification to the Commissioner, or the Commissioner makes or amends an assessment of the amount. Under section 8AAZLGB, the Commissioner may retain the refund until they become reasonably satisfied that the taxpayer does not have to give the relevant notification under the Single Touch Payroll provisions in Division 389 in Schedule 1 to the TAA 1953 or does not have a PAYG withholding liability. The Commissioner must pay interest on the amount under the Taxation (Interest on Overpayments and Early Payments) Act 1983 if the refund is further delayed.

5.12              Taxpayers engaged in illegal phoenix activity will often not lodge or will delay lodging returns that will result in a tax liability becoming due. However, these taxpayers may lodge a return (often a BAS) where it will result in a credit arising. Operators may use the delay in the tax liability arising to obtain a refund they would otherwise not be entitled to, strip assets from the company or otherwise frustrate the collection of the liability.

5.13              In more egregious cases, taxpayers with outstanding lodgements may claim a refund consisting of false credits and strip the refund from the company before they place their companies into liquidation. Liquidators are often not in a position to recover these refunds, which has the effect of diluting non-government creditors’ claims in the liquidation.

Summary of new law

5.14              The Commissioner may retain tax refunds where a taxpayer has failed to lodge a return or provide other information that may affect the amount the Commissioner refunds. This ensures taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.

Comparison of key features of new law and current law

New law

Current law

The Commissioner may also retain a refund to a taxpayer that has other outstanding lodgements or information that needs to be provided to the Commissioner.

The Commissioner may retain a tax refund to a taxpayer that has an outstanding notification under the BAS or PRRT provisions.

Detailed explanation of new law

5.15              Schedule 4 to the Bill extends the operation of section 8AAZLG to authorise the Commissioner to retain refunds from a taxpayer that has a failed to lodge a return or provide other information that may affect the amount the Commissioner refunds. [Schedule 4, item 1, subparagraph 8AAZLG(1)(b)(iii) of the TAA 1953]

5.16              The Commissioner may retain the refund until the return or other information is provided, or the Commissioner makes an assessment of the underlying amount. The Commissioner must then refund the amount or apply a separate discretion to further retain the amount (for example, section 8AAZLGA).

5.17              Where a new tax liability arises before the date the Commissioner must pay a refund, the Commissioner is able to apply the amount that would otherwise have been refunded against the new liability. This ensures taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.

5.18              If the taxpayer is a full self-assessment taxpayer, the lodgement of an outstanding income tax return causes the taxpayer to be taken to have received an assessment, crystallising the taxpayer’s income tax liability (see section 166A of the Income Tax Assessment Act 1936 and section 5-5 of the Income Tax Assessment Act 1997).

5.19              The introduction of this discretion does not affect the existing discretion the Commissioner has to retain refunds where a notification under the Single Touch Payroll, BAS or PRRT provisions is outstanding. The Commissioner’s existing administrative arrangements (see Practice Statement Law Administration 2011/22) in relation to this discretion are unaffected by these amendments.

5.20              The Commissioner will release guidance to support the administration of the discretion in the amendments. The Government envisages the Commissioner will apply the new discretion in relation to taxpayers identified as a high-risk, including those engaging in illegal phoenix activity.

Example 5.1 Retention of refunds

Fred is the sole shareholder and director of Super Express Deliveries Pty Ltd, which carries on a business as a courier. It lodges its BAS for the quarter ending 30 June 2019. The lodgement triggers an assessment of the entity’s GST liability for the quarter, which reveals the entity is entitled to a credit of $200,000.

At the time, Super Express Deliveries Pty Ltd does not have any outstanding tax debts and would ordinarily be entitled to have the credit paid out as a refund. However, Super Express Deliveries Pty Ltd has not lodged its income tax return for the 2017-18 income year.

The Commissioner reviews the affairs of the Super Express Deliveries Pty Ltd and Fred. The Commissioner identifies that, over the past five years, Fred has owned and operated three other courier companies, each of which has entered into liquidation owing significant debts to its employees, the Commissioner and other creditors. The Commissioner learns ASIC is investigating Fred for engaging in illegal phoenix activity.

The Commissioner exercises his discretion to retain the $200,000 refund until Super Express Deliveries Pty Ltd lodges its outstanding income tax return.

On learning that the refund will not be paid, Fred lodges the outstanding income tax return on behalf of Super Express Deliveries Pty Ltd. The return results in the company being taken to have received an assessment and the crystallisation of a liability of $150,000.

The Commissioner applies the $200,000 credit against the income tax liability, reducing it to nil. The Commissioner pays a refund of $50,000 to Super Express Deliveries Pty Ltd.

The Commissioner continues to explore other avenues to recover the unpaid tax liabilities from Fred’s other companies.

