BRADSHAW, Mr Michael, Senior Adviser, Department of the Treasury
DARMANIN, Mr Grant, Senior Director/Phoenix Risk Manager, Australian Taxation Office
DAW, Mr Haydn, Manager, Small Business and Trusts Unit, Department of the Treasury
PANFILO, Mrs Geraldine, Director, Superannuation, Australian Taxation Office
CHAIR: Welcome. Although the committee does not require you to give evidence on oath, I should advise you that these proceedings are legal proceedings of the parliament and therefore have the same standing as proceedings of the parliament. Do you wish to make an opening statement to the committee?
Mr Daw : Yes, I have an opening statement. As you are probably aware, this measure makes changes to the tax laws to strengthen the obligations of company directors, to protect employee entitlements to superannuation and to counter fraudulent phoenix activity. Before I delve into the details of the measure, I think it is necessary to understand the existing director penalty regime. Prior to 1993 the ATO was a secured creditor and had preferential treatment in terms of chasing up certain tax debts. But that all changed in 1993, when they became an unsecured creditor and took a lower priority compared to others.
The trade-off with that change, though, was the introduction of the director penalty regime, which meant the ATO could pursue company directors in respect of unpaid tax amounts relating to withheld amounts. Under the director penalty regime, directors are required to make their companies do one of three things: comply with the obligations and pay to the Commissioner any amounts that they have withheld; appoint an administrator; or wind up the company. If the company does none of these things, the director is liable to pay a penalty equal to the amount of tax they have withheld but not remitted to the Commissioner. In cases where the director has not done any of those three things, the Commissioner is required to issue a notice and they cannot commence recovery proceedings until 21 days after that notice is issued.
There are some limitations with the existing director penalty regime: it only applies to PAYG withholding amounts in respect of salary and wages; it does not apply to superannuation amounts. The current recovery rules around the 21 days impede the efficient collection of the liabilities because phoenix operators can deliberately undermine the rules by going into liquidation shortly after the notice is issued and leave a trail of debts behind them, for which it is difficult to recover. Because of the nature of the tax system, which talks about withheld amounts in respect of salary and wages, it often does not become evident until after the end of the year that there is a significant debt in existence. It can mount up. It is not until people start claiming their tax credit entitlements at year's end that it becomes evidence that there has been non-compliance by company directors.
Turning to the things that the bill aims to do, firstly it modifies the director penalty regime so that it applies also to Super Guarantee amounts are not just to PAYG tax withheld amounts. It also allows the ATO to start recovery action in respect of a director penalty without issuing a director penalty notice. But it cannot do that until three months after the date of the initial liability arising, and provided the company has not reported the debt to the Commissioner. Finally, it denies directors entitlement to a tax credit in their own tax return if the actual amount of tax has not been passed on to the Commissioner. So there are really three dimensions to this bill.
There are a few important things to mention about the bill. One is that it is not a whole new regime; it builds on an existing regime, the director penalty regime. In terms of wider exposure to directors, the only wider exposure in respect of an existing regime is that it also is proposed that it applies to super guarantee debts as well. I heard in the previous evidence that there was some discussion that it was going to be a much wider regime and create much wider obligations. That is not quite the way I would tend to look at it; it is more an existing regime and an additional debt has been inserted into the director penalty regime—that is, the super guarantee.
The other important point to make is that the existing regime has defences for directors so that they are not inadvertently swept up and they continue to apply under these new rules. This means that if a director has good reason for not participating in the management of the company or the director has taken reasonable steps to cause the company to comply with its obligation then there are already existing defence mechanisms available so that they are not inadvertently swept up.
Treasury undertook quite an extensive consultation process both on the policy and on the draft legislation. An options paper was issued by the government in 2009-10. A range of comments came back in respect of that. Also, draft legislation was issued in July of this year that ran to August 2011. In summary, these measures are intended to make fraudulent phoenix behaviour less appealing to company directors and encourage them to make sure that they take prompt action in respect of passing on the money to the commissioner that they have withheld and belongs to others.
