What the Tax Commissioner’s new powers mean for SMEs

Recent amendments to the tax law have given the Tax Commissioner new expanded power when it comes to collecting tax debts. He can now require taxpayers to provide security deposits for existing or future tax debts – yes, that’s right, future tax debts as well.

Among other things, the changes to the tax law are designed to assist the Government’s crackdown on “phoenix” activity by expanding and reforming the use of “security deposits” and significantly increasing penalties for failing to comply with the requirement to provide a security deposit.

The new security deposit rules now cover all taxes administered by the Tax Commissioner, including superannuation guarantee and GST payments, whereas the coverage was previously limited to only income tax liabilities.

The penalty for non-compliance with a requirement to provide security has also been significantly increased for individuals from 20 penalty units ($2,200) to 100 penalty units ($11,000), and for companies from 100 penalty units ($11,000) to 500 penalty units ($55,000).

The new security deposit provisions are intended to apply to situations where the Commissioner believes there is a serious risk of a tax-related liability not being paid, such as:

where a taxpayer plans to temporarily carry on an enterprise in Australia and leave without returning;
where the taxpayer has a history of non-compliance (including by defaulting on their tax liabilities);
where the directors of a company have a history of non-compliance; and
where the Commissioner grants a taxpayer the benefit of a payment arrangement.

Under one of the provisions of the new law, the Commissioner can require a taxpayer to give security for the payment of an existing or future tax-related liability if he “reasonably believes that the requirement is otherwise appropriate, having regard to all relevant circumstances”.

This is about as wide a discretion as there is, and one wonders if these new powers really need to be that wide. The administration of these provisions by the Tax Office will need to be closely watched, especially as refusal to provide the required security will constitute a criminal offence.

An important point for taxpayers to note is that the Commissioner can now demand a security deposit for a future tax liability, so there does not even have to be an existing liability for the provisions to be invoked. The Commissioner is required to give written notice of a requirement to give security.

The security itself can be a bond or deposit, or it can be by way of a mortgage over property, floating charges or guarantees. The power of the Commissioner to take a mortgage over property opens up a whole new area of concern for taxpayers and again highlights the very broad and strong powers these new laws give the Commissioner.

Individuals and SMEs facing financial difficulties now have to ponder the possibility of the Commissioner requiring them to stump up a security deposit for a tax debt that may not yet exist.

While there are safeguards in that the Commissioner’s decision to request security is reviewable by the Federal Court under the Administrative Decisions (Judicial Review) Act 1977, there is obviously cost and inconvenience for taxpayers in doing that.

It is understood that the Commissioner would, in general, be able to exercise his rights under a security arrangement where a business for example had failed to meet its tax debt by the due date, or where the taxpayer had breached the conditions of a payment arrangement.

It would seem that a security deposit could be sought where a taxpayer has a history of non-compliance or where a payment arrangement for payment of tax is in place. While the circumstances of each case would dictate whether a security deposit was requested, there now seems to be a new degree of uncertainty for taxpayers to contend with.

These new laws now represent a powerful tool in the Commissioner’s armoury. Taxpayers need to aware that the powers now exist. The Commissioner may well exercise his discretion sparingly, but the discretion is now so wide, it creates uncertainty.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.