Application provisions

5.21              The amendments in Schedule 4 commence on the first day of the quarter following Royal Assent. [Item 11 of the table in subclause 2(1) of the Bill]

5.22              The amendments apply to refunds the Commissioner is otherwise required to pay on or after commencement. [Schedule 4, item 2]


Chapter 6         
Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Phoenixing offences and property transfers to defeat creditors

6.1                  This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

6.2                  Schedule 1 to the Bill introduces new phoenixing offences to prohibit creditor-defeating dispositions of company property, penalise those who engage in or facilitate such dispositions, and allow liquidators and ASIC to recover such property.

6.3                  In particular, the amendments in this Schedule create the following offences and civil penalty provisions:

       a criminal offence that applies to officers that engage in conduct that results in the company making a prohibited creditor-defeating disposition;

       a civil penalty provision that applies to officers that engage in conduct that results in a company making a disposition where a reasonable person would have known the disposition was a prohibited creditor-defeating disposition;

       a criminal offence that applies to persons that procure, incite, induce or encourage a company to make a prohibited creditor-defeating disposition;

       a civil penalty provision that applies to a person that procures, incites, induces or encourages a company to enter into a disposition where a reasonable person would have known the disposition was a prohibited creditor-defeating disposition;

       a strict liability criminal offence that applies to a person that does not comply with an ASIC order for the recovery of property disposed of under a voidable creditor-defeating disposition.

Human rights implications

6.4                  Consideration has been specifically given to the guidance in the Parliamentary Joint Committee on Human Rights’ Guidance Note 2: Offence provisions, civil penalties and human rights and to the Attorney‑General’s Department’s Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, September 2011 Edition.

6.5                  The amendments in Schedule 1 engage the right to be presumed innocent until proven guilty according to law under Article 14(2) of the ICCPR.

6.6                  Article 14(2) of the ICCPR protects the right of a person charged with a criminal offence to be presumed innocent until proved guilty according to law. Generally, consistency with the presumption of innocence requires the prosecution to prove each element of a criminal offence beyond reasonable doubt. It may, however, be appropriate to limit this right in certain circumstances.

6.7                  The amendments provide for some offence-specific defences where the evidential burden is shifted from the prosecution to the defendant. In these cases, a defendant has an evidential burden to point to some evidence that suggests a reasonable possibility that a matter exists or does not exist.

6.8                  The following defences apply to the criminal offences established by the amendments (other than the offence for failing to comply with an ASIC order):

       the disposition was made under a deed of company arrangement or scheme of arrangement;

       the disposition was made by the company liquidator or provisional liquidator;

       the disposition was made in connection with a course of action and the safe harbour applies to the defendant.

Creditor arrangement defence

6.9                  The main criminal offence provisions do not apply if the defendant can meet an evidential burden that the impugned disposition was made under a deed of company arrangement or scheme of arrangement.

6.10              In this case, it is appropriate for a defendant to have the burden of pointing to some evidence that the disposition is made under a deed of company arrangement or scheme of arrangement because it will be peculiarly within the defendant’s knowledge. Defendants are likely to:

       be an officer of the company or have a strong connection to the company;

       have been involved in a court process related to a scheme of arrangement;

       be parties to a deed of company arrangement; and

       have access to company records and documents that would establish a deed of company arrangement or scheme of arrangement was entered into.

6.11              It would also be significantly more difficult and costly for the prosecution to disprove the fact that the disposition was under a deed of company arrangement or scheme of arrangement.

Liquidator defence

6.12              The second of the offence-specific defence is that the main criminal offence provisions do not apply to a liquidator or provisional liquidator of the company that causes a company to make the impugned disposition.

6.13              In this case, it is appropriate for a defendant to point to some evidence that the relevant agreement or transaction was entered into by a liquidator because the circumstances of the disposition will be peculiarly within the defendant’s knowledge.

6.14              It would also be significantly more difficult and costly for the prosecution to disprove the fact that the relevant disposition was not by a liquidator.

Safe harbour defence

6.15              A company officer or other person relying on the safe harbour defence will be required to point to evidence that suggests that they started to develop a course of action reasonably likely to lead to a better outcome for the company after starting to suspect the company was insolvent.

6.16              It is appropriate for an evidential burden to apply to a person wishing to rely on safe harbour because:

       details about the courses of action developed are peculiarly within the person’s knowledge; and

       it would be significantly more difficult and costly for the prosecution to disprove the possibility that the person developed a course of action reasonably likely to lead to the better outcome for the company.

Civil penalty provisions

6.17              Civil penalty provisions within the Corporations Act 2001 currently allow courts to order individual defendants to pay penalties of up to $200,000 where there has been a breach of a relevant civil penalty provision. Once a court decides a breach of a civil penalty provision has occurred, ASIC can apply to the Court to seek disqualification orders of relevant persons from managing corporations for a period of time the Court considers appropriate.