CHAIR: Thank you very much, and thank you for clarifying a lot of that. Can I just go back to something you said about the 21 days. I doubt that we will hear any evidence today from anyone who suggests that the super guarantee should not be collected in the same way as the PAYG. But there are questions about the 21 days and whether by removing the 21 days you inadvertently capture people who perhaps are just a bit sloppy. You said that you quite often do not know until you actually issue the 21-day notice that you are dealing with a phoenix company—is that right? Do you get any indication before the 21-day notice or is it the behaviour after that issuing that is the first flag?
Mr Daw : Directors and companies have the opportunity to report these amounts or they can just go unreported. Typically, in the case of phoenix activity, it would go unreported and it would not be until after the year end that it emerges that these amounts have been withheld and not remitted to the commissioner. Once that occurs, the tax office would issue a notice and the directors of the company would have 21 days to make good or to wind up the company. The new facility that the government has proposed is to allow the tax office to issue this notice after three months of the end of the quarter, provided they have not reported it or it has not gone unpaid.
Mr Bradshaw : Failure to report is a particularly important aspect. For some years now the pay-as-you-go withholding provisions have been crafted to encourage the prompt reporting of obligations, particularly since the removal of the criminal offence for failure to remit amounts withheld and the recasting of those provisions to omit that criminal offence and to encourage prompt reporting. If the ATO knows that you have an obligation and you have reported it, they are in a much better position to deal with you if you have any short-term cash flow problems or the like. If you are not only failing to pay but also failing to report, you are really not meeting the central obligations of the pay-as-you-go withholding system. The automatic three-month rule that Haydn explained only comes into play if you have made those dual failures—failure to pay and failure to report.
CHAIR: At the end of that three months, you can take actions to recover the money without 21 days. That is a change?
Mr Bradshaw : Yes.
CHAIR: In terms of phoenix activity, why is that change good?
Mr Daw : Under the current arrangements, a phoenix operator could continue to trade, not meet its obligations and wait for the notice to be issued. It knows it then has 21 days to deal with that notice. Usually that would mean dissolving the company and leaving a trail of debt. With the new arrangement, after three months, provided it has not been reported, the ATO can take immediate action without issuing a notice.
Mrs Panfilo : The super guarantee system is a self-assessment system, so employers do not need to report to us that they have made payments. This encourages engagement because if a director ensures that the company reports its obligation within three months after the due date, the director avoids being personally liable. It encourages that engagement and lets us know what the liability is. Then we can pursue the company or pursue the director via the 21-day director penalty notice.
CHAIR: Is there truth in the statement made by the previous witness that it is a very punitive approach for a person who might have inadvertently missed it?
Mrs Panfilo : The super guarantee law is not changing. There is nothing new. It has been around since 1992. Employers need to be aware of their obligations. This is really giving them five months to make sure that they report their liability. There is a bit of concern if after five months a director does not know what the super guarantee obligation of the companies is.
Ms O'DWYER: I do not know if you have had the benefit of looking at some of the other submissions as I do not know if they have been made public. Have you looked at the submission of the Australian Institute of Company Directors?
Mrs Panfilo : No.
Ms O'DWYER: I suspect that in the course of preparing this legislation you had discussions with the Australian Institute of Company Directors. Is that right?
Mr Daw : They put a submission in for the options paper in 2009-10, but they did not participate in the consultation on the draft legislation.
Ms O'DWYER: The reason I ask is that they have put forward a very strong submission that highlights concerns that they have around the drafting of legislation, noting that we are all in heated agreement that people with superannuation entitlements ought to be paid those superannuation entitlements. I think everybody is in heated agreement on that point; it is now just a matter of making sure that the legislation is appropriate to meeting those needs. The concerns raised by the Australian Institute of Company Directors highlight people who might inadvertently breach the law and how this puts more onerous obligations on directors and harsh penalties that may apply to those directors. Do you accept that concern?
