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Economics References Committee
14/03/2017
Superannuation guarantee non-payment

FERRIER, Ms Narelle, Technical and Standards Director, Australian Restructuring Insolvency and Turnaround Association

KORDA, Mr Mark Anthony, Partner, KordaMentha

WINTER, Mr John, Chief Executive Officer, Australian Restructuring Insolvency and Turnaround Association

[11:35]

CHAIR: Welcome. I invite you to make a brief opening statement, should you wish to do so.

Mr Winter : Thank you. Our concern around the issue of the non-payment of SGC comes from representing those who see, first-hand, businesses in financial distress and the extent of non-payment and how the system is being abused. It is important to note that while most people expect that the regulators fulfil the role it is actually liquidators who are the frontline of investigating corporate collapses, including the non-payment of employee entitlements.

It is, indeed, unfortunate that we have seen directors of financially distressed businesses using the non-payment of their tax and employee-entitlement obligations as a kind of informal borrowing arrangement. That informal borrowing is fraught. The ATO have wonderfully articulated their strategy as focusing on 'paying the right amount at the right time' and, most importantly, 'no unfair advantage to nonpayers'. This last element is particularly appropriate in considering this issue. Delayed payers or nonpayers are gaining a significant advantage over those who do not properly meet their obligations. With SGC they are doing so with other people's money and, obviously, without their consent. Further, the non-payment or delayed payment can cost employees either their missed entitlements or, as a minimum, the lost return for the time that the payment is not made into their superannuation portfolio.

Put simply, we support policy changes that ensure that the right amount of superannuation is paid at the right time and are not allowed to become a lender-of-last-resort option. That may include considering the superannuation guarantee and extension of the single-touch payroll concept. We do not subscribe to the approach that says you are removing the flexibility of a small business—particularly, we talk here about small business—to manage their cash flow by forcing on-time payment. That argument can be properly applied when those businesses must negotiate with suppliers about their credit terms. But in the case of employees not being paid their superannuation, they are not a consenting party to that deal. If a business cannot meet its superannuation payment obligations as and when they fall due, in the most simple definition, the business is insolvent—that being the definition of insolvency.

We are strongly of the view that non-payment of superannuation must be pursued, even for the small amounts. Failure to do so sends a market signal that you can escape without consequence; it creates a moral hazard and it leaves those employees out of pocket. If the ATO retains the responsibility for pursuing SGC non-payment then it must find cost-effective strategies to recover small claims. There is a social obligation for this to occur.

Given that there are few real consequences for non-payment, and most employees tend to not notice non-payment until it is too late, it is endemic that superannuation guarantee is one of the first bills that goes unpaid in distressed businesses or businesses that are planned to be phoenixed. To that end, we also commend to the committee the recent outstanding work of Professor Helen Anderson and the Melbourne university team on phoenixing.

CHAIR: Thank you very much, Mr Winter. Mr Korda, do you have an opening statement?

Mr Korda : No. We support the position of ARITA, and I am here to help if I can at all.

CHAIR: Thank you very much. Firstly, I want to ask about the situation of a business in its normal operation—that is, prior to any question of insolvency or being close to insolvency. What, in your view, needs to change, with reporting and payment frequencies, for SGC payments not to be used as a cash-management tool?

Mr Winter : I think that comes to the point around trying to align the payment mechanisms. The ATO's approach to single touch payroll, we think, is instructive in this case. If there is a mechanism where a business reports and meets its obligation in a timely fashion, that is likely to reduce any scope for this. But there is a significant issue around simply the notification going through and then the non-payment following where the director penalty notices might not be able to be enforced if that occurs.

CHAIR: Do you suggest any changes there in terms of reporting obligations?

Mr Winter : We think it should be reported as and when it falls due.

Ms Ferrier : Reported and paid.

Mr Winter : Yes, reported and paid.

Mr Korda : I thought it was fairly simple. If you pay the wages to the person fortnightly or monthly—they are usually by direct bank debit these days not cash—you should have the superannuation that day as well. It is the employee's money. They are entitled to it, it should be.

CHAIR: I think a lot of payroll systems can handle a pay going into multiple bank accounts. Do you think that that would impose an additional burden on businesses?

Mr Korda : They have to make the payment anyway, it is just a matter of when. You will have a lot less super funds to pay than you will have employees because you will have multiple employees who will be members of a particular super fund. I just cannot see why it cannot happen.

Mr Winter : I think most businesses that are well run tend to do exactly as Mark is suggesting: they pay their superannuation at the same time they pay their employees. Certainly, it is the way I run ARITA as an organisation, and I think it is simply good practice in managing your cash flow in that way as much as anything else.

CHAIR: That is your experience. Are there any hard and fast statistics that demonstrate that to be the case?

Mr Winter : I am not aware of any particular statistics on it. Certainly, most payroll systems are being set up that way in a contemporary sense—whether or not they are being fully taken advantage of. Perhaps organisations like MYOB or Xerox might be able to provide you that data because they would see what was happening going through their automatic systems.

Mr Korda : It is not particularly complex. If you pay an employee at the end of the month, you could pay their super, and then you start to eliminate a problem rather than overlay myriad legislation and rules on top of something that you could eliminate in the first place. The other thing I would add is it should not go on the employee's pay slip until it has been paid, not when it is being deducted.

Mr Winter : That is actually a very important point because a lot of employees are presumptive that it is being paid when it shows up on their pay slip. Most employees, of course, do not tend to go and check their super statement very often. They are presumptive that it is being paid at that point in time. When a business is in financial distress, that is when we clearly see that it has not been paid on most occasions.

