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Michael Murray’s on-going commentary on issues in corporate and personal insolvency law and related policy and law reform, in Australia and internationally. Given the scope of insolvency, this extends to business, consumer and professional conduct, and ethics, governance and regulation, criminal, tax, environmental and administrative law, and the courts and government.

 

Single touch payroll – disrupting the way things have been done

Single-touch payroll (STP) legislation was introduced into federal parliament on 31 August 2016 through the government’s Budget Savings (Omnibus) Bill 2016.  This law would eventually remove unfair reliance by business on what is often said to be “Australia’s largest bank” – the ATO – and lessen the extent to which the ATO is, as at present, often the largest creditor in the liquidation of businesses.  STP represents a process of prevention, rather than cure, and is one necessary element in countering unlawful phoenix misconduct.

 

Under the STP process, when employers pay their staff, the employees’ salary or wages and PAYG withholding amounts will be automatically reported to the ATO.  Employers will have the option to pay their PAYG withholding at the same time they pay their staff.

STP reporting is designed to reduce the compliance costs for employers meeting their PAYG withholding obligations by using standard business reporting (SBR) enabled software to automatically report employee salary or wage information to the ATO at the time these amounts are paid.  At present, it is an obligation of employers to pay the moneys to the ATO. This is often not done, or delayed, so that the employer can use the moneys as a cash float.  Company liquidators often find large amounts of unpaid tax withholdings when the business fails, and often by that time the directors might be personally liable through the director penalty regime.

Real-time recovery

That is not an effective enough deterrent, or recovery process.  STP is all about moving from this initial reporting process, through to real-time recovery of tax by the ATO, not unlike tax taken from gross salary of employees. Reliance on business to pay the taxes is not secure enough, any more than relying on employees to pay tax from their gross monthly salary.

It follows ATO tax design principles that seek to drive positive behavioural change and good business practices rather than change driven by compliance and deterrence.   

There will be no changes to the way employers pay their superannuation. However, when those payments are made to their employees’ funds, the information will be automatically reported to the ATO.  Unpaid employee superannuation is another liability often found in a company’s winding up.

Employers will be able to report to the ATO through Single Touch Payroll from 1 July 2017. However, those with 20 or more employees will be required to report from 1 July 2018.  For the first 12 months, reporting entities will not be subject to administrative penalties, unless first notified by the Commissioner. Employers with 19 employees or less will be assisted by an ATO pilot program on STP.  

The ATO is pursuing other digital initiatives – the use of standard business reporting and the adoption of a standard chart of accounts as the basis for streamlined business tax reporting directly from business’ accounting systems are two.

Business impact

As to the impact on business cash flow, culture and practices will need to change and adjust, including those of the accounting profession. Over 25 years ago, a judge referred to the use of employees’ tax withholdings as showing “a complete lack of appreciation … and a serious lack of commercial reality”, with perpetrators often disbarred from acting as directors: see Cullen v Corporate Affairs Commission (NSW) (1988) 14 ACLR 788 at 795; also Didovich v ASIC [1998] NSWSC 534.  The ATO’s director penalty regime was in part introduced in 1993 to address this.  Its apparent “harshness” was described as

appropriate, because the evils of tax payers deducting taxation payments from employees’ wages and not passing them to the authorities are considerable and perhaps widespread. The evils are not limited to the tax avoided: they extend to the use made of the money, namely either theft or use as working capital, thereby permitting companies to continue to trade which in truth are not capable of continuing to trade lawfully“.  

An early sign of problems in a company is its “living on the false reserves of non-remitted” deductions from employees’ wages: DCT v Saunig [2002] NSWCA 390. 

The growing level of unpaid business tax debt reported by the ATO indicates the extent of the existing and on-going culture and practices in using employee witholdings as working capital. The ATO’s effectiveness in countering this is presently under review by the Australian National Audit Office – ANAO.  This is despite a tightening of the director penalty regime in 2012.

Easier to continue with the ways things have been done rather than embrace new technological opportunities

As the government says in its December 2015 Innovation Agenda, it has often been easier for government to continue with the ways things have been done rather than embrace new technological opportunities. It is inevitable that the government, and governments generally, will proceed to “digital by default”, STP being one example, with the ATO leading the process for what should be a whole of government approach.  

The same inevitability of disruption applies to private businesses and the professions

The Omnibus Bill has been referred to the Senate Economics Legislation Committee for a quick report, by 13 September 2016.

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