Mr Bradshaw : It has already been explained that the existing laws for director penalties has well-established defences. I suppose there are two broad heads of defence. If for illness or other good reason the director was not involved in the management and it was not reasonable. The alternative is if the director took reasonable steps to ensure the company meets its obligations either to pay its debt properly or to go into voluntary administration or liquidation. These are well-established defences that have been there since 1993 in relation to withholding. Those defences apply equally to director penalties in relation to the super guarantee. They are mirrored also in the provisions which effectively deny credits.
Ms O'DWYER: People who are going to do the wrong thing are going to do the wrong thing, is one way of looking at it. For those people who do not fall into that category, do you have any figures for people who may inadvertently have not paid their entitlements and have made prompt payments within the 21-day period? Do you have any statistics that you can provide to the committee?
Mr Darmanin : The Tax Office does. I do not have with them with me, so if it pleases the committee, I can take that on notice.
Ms O'DWYER: Yes. I think it would be helpful for us to understand the people who inadvertently do not pay compared to the people who are involved in phoenix or fraudulent activity. Obviously we are not looking to catch those people who are not involved in fraud.
Mr Bradshaw : Madam Deputy Chair, do they explain what they mean by inadvertent?
Ms O'DWYER: This is the thing. We will ask them questions about all of that, but they are suggesting that there isn't any direct intention to deny people payment of their superannuation entitlements presumably and that when notified of that need they make then prompt payment. I am presuming that is what they mean when they talk about inadvertent.
Mr Daw : It would be a reasonable question to ask why the existing defences do not necessarily cover off on those examples.
Ms O'DWYER: So you would say that that it is adequately covered already under the existing defences?
Mr Daw : Without knowing the scenario they are describing, I would think yes. As my colleague Michael pointed out, the provisions have been around for quite some time since 1993, so those existing defence mechanisms have been operating for quite some time.
Ms Panfilo : Even so, under this new legislation, the director can still cause the company to pay the liability and be extinguished of his personal liability as he would under the 21-day rule or cause a company to enter into a payment arrangement if they are suffering cash-flow problems. So those remedies still exist.
Ms O'DWYER: I think we heard earlier that sometimes it can be difficult to determine what the superannuation entitlements might be and that is how presumably inadvertence has come about. We heard earlier evidence before from the institute that sometimes it is difficult to understand—unless I am misrepresenting the evidence that they presented before but that was my understanding of what they said.
Mr Daw : The super guarantee stuff has been around for quite some sometime. The obligations to permit that amount have been around for a significant period.
Ms Panfilo : The law is not changing around their obligations.
Ms O'DWYER: I have got some other questions. Can you give us some additional background about the number of people who would be presumably targeted by this change in the law? Do you have some statistics on the number of companies, the number of people, who would be targeted and the sorts of amounts that we are talking about in terms of superannuation.
Mr Darmanin : Our best estimate is that at any given time there are around 6,000 phoenix companies operating in Australia, and we estimate that, given that not all of them have a single director—some have two directors—somewhere between 7½ thousand and 9,000 company directors could be exposed in particular to this legislation. These are fraudulent phoenix operators; they are not just people making bad business decisions. The way the ATO is keen to administer this legislation is to target those that are quite clearly and intentionally doing the wrong thing. That is our best estimate of the population at this point in time. Most of them are operating, as I heard in the evidence before the break, in the SME market and they could have a business turnover of $2 million. We have had phoenix operators with turnovers in excess of $100 million. They are all in the SME market but having said that, they are also very active and prevalent in the micromarket, the below $2 million turnover market. We think that that is a fairly conservative estimate but that is our best based on the analysis we have conducted over the years.
Mr STEPHEN JONES: A couple of quick questions: what public policy reasons are there for extending the director liability provisions beyond those companies that have form? It was put to us by the institute earlier in evidence—and I think you were in the room—that the legislation should be amended to target only those companies that have got form, and I think we are using the shorthand as phoenix operators. What possible policy reasons do you proffer for extending beyond those companies with form?