CHAIR: The corollary of what you have said is that paying superannuation outside of the payroll cycle is actually an extra administrative burden.

Mr Korda : It gives the business some cash flow advantage, but it is small and if you are paying your wages you should pay the super at the same time. You sort of get a system that gets layered upon layer upon layer upon layer, and it should go back to basics and just say, 'I've paid my net wages, I'll pay my super now.' If the tax office is happy to take pay-as-you-go tax on a three-monthly basis, that is between the company and the tax office. I can understand that is a bigger figure in cash flow, and the tax office should be self-sufficient in being able to look after collecting its money and its taxes, whereas an individual employee that is due super—and there is a wide range—is not necessarily that financially sophisticated, and we should try and protect them.

CHAIR: Let us talk about businesses that are getting close to insolvency. What place do you see super funds having in following up possible unpaid superannuation?

Mr Korda : I think there are a couple of things. Obviously, they are incentivised to do that. They want to look after their members first, but also the more you have the funds under management the more you can defray your costs—the expense ratio. So they would be naturally incentivised to do that. Again, then you put in a whole regime on top of something that maybe should not exist—that is, if people are paying the super when they pay the wages, you shrink the problem down significantly rather than trying to police something that should not exist in the first place, if you know what I meant. So there are some practical issues like people leaving funds and changing funds and how does the super fund really know. I would have thought that if it is a significant problem, the super funds should have some ability to do the debt collection on behalf of the employee.

Mr Winter : I would guess that it probably relies on the fact that there is a consistent income coming in for those individuals. For those who have a variable income rate over time, it is going to be less obvious to a superannuation fund that there is an outstanding obligation.

CHAIR: I think one of your recommendations is that there be reporting of default in payments to the ATO if the employer has not advised the fund that they have ceased employment or moved funds. Can you tell us a bit about that?

Ms Ferrier : One of the key issues specifically that we see when a company has gone through financial distress and into liquidation, particularly for the liquidators, is lack of information with the ATO and the ATO being able to verify and substantiate the amount of outstanding superannuation. So if funds can effectively report into the ATO then that gives the ATO data that they would be able to provide in circumstances where there was a liquidation. It would also enable the ATO to then contact employers directly and follow-up those outstanding payments as well. So it would create a trigger to try and get those payments remitted before a company went into liquidation.

CHAIR: And in the first instance the fund itself would be in the position to identify that as an issue.

Ms Ferrier : Certainly.

CHAIR: What needs to change to enable that to occur?

Ms Ferrier : The operation of super funds is not an area of expertise for us. I presume there is some internal reporting mechanisms that they have and whether there are certain KPIs that can trigger whether there are defaults by employers and whether that would then trigger a referral to the ATO or reporting to the ATO.

CHAIR: Do you have any knowledge of the ATO payment plans that might come into existence if a business is approaching insolvency? Do you have any comments about those ATO payment plans?

Mr Korda : We typically refer to it as the twilight zone. We probably deal with larger companies—so the ability to have a confidential negotiation and entry into a payment plan as being very important in certain circumstances. I note that even when we had the floods in Queensland and the GFC, there were lots of payment plans that almost did not have to be negotiated; there needed to be some cash flow managing of the situation—not unlike when then Prime Minister Rudd put in the guarantee for the banks, and it was a very good idea at the time. Like with any large creditor, you have to be able to have the ability to negotiate your payment terms.

We have potentially fairly draconian insolvency laws, which basically say that if you cannot pay your debts as and when they fall due, you are personally liable and you can go to jail. So you need to be able to reschedule, potentially, a bank debt. You need to be able to reschedule a large creditor. You need to be able to reschedule mezzanine debt. You need to be able to reschedule the tax office—which sometimes can be quite substantial, and they can make that economic assessment because they will usually decide it is in their best interest as well, like most of the other creditors. That should not be made public. They have been talking about some safe harbour things, 'If a company wants to go into safe harbour, let's make it public,' then you will not have any credit left. The twilight zone is all about trying to save and turn around businesses and, if that is not possible, limit the losses. Our insolvency laws—which we can talk about separately—do not encourage that because of trading whilst insolvent—

CHAIR: We will come to insolvency in a second. I am not sure if you were here when I was asking the previous witnesses about small business. I understand you may not have great exposure there, but do you have a view about the responsiveness of financial institutions assisting businesses, particularly when it comes to late payments, where they are experiences cash-flow issues? I know you have a black-and-white view—if you cannot meet your payment when it is due then you are insolvent—but are financial institutions helping to alleviate the stress here?

Mr Winter : Certainly in that small-business space, we tend to find that the major lenders are extremely flexible. Indeed, we would say that often they come to a decision around the insolvency of a business a little bit too late. Banks are incredibly flexible and mindful of the criticism they face if they do seek to gain financial redress from distressed businesses. In most instances you will find that banks do tend to go above and beyond what you would normally expect in that regard.

CHAIR: From that I understand your comments about the black-and-white nature of this. If the financial institutions are flexible then there really should not be any need for employers to be using employee entitlements as cash-flow management tool.

Mr Winter : I think one of the most important things here is that, as Mark was talking about being able to negotiate with the ATO, you can negotiate with your lender. What is not occurring is negotiation with the employee, whose entitlements are being used elsewhere. To me, that is the missing piece. Where you are able to negotiate with a creditor, you can and should be doing so in order to find a way to turn around any distressed entity, but