The Howard Government continues to make strong progress in cracking down on high-income earners who try to avoid their obligations to pay income tax.
Attorney-General Daryl Williams and the Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, have today released an update on the implementation of recommendations from a joint taskforce on this issue.
The taskforce report, titled "The Use of Bankruptcy and Family Law Schemes to Avoid Payment of Tax", shows that there has already been a marked change in compliance by high-income professionals.
There has been a significant reduction in the level of debt and an increase in the percentage of debt under recovery since the crackdown by authorities, indeed the total debt to the Australian Taxation Office from barristers in New South Wales has dropped by around 40 per cent.
The report made 12 recommendations dealing with a number of possible changes to strengthen the operation and effectiveness of the bankruptcy, family and taxation laws to help ensure that high-income professionals meet their tax obligations and that bankruptcy and family laws are not abused.
In August 2002, the Government initiated a range of changes to bankruptcy, tax and family law following consideration of the report. The latest developments in response to each of the 12 recommendations are attached.
As the report contains information on methods of possibly manipulating existing laws to avoid the payment of tax, the Government has modified the report for public release.
The modified report removes references detailing any manipulation methods and other aspects of the report that are subject to legal professional privilege. (The modified report is available at www.law.gov.au/olsc or www.itsa.gov.au).
The Government is committed to ensuring that high-income professionals meet their tax obligations and that bankruptcy and family laws are not abused.
While the taskforce report shows that there has already been a marked change in compliance, the progress of the Government's response to the recommendations of the taskforce will go a long way to ensuring this trend continues and that the tax obligations of high-income professionals are met.
ATTACHMENT A
UPDATE ON THE IMPLEMENTATION OF TASKFORCE RECOMMENDATIONS
Recommendation 1
"It is recommended that the ATO and the Attorney-General's Department cooperate in developing guidance on the matters specified in paragraph 3.27 for ATO decision makers to ensure that a decision to disclose information to a trustee in bankruptcy or liquidator is made: at an appropriately senior level; and in accordance with the requirements of both the Income Tax Assessment Act and the Privacy Act."
Progress on response
The Australian Taxation Office (ATO) is currently developing these guidelines together with the Attorney-General's Department (AGD) and expects to have new guidelines in place by 30 June 2003.
Recommendation 2
"It is recommended that subsection 16(4) of the Income Tax Assessment Act and section 3C of the Taxation Administration Act be amended to authorise the Commissioner of Taxation to provide publicly available information to prescribed industry or professional associations."
Progress on response
The Treasury, in consultation with AGD are currently weighing up the various considerations involved in providing publicly available information to prescribed industry and professional associations, including the rights of individuals concerning access to their taxation information as recommended in the Taskforce Report. While legislative change may provide another avenue for such information to be provided, industry and professional associations can also consider the extent to which they may require the provision of such information directly from their members as a condition of membership.
Recommendation 3
"It is recommended that a committee of AGD and ITSA officers be established to review the law relating to `looking through' asset ownership structures under the Bankruptcy Act, the Family Law Act and State and Territory de-facto legislation, in consultation with relevant stakeholders.
Courts having bankruptcy jurisdiction might be empowered to determine asset recovery applications by bankruptcy trustees where associated entities (including family members) of the bankrupt hold assets sourced from the bankrupt's income flow or activities. This jurisdiction is to be additional to that conferred already under Division 4A of Part VI of the Bankruptcy Act.
The amount recovered could be determined by reference to family law principles relating to the contributions and needs of the parties to the marriage or, where applicable, by principles of property division under State domestic relationships law: in each instance the principles would be applied as if the relevant relationship between the bankrupt and another person had broken down."
Progress on response
The Insolvency and Trustee Service Australia (ITSA) and AGD released an Issues Paper on 20 November 2002 describing proposed changes to the Bankruptcy Act in line with this recommendation. ITSA and AGD are currently considering submissions received in response to that Issues Paper with a view to providing advice to the Attorney-General in the near future.
Recommendation 4
"It is recommended that a different and more rigorous contribution collection regime (`the second-tier collection regime') be developed along the following lines, to supplement the existing scheme:
(a) If the trustee decides that the second-tier collection regime is to be applied to the bankrupt and notifies the bankrupt accordingly, then:
(i) the whole of the debtor's receipts must be deposited into an account with an approved financial institution of which identifying details are provided to the trustee - no payment to the debtor by cash in hand or, except with the trustee's written permission, by fringe or other benefits would be permitted;
(ii) any periodic payments, pre-existing charges on income, and the like are cancelled by law upon bankruptcy but can be reinstated with the trustee's written permission;
(iii) any existing arrangement where clients pay a service company or other entity, rather than the bankrupt, are either:
(A) cancelled by law; or
(B) permitted to continue only with the trustee's written consent and even then only subject to the trustee's right to garnishee the receipts of that entity to collect contribution liabilities;
(iv) the trustee could permit the bankrupt to draw on the account to an agreed sum per week/ fortnight/ month but the trustee would have no obligation to put the bankrupt's preference for a particular standard of living ahead of the interests of creditors: this might well cramp the bankrupt's style to ensure that contribution amounts and accruing tax liabilities were paid ahead of `lifestyle' choices, eg, the $60,000 annual family holiday;
(v) there would be allowance for reasonable excuses as to why contributions could not be paid;
(vi) the regime would continue in place after discharge until all contributions had been paid - this is necessary to ensure `affluent' bankrupts do not simply take a three year holiday from their profession, supported by friends and family; and
(b) The scheme would include an ultimate sanction of a criminal offence with a penalty of imprisonment. The detail of that offence should be developed in consultation with the Criminal Justice Division of the Attorney-General's Department. Trustees also to be empowered to seek a court order that a non-compliant bankrupt comply with the key elements of the alternative contribution regime, and failure to comply fully and promptly with such an order be a contempt of court punishable by imprisonment. The scheme would enable the ATO to garnishee in respect of tax debts not covered by the bankruptcy, ie, those arising after the date of the bankruptcy."