Mr Daw : The way I would look at the question would be more to say that the director penalty regime already applies more broadly than to just phoenix companies. That is our base. This is in addition to an existing base. So whilst the director penalty regime does sweep up Phoenix type operators, it can also extend to other directors who have not had a trend of phoenixing in and out all the time. It is there to ensure that those directors do take seriously their obligations to remit amounts they have withheld on behalf of others. Imputing some sort of trend analysis or rule into the existing director penalty regime would be quite a change, because that is not what these amendments are about.
Mr STEPHEN JONES: The objective, then, is to ensure that workers get their superannuation. It shouldn't matter whether they're working for a company that has form or not if they are getting their superannuation paid.
Mr Bradshaw : Broadly, we understand that the government is trying to get better voluntary compliance from companies with their super guarantee obligations, yes.
Mr STEPHEN JONES: My second question goes to the issue of extending the liability to associates of directors. Could you explain to us why it is thought that that is a necessary extension of the liability?
Mr Daw : Sometimes it might be the case that an associate might be a wife or spouse of the company director who just so happens to be the husband or wife. It facilitates outcomes by which amounts can be paid to one party but, in reality, it is to the other party. It is an integrity measure to make sure that there is not the opportunity to undermine the rules so that people who are working in conjunction cannot undermine and exploit these rules. The associate rules are a hook, or a label, in the tax law to make sure that we can sweep up people who have that association and who should be treated as a single entity, so that they cannot manipulate the tax laws. This would be such a case.
Mr STEPHEN JONES: It was put to us in earlier evidence that the provisions as currently drafted will catch the innocent or gullible bystander in an unintended way. What do you say to that suggestion?
Mr Daw : The defences that we spoke about before are also available to associates. There might be some additional features that apply particularly to associates, so that—
Mr STEPHEN JONES: The good reason defence—
Mr Daw : Yes, or they took reasonable steps. They would apply.
Mr Bradshaw : There are a number of additional conditions, as Haydn was saying, for an associate to have effectively their credits denied. At least one of the previous witnesses suggested an associate might be more readily caught in that element of the measure, but in fact there are a number of additional conditions relating to their relationship with the director and whether they knew that the company hadn't paid the amounts withheld. There needs also to be satisfaction that they did not take various other steps they could have taken, including reporting the failure to one of a number of relevant authorities.
Mr STEPHEN JONES: So it is not a strict liability; there has to be some mental element. They have to have some knowledge—in fact, a bit more than knowledge by the sound of it.
Mr Bradshaw : Indeed. Even overlaid on that, both for the director and for the associate, is that their credit cannot effectively be denied unless it is fair and reasonable for the commissioner to issue the relevant notice. Not only must the primary conditions be satisfied, there is overlaid an additional test as to fairness and reasonableness for the denial of the credit.
Mr STEPHEN JONES: After the three-month trigger of the non-reportage and non-payment, there is in normal circ*mstances the 21-day notice or the waiving or the removal of the obligation of the commissioner to issue the 21-day notice. I suspect this is a question for the tax office: what is the operational reason for that?
Mrs Panfilo : As I mentioned before, it encourages engagement with the tax office. Because the super guarantee is a self-assessment regime, we don't know sometimes whether employers are making contributions for their employees, so it does encourage engagement. The director can avoid the personal obligation by ensuring that the company reports the obligation. It does not necessarily have to pay, as long as it reports. The time frame is actually five months from the end of the quarter. The super guarantee should be paid by the 28th day of the month after the quarter. If that is not met, the employer has an obligation to lodge a statement with the tax office 28 days after that, so two months after. That is the current law. This now gives them a further three months to report their liability to us. If they do that then the director is not personally liable. And then we have the normal DPN regime whereby we can issue a notice and give them the 21 days. So it encourages that engagement, and it gives us a better picture of the employer—of whether they are compliant or not. It also helps us to identify employers who are trying to avoid their obligations and stay unnoticed.
