Variation of amount to be withheld from certain payments made by external administrators in accordance with Section 15-15 of Schedule 1 to the Taxation Administration Act 1953
Explanatory Statement
General Outline of Instrument
This instrument is notice to specific PAYG withholding payers of a variation to the amount required to be withheld from particular payments made to certain payees.
The instrument is made under section 15-15 of Schedule 1 to the Taxation Administration Act 1953.
The proposed instrument would be a legislative instrument for the purposes of the Legislative Instruments Act 2003.
Date of effect
This instrument applies from 1 July 2005.
What is this instrument about:
The principle purpose of the notice is to provide external administrators with a varied amount that is required to be withheld from certain payments to payees, where the amount being paid has accrued prior to their appointment. The Gazettal notice provides the nature of the payments that are affected by the variation and also details the rate of withholding that applies to these payments.
What is the effect of this instrument:
The effect of the instrument is that external administrators can apply a uniform rate of withholding to payments that accrued prior to their appointment. This provides a less onerous process for these payers in addressing the historical payment obligations of the administrated/insolvent entity.
Background:
As a result of the decision in Deputy Commissioner of Taxation v Applied Design Development Pty Ltd (in Liq.) (Case ref: 2002 ATC 4193; (2002) 49 ATR 196) which ruled that a priority payment made to an employee who had proved a debt for wages retained its character as salary or wages for the purposes of the PAYG withholding system, external administrators have had new PAYG withholding obligations arise.
Previously, these payments were simply treated as a distribution of the entities and there were no PAYG withholding obligations. As the payments retain their character as salary or wages, there are standard PAYG withholding obligations on the administrator to:
- obtain Tax File Number (TFN) Declarations from all payees;
- obtain Withholding declarations from payees where applicable;
- withhold an amount from the payment based upon the information provided on the TFN declaration and Withholding declaration, and in accordance with the applicable PAYG withholding tax table;
- issue payment summaries to all payees by 14July following the end of the financial year in which the payments were made (Subsection 16-155 (1)(a) of Schedule 1 to the Taxation Administration Act 1953); and
- give an annual report to the Commissioner (Subsection 16-153 (2)(a) of Schedule 1 to the Taxation Administration Act 1953).
As the payments of salary and wages give rise to these obligations the Insolvency Practitioners Association of Australia (IPAA) approached the Australian Taxation Office (ATO) to provide a variation of these obligations to remove some of this new administrative burden. The ATO agreed to provide a standard rate of withholding (31.5%) for those payments that have accrued prior to the appointment of the external administrator.
Consultation:
The ATO has consulted extensively with the IPAA in relation to this matter. Following the decision in Deputy Commissioner of Taxation v Applied Design Development Pty Ltd (in Liq.) (Case ref: 2002 ATC 4193; (2002) 49 ATR 196) the IPAA requested from the ATO a product that provided a detailed summary of their new obligations under the PAYG withholding legislation. Upon producing this document, PAYG withholding for external administrators, the IPAA indicated that they wished for the ATO to provide some relief for administrators where they were making payments that had accrued prior to their appointment. After consulting with the IPAA personally, the ATO pledged to provide such relief by way of a ‘variation’ to their withholding requirements with respect to these payments.
Deputy Commissioner of Taxation
[13 May 2005]
Overview
The Taxation Administration Act 1953 was enacted by the Parliament of Australia to provide a framework for the administration of taxation laws. The instrument F2005L01215, issued under Section 15-15 of Schedule 1 to the Taxation Administration Act 1953, addresses the problem of external administrators being burdened with new PAYG withholding obligations for payments that accrued before their appointment. This was highlighted by the decision in Deputy Commissioner of Taxation v Applied Design Development Pty Ltd (in Liq.), which determined that priority payments made to employees for wages retained their character as salary or wages, thereby subjecting them to PAYG withholding. The instrument, which took effect from 1 July 2005, was introduced to alleviate some of the administrative burden by allowing external administrators to apply a uniform withholding rate of 31.5% on these historical payments. This legislative instrument was developed following extensive consultation with the Insolvency Practitioners Association of Australia, which had sought relief from the Australian Taxation Office due to the additional obligations arising from the aforementioned court decision.
Scope and Application
The legislative instrument F2005L01215 is designed to modify the amount of PAYG withholding required from certain payments made by external administrators to payees where the payments accrued before the administrators' appointment. It applies to external administrators, specifically those managing the affairs of an entity in liquidation or administration, and pertains to payments that retain their character as salary or wages. The legislation was enacted under section 15-15 of Schedule 1 to the Taxation Administration Act 1953 and took effect from 1 July 2005. The instrument aims to alleviate the administrative burden on external administrators by introducing a uniform rate of withholding, thereby simplifying the process of addressing historical payment obligations of the entity in question. It does not apply to payments made after the administrators' appointment and is confined to the scope of the PAYG withholding system in Australia. The application of the instrument can be extended or restricted through subordinate instruments as deemed necessary.
Key Provisions
This instrument, issued under section 15-15 of Schedule 1 to the Taxation Administration Act 1953, is designed to inform specific PAYG withholding payers about a variation in the amount required to be withheld from certain payments made to external administrators. The instrument aims to provide a uniform rate of withholding for payments that accrued before the appointment of the external administrator. This change was made in response to the ruling in the case of Deputy Commissioner of Taxation v Applied Design Development Pty Ltd (in Liq.) (2002 ATC 4193; 49 ATR 196), which determined that priority payments to employees retained their character as salary or wages, thereby imposing PAYG withholding obligations on external administrators. The new rate of withholding is 31.5% for these payments, simplifying the process for external administrators in managing historical payment obligations.
The obligations imposed by this instrument on external administrators include obtaining Tax File Number (TFN) Declarations from all payees and withholding an amount from the payment based on the information provided in these declarations, in accordance with the PAYG withholding tax table. External administrators are also required to issue payment summaries to all payees by 14 July following the end of the financial year in which the payments were made, as stipulated in Subsection 16-155 (1)(a) of Schedule 1 to the Taxation Administration Act 1953. Additionally, they must give an annual report to the Commissioner, as outlined in Subsection 16-153 (2)(a) of Schedule 1 to the Taxation Administration Act 1953. These obligations are designed to ensure that external administrators properly account for and withhold the necessary tax from payments made to employees.
Failure to comply with the requirements of this instrument could result in various civil and criminal consequences. The maximum penalties for non-compliance can include fines and, in more severe cases, imprisonment. The specific penalties depend on the nature and extent of the breach. For example, willfully disregarding the requirement to withhold the correct amount of tax from payments could lead to substantial fines or imprisonment. It is crucial for external administrators to adhere to these requirements to avoid legal repercussions and to ensure the proper administration of the PAYG withholding system.