6.18              The amount of civil penalties the court may impose will be increased under the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018. The maximum penalty for contravening a civil penalty provision for an individual is increased to either 5,000 penalty units or the benefit derived or detriment avoided, multiplied by three. The increased penalty ensures civil penalties for individuals proportionately align with the increase in civil penalties for bodies corporate, and act as a sufficient deterrent for misconduct.

6.19              The Parliamentary Joint Committee on Human Rights’ Guidance Note 2 observes that civil penalty provisions may engage criminal process rights under Article 14 of the ICCPR, regardless of the distinction between criminal and civil penalties in domestic law. This is because the word ‘criminal’ has an autonomous meaning in international human rights law. When a provision imposes a civil penalty, an assessment is therefore required as to whether it amounts to a ‘criminal’ penalty for the purposes of Article 14 of the ICCPR.

6.20              While the civil penalty provisions are not classified as criminal under Australian law, consideration must be had to the nature, purpose and severity of the penalties.

6.21              While the purpose of the civil penalty is to act as a sufficient deterrent for misconduct, the penalties apply to people who, in light of their conduct, should be aware of their obligations, such as company directors, officers and professional advisers.

6.22              In practice, it is intended that courts would determine which method provides the greatest penalty, and then use discretion to impose an appropriate penalty up to that amount. The penalty is the maximum that a court can impose, taking into account the facts and circumstances of each case.

6.23              While the civil penalty amounts are intended to deter misconduct, neither of the civil penalty provisions carry a penalty of imprisonment. The civil penalty provisions should not be considered ‘criminal’ for the purpose of human rights law due to their application in the regulatory environment for corporate insolvency. Therefore, the civil penalty provisions do not create criminal offences for the purposes of Article 14 of the ICCPR.

Conclusion

6.24              To the extent that the Schedule engages the rights under Article 14 of the ICCPR, it is compatible with human rights as the offences and civil liability provisions are appropriate because it:

       achieves the legitimate objective of protecting a company’s creditors from serious misconduct;

       is rationally connected to the objective by improving the likelihood of compliance with the law; and

       imposes proportionate penalties for misconduct.

Improving the accountability of resigning directors

6.25              This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

6.26              Schedule 2 to the Bill ensures directors are held accountable for misconduct by preventing directors from improperly backdating resignations or ceasing to be a director when this would leave the company with no directors. This will reduce the incidence of illegal phoenix activity and its effect on employees, creditors and government revenue.

6.27              The amendments in this Schedule make it a strict liability offence for a person to fail to notify ASIC of certain Court orders affecting their position as director of a company.

Human rights implications

6.28              Consideration has been specifically given to the guidance in the Parliamentary Joint Committee on Human Rights’ Guidance Note 2: Offence provisions, civil penalties and human rights and to the Attorney‑General’s Department’s Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, September 2011 Edition.

6.29              This Schedule engages the right to a fair trial in Article 14 of the ICCPR.

6.30              A strict liability offence is considered appropriate in the case of non‑compliance with this obligation. It is necessary to strongly deter misconduct that can have serious detriment for the accuracy of the company registry, which members of the community may rely when dealing with companies and their directors.

6.31              The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact. This defence maintains adequate checks and balances for persons who may be accused of such offences.

6.32              The Attorney General’s Department’s Guide suggests an appropriate penalty for a strict liability offence is 60 penalty units for an individual. While the amendments depart from the Guide, the penalty is at the lower end of the penalty scale and does not include imprisonment.

6.33              The offence and the penalty is consistent with the strict liability offence for failing to notify ASIC that a company director has ceased to be a director (subsection 205B(5) of the Corporations Act 2001 (as amended by the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018)).

Conclusion

6.34              To the extent that the Schedule engages the rights under Article 14 of the ICCPR, it is compatible with human rights as the strict liability offence is appropriate because it:

       achieves the legitimate objective of protecting the general public from misconduct;

       is rationally connected to the objective by improving the likelihood of compliance with the regulatory regime; and

       imposes proportionate penalties for misconduct.

GST estimates and director penalties

6.35              This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

6.36              Schedule 3 to the Bill allows the Commissioner to collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities in certain circumstances.

6.37              Director penalties are a mechanism to make company directors personally liable for certain tax debts of the company. They are not criminal in nature.

Human rights implications

6.38              The Schedule does not engage any of the applicable rights or freedoms.

Conclusion

6.39              This Schedule is compatible with human rights as it does not raise any human rights issues.

Retention of tax refunds

6.40              This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

6.41              Schedule 4 to the Bill authorises the Commissioner to retain tax refunds where a taxpayer has failed to lodge a return or provide other information to the Commissioner that may affect the amount the Commissioner refunds. This ensures taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.

Human rights implications

6.42              The Schedule does not engage any of the applicable rights or freedoms.

Conclusion

6.43              This Schedule is compatible with human rights as it does not raise any human rights issues.