Mr Darmanin : Perhaps I could add to my colleague's evidence. Fraudulent phoenix operators, almost to a person, do not report, they do not lodge and they do not pay. We have to go out and identify them and quantify the liability, sometimes using forensic-style investigative or audit techniques. This particular measure encourages them to come into our system to talk to us or seek some insolvency advice from a professional or face the consequences of personal liability should they decide to not report and pay those liabilities—those PAYGW and potentially superguarantee liabilities—when they are three months older or more. So we may still have to go out and locate them, but when we do we potentially have a new weapon—a new piece of law—to attach personal liabilities to them. We collectively believe that will be a fairly powerful disincentive. The way they currently operate, as colleagues from Treasury advised, is to wait until they get a direct penalty notice and then put their company into administrational liquidation within 21 days, essentially wiping their hands of that formal liability. They start a new company and carry on the same business again. That is the reality.
Mr STEPHEN JONES: So the notice of 21 days is effectively a tip-off for them under the current arrangements. Removing the 21-day notice means you can effectively put in place action to collect those unpaid superannuation payments.
Mrs Panfilo : Yes.
Mr Bradshaw : There are firms that tout their business who, if you have a director penalty notice and you contact them, will get you into voluntary administration—within hours, they claim.
CHAIR: Because Mr Jones's question will not end up in the report, if would be nice if you could just give a few sentences on the notice of 21 days as a tip-off. Your words will end up in the report, not Stephen's. Is that okay?
Mr Bradshaw : Yes. The issue of the notice effectively tips them off, and then they meet the professionals who provide that service.
Mr BUCHHOLZ: It's the ombudsman revisited! Anyway, these amendments reduce the scope for companies to engage in fraudulent phoenix activities or escape liabilities and payments for employee entitlements. So we have 6,000 potential phoenix companies. I want to focus on the part of the bill that speaks to the fraudulent phoenix company. You mentioned earlier on that the company goes into liquidation to avoid making the payment. Under the expansion of the current rules, aren't the employees—after the administrators or the receivers—one of the priorities to be the first recipient of the sale, at least in some cases?
Mr Darmanin : The vast majority of the entities that are directly involved in phoenixing, the companies do not have assets. The assets are held in another part of the business group. So it is very easy—almost seamless—to liquidate that entity, move the workers to a new entity and carry on. Quite often the workers are oblivious to the fact that their entitlements have not been met.
Mr BUCHHOLZ: What about the tax liability? You implied that they walk away scot free. Does the Taxation Office share the same view—that they walk away scot free and that there is no intent for the taxation department to recoup that?
Mr Darmanin : Through the liquidation process we make every effort to ensure that that liability is more or less quarantined against that entity. So once that entity is dissolved our ability to recover against that entity also typically dissolves. There are occasions when we can demonstrate fraud—for example, we have evidence to suggest a genuine fraud against a commissioner or documents that support a fraud being perpetrated—and we do refer those matters to the Commonwealth Director of Public Prosecutions and they prosecute company directors for phoenix type activities. There is no real offence in any legislation about phoenixing, but it is a fraud against the Commonwealth.
Mr BUCHHOLZ: To go and get another ABN, to start the next company up, isn't there a tick-and-flick sheet where they ask you if you have any current tax liabilities outstanding?
Mr Darmanin : I do not believe there is, but we can take that on notice as well to confirm.
Mr BUCHHOLZ: If the intent of the bill is to catch those phoenix operators and the concern from some of my colleagues is that in throwing the net we catch a wider audience than the bill intends, are there any other options that you could suggest? Are there any mechanisms that come to mind, in giving an ABN to the same party that has form, to use this terminology, or other tools available to you?
Mr Darmanin : There are, but phoenix operators, particularly the fraudulent ones, are very adept at flying under the radar, so to speak. When they come back into the ATO's systems, they will quite often use as the director someone who is not directly related to the former group. It might be someone that they engage, pay or hire or a name they pick from the telephone book. When we profile that individual when it comes through, quite often the direct links to that former business are not obvious. I take your point, though, that if we ask them questions we may get some answers, but phoenix operators do not like telling the truth. If they did, we would not—
Mr BUCHHOLZ: Are you suggesting that, if this bill were enacted, phoenix operators will start telling the truth?