Progress on response
ITSA and AGD released an Issues Paper on 20 November 2002 describing proposed changes to the Bankruptcy Act in line with this recommendation. ITSA and AGD are currently considering submissions received in response to that Issues Paper with a view to providing advice to the Attorney-General in the near future.
Recommendation 5
"It is recommended that the definition of maintenance agreement at subsection 5(1) of the Bankruptcy Act be narrowed to exclude financial agreements entered into under Part VIIIA of the Family Law Act."
Progress on response
ITSA and AGD released an Issues Paper on 20 November 2002 describing proposed changes to the Bankruptcy Act in line with this recommendation. ITSA and AGD are currently considering submissions received in response to that Issues Paper with a view to providing advice to the Attorney-General in the near future.
Recommendation 6
"It is recommended that the Child Support Agency consider amendments to the Child Support (Assessment) Act such that:
- child support agreements are not available where their effect will be to render a party insolvent; and
- the trustee in bankruptcy or the ATO have standing to challenge a child support agreement. Appropriate disclosure and notice provisions would be required."
Progress on response
The Minister for Community Services has agreed in principle to this amendment. AGD and the Department of Family and Community Services are developing the necessary amendments.
Recommendation 7
"It is recommended that s.106B of the Family Law Act be widened to allow third parties to apply to the court for an order or injunction preventing the disposition of property pending an application to set aside or overturn a s.79 order".
Progress on response
This recommendation is being considered in light of the decision of the Full Family Court in Deputy Commissioner of Taxation and Kliman [2002] FamCA 629. As a result of that decision, AGD are considering whether the amendment referred to in the recommendation is necessary.
Recommendation 8
"It is recommended that:
(a) the Family Law and Legal Assistance Division of the Attorney-General's Department consult with courts exercising jurisdiction under the Family Law Act to facilitate the development of a standard form of disclosure of taxation liabilities as a requirement for all family law property orders; and
(b) the Family Law Act be amended to include provision for notice to be provided to affected third parties in matters involving property orders."
Progress on response
AGD is consulting with relevant courts to develop a standard form and further amendments to provide for affected third parties. The Family Law Amendment Bill 2003 (currently before the Parliament) contains provisions concerning orders and injunctions binding third parties.
Recommendation 9
"It is recommended that the Bankruptcy Act be amended to insert a new act of bankruptcy to apply where a person is rendered insolvent as a result of assets being transferred pursuant to a financial agreement under Part VIIIA of the Family Law Act. The act of bankruptcy would be deemed to occur on the date of the transfer of property pursuant to the agreement that made the person insolvent."
Progress on response
ITSA and AGD released an Issues Paper on 20 November 2002 describing proposed changes to the Bankruptcy Act in line with this recommendation. ITSA and AGD are currently considering submissions received in response to that Issues Paper with a view to providing advice to the Attorney-General in the near future.
Recommendation 10
"It is recommended that there be a separation declaration for financial agreements generally not only for superannuation agreements, to ensure that financial agreements are not entered into by couples for the purposes of avoiding creditors. An additional requirement might be included in s.90G of the Family Law Act, to ensure that legal advice received in relation to an agreement includes notice that a declaration of separation is required."
Progress on response
AGD is in the process of finalizing advice to the Attorney-General on options for the implementation of this recommendation.
Recommendation 11
"It is recommended that the committee proposed in Recommendation 3 also consider amendment of the Family Law Act and the Bankruptcy Act to provide that:
- where the marriage has broken down, all bankruptcy matters which involve the family law claim of a non-bankrupt spouse be transferred to a court exercising jurisdiction under the Family Law Act; and
- the trustee in bankruptcy will be made a party to the family law property proceedings, and be given the opportunity to make submissions to the Court on behalf of the creditors."
Progress on response
ITSA and AGD released an Issues Paper on 20 November 2002 describing proposed changes to the Bankruptcy Act in line with this recommendation. ITSA and AGD are currently considering submissions received in response to that Issues Paper with a view to providing advice to the Attorney-General in the near future.
Recommendation 12
"It is recommended that the penalties for key offences in the Taxation Administration Act be reviewed in accordance with advice to be provided by the Criminal Justice Division of the Attorney-General's Department with a view to enhancing their deterrent effect upon high income professionals avoiding payment of their income tax liabilities."
Progress on response
The Treasury, ATO and AGD are currently examining the adequacy of the existing penalties or whether other alternative approaches will enhance the deterrent effect upon high income professionals from avoiding their income tax liabilities.