Mr Darmanin : We would expect some of them to. We would expect those who might be thinking of becoming more fraudulent in their nature to have a second thought and comply because of the added personal liability that could potentially attach to their actions. It would also give us more ability to recoup unpaid taxes from these directors personally.
Mr BUCHHOLZ: I would suggest that the person you are not seeking to capture in this would react to the bill, but those at the very core of what this is about will continue on their fraudulent ways. Do you have any other suggestions of mechanisms that could potentially capture these guys?
Mr Darmanin : We do, but I do not know if—
Mr Daw : We would have to go away and think about that. It is not within the confines of this bill.
Mr BUCHHOLZ: Surely it is within the confines. You are speaking to the part of the bill's explanatory memorandum that says:
These amendments reduce the scope for companies to engage in fraudulent phoenix activity or escape liabilities and payments of employee entitlements …
I thought that was what we were just speaking about. I was not trying to go beyond the scope of the inquiry.
Mr Daw : The ability of the commissioner to issue a notice without waiting 21 days is quite a significant deterrent in respect of phoenix operations because it attaches a personal liability to the company director. I think the issue about phoenix operators starting up again and trying to create disincentives in that sort of territory is a related issue. This is all about trying to collect the tax. I am sure the ATO have lots of systems in place for collecting evidence and lots of investigatory powers that try to make sure that we do not make it easy for them.
Mr BUCHHOLZ: That is my very point. You are failing to convince me that this bill will actually go to seeking the operations of phoenix operators.
Mrs Panfilo : It will discourage some from entering into those sorts of arrangements, but when we do track down those that are already under the radar and are quite savvy in what they do, we can immediately pin the directors for the liability. We do not have to issue a notice, wait 21 days and let them go into insolvency.
CHAIR: So for you this is part of a suite of actions that you take?
Ms Panfilo : Yes.
CHAIR: I imagine that in that 7,000 to 8,000 directors that you are talking about—
Mr BUCHHOLZ: 6,000.
CHAIR: In those 6,000 companies and among those however many directors, are there first timers—people who may be getting into it for the first time because they inadvertently ran their company into the ground and are looking for a way out? Are there long termers? What is the range of companies within that—
Mr Darmanin : Oh, yes.
Ms Panfilo : There may be some that do not have super guarantee obligations because they do not have employees.
Mr Darmanin : That 6,000 is our estimate of people actively involved in more fraudulent phoenix activity. All of those started somewhere. They all took their first steps by having a company going into liquidation with employee entitlements or tax not being paid. Some people dust themselves off, start again and get it right the next time. Some people get advice that it is easy and that they can just liquidate the company, start again and pay no-one. That gives more profit to them; they can undercut their competitors, win contracts that they are not entitled and live a lifestyle that they are not supposed to be able to afford. These measures deter that type of outcome. From a definition perspective, it is very hard to say, 'This is very clearly the line at which someone crosses from inadvertent behaviour to fraudulent phoenix activity.' But what this is does is potentially give the Commissioner the power to target those who are quite clearly demonstrating fraudulent behaviour. This does not mean that the ATO would want to take that action against those who have slipped up on one or two occasions or those who have good reasons why they did not comply. That is not how the ATO is intending to administer this legislation should it become law.
Mr BUCHHOLZ: I am sure. But there is a vast difference between your intent and what the bill actually says. All I am trying to do is to seek clarity on that very point. I would suggest that maybe a mechanism in moving forward should be that we identify who the 6,000 companies and directors are. Maybe if there was an amendment to the bill that spoke about targeting those guys who had gone beyond the realms of social justice within their business and had clearly broken the law. Then a bill like this, which is intended to pick up those phoenix operators, would be focused on those operators who worked beyond the rules rather than be throwing a blanket across the whole industry—every employer; every small and medium business. It is an extra compliance burden that, with the current cost of doing business at the moment, would not be something that the industry would be screaming for. And it would be an additional compliance worry for you blokes as well.
Mr Bradshaw : There are no new obligations. The obligations are to remit to the Commissioner pay-as-you-go withhold amounts and to pay the superannuation guarantee. Those are two existing obligations. There are no extra company obligations.
Ms Panfilo : There would be inconsistent application of the director penalty regime, because currently we apply it to everyone for pay-as-you-go withholding. You are saying that we are going to restrict it for superannuation guarantee money. But that is money that is not kept by the Commonwealth but is given back to the employees; it is their money for their retirement.
Mr BUCHHOLZ: Absolutely. That is absolutely not in dispute.
Ms Panfilo : But then we are going to have inconsistent application, as we would only be targeting phoenix entities for the superannuation guarantee. I get—
Mr BUCHHOLZ: But there is a vast difference between the intent and what the bill says. That is my point.
CHAIR: Of that 7,000 to 8,000 directors that you estimate are involved in fraudulent activities, how many of those do you think that you would be able to identify as people associated with past phoenix activity?
Mr Darmanin : All of them.
CHAIR: All of them?
Mr Darmanin : Yes.
CHAIR: So you flag those already.
Mr Darmanin : Yes. They are in the process of being actioned. We are monitoring them. We have various responses in place already for a lot of those. There are those sitting there yet to be audited and potentially even prosecuted.
CHAIR: Okay. So there are 6,000 to 7,000 that you know about. Do you have an estimate of how many you might not know about and how many new ones come in every year?
Mr Darmanin : No, we do not. There have been various studies done over the years, not so much by the ATO but by other committees and organisations, that have made various assessments of the impact of phoenix activity on the Australian economy. The most recent one was a 2004 parliamentary joint committee inquiry into corporations and financial services. That put the impact on the Australian economy at that time—2004—as being between $1 billion and $2.4 billion per annum. That is the most recent hard data we have to work with. Since that time, all the ATO's experience is that fraudulent phoenix activity has continued to increase not decrease, despite the ATO having a targeted approach to try to address this behaviour since the late nineties.
CHAIR: How much is it increasing every year?
Mr Darmanin : It is hard to be definitive around that. When I say 'increasing', the indicators that we look at are the number of complaints being lodged by individuals whose entitlements have not been paid and we look at those companies and find that they are involved in repeat phoenix behaviour. We have incidents of companies incurring repeat liabilities—companies who are given an income tax adjustment the first time who choose to liquidate and continue their business through a new company rather than pay those assessments, for example. We have break-outs in different parts of our business, as I talked about before. A lot of phoenix activity in previous years used to be at the lower end of the SME market; now it is across the whole of the SME market. It is active in the micromarket as well. Originally, it used to be PAYE and prescribed payments, when we had that system; now it is in the superannuation, GST and income tax. And we are seeing more and more evidence of facilitators, promoters and business resumption specialists, for want of a better description, out there touting and promoting easy ways to deal with your tax liability. It is all those indicators that add up to our concerns.
CHAIR: If I am a director of a company that is attempting to do the right thing and I inadvertently did not pay my super liabilities for three months, what steps would I have not gone through? What would I normally be required to do that I did not do?
Mrs Panfilo : The corporate employer is required to pay nine per cent of the salary and wages into the employee's superannuation fund by the 28th day after the end of a quarter. If they fail to do so or if they underpay then they need to lodge a super guarantee statement with the tax office by the 28th day of the second month at the end of the quarter. That is the current law. That is the obligation as it stands. If they then do not lodge that statement and for us to penalise the director personally that statement has not been lodged for a further three months—so we have not received notification of the liability and they have not reported their obligation to the tax office. In effect, it is five months from the end of the quarter.
CHAIR: So technically there should be a second one by then?
Mrs Panfilo : Yes, there would be another quarter.
CHAIR: For me to actually attract the attention in this way, I would have had to not pay it the first time at the end of the first quarter, not put in a statement a month later, not paid the next one and not put in a statement again—is that right?
Mrs Panfilo : Because they do not need to report what they pay to the tax office, we get alerted to the fact that the employer has not paid, usually by employees notifying us and lodging complaints. The problem with that is that a lot of employees wait until they leave their job. They usually do not do it while they are working, so there is a delay in timing. Often, by the time we come to try to retrieve the money—
Mr BUCHHOLZ: The employee gets an annual statement.
Mrs Panfilo : They might get an annual statement, but not all of them are savvy and some of them do not want to complain to the tax office because of fear of losing their job or upsetting their employer. Some employees are aware that they are not getting their super, but they are too afraid to come forward and they will not come forward until they have left their job and moved on or something else.
CHAIR: By the time the tax office comes to me as a director and makes me liable for that super, I would have had to at least not paid two consecutive quarters and not submitted a statement for two consecutive quarters. It is virtually seven months of inadvertent nonpayment of super before I get—
Mrs Panfilo : Yes, but the director will not be penalised personally for that second quarter until three months thereafter—
CHAIR: Nevertheless, if I paid in the second quarter, I would not be in the position.
Mrs Panfilo : Yes.
CHAIR: My inadvertent lack of activity would have had to be over seven months.
Mrs Panfilo : Yes.
Mr STEPHEN JONES: If I may, Madam Chair: you have conducted over a number of years a range of inquiries into avoidance, maladministration et cetera. I am interested in whether during the course of those inquiries you have received evidence from the business sector, particularly the small-medium sized business sector, about the competition impact of noncompliance for those businesses who are lawfully complying. If you have received that evidence, could you give us some understanding of what it is?
Mr Darmanin : Since, I think from recollection the former royal commission into the building and construction industry, the Cole royal commission , where phoenix activity was recognised as highly prevalent in industry, the ATO has conducted a range of consultative forums with the industry and representative associations. Some of those associations have repeatedly shared with us their concerns about the impact of fraudulent phoenix activity in disturbing the level-playing field of compliance, if you like, the advantage these individuals gain and the lives that they destroy in the process. That type of intelligence, if you like, has been consistent since early 2000 at the very least. I am not in possession of any intelligence and I have met with some of these associations as recently as two weeks ago to suggest that the risk is diminishing out there. They have consistently told us that we need to take steps to fix it to the extent that the tax office has, and hence our relationship with Treasury and through to government in trying to fix this problem.
Mr STEPHEN JONES: It would be true to say, would it not, that the failure to have an effective compliance regime around collection and enforcement of superannuation obligations is effectively protecting those noncompliers and giving them a market advantage over the lawfully operating businesses?
Ms Panfilo : Yes.
Mr Darmanin : I accept that, but the way the superannuation legislation operates the commissioner is not told about what is reported or unreported. The ATO and its compliance program consistently has included strategies and focus on fraudulent phoenix activity. We have been in that for years now. It is in the current compliance program as well.
Mr BUCHHOLZ: Just in closing, no-one here disputes that the entitlement to someone's superannuation should and must be paid. That is lawfully the worker's contribution. They have worked for it. There is a legislative requirement for it to be paid. The employer pays into a fund, so if and when all of the employees retire on the same day there is a superannuation contribution that they will be met on that day. How would that apply to, say, a federal government? What happens if the Future Fund only goes to about 50 per cent of what the entitlement is?
CHAIR: I do not think that is really—
Mr BUCHHOLZ: It very well could be, because I do not think that that Future Fund entitlement—and this goes to the very heart of this—that we have for our superannuation contributions for our Public Service goes anywhere towards actually meeting what the super contribution is if they were all to leave on the same day. Do you disagree?
CHAIR: I just do not think it is relevant to this inquiry, because the directors of the Future Fund are not going to be chased by the ATO for unpaid super contributions.
Mr BUCHHOLZ: The principle remains.
CHAIR: But it is not part of this inquiry. I think we will call it a day here. Thank you very much for your attendance here today. If you have been asked to provide additional material, would you please forward it to the secretary. You will be sent a copy of the transcript of your evidence to which you can make corrections of grammar and fact. Thank you very much for coming in at such short notice. Thank you.
Proceedings suspended from 12:49 to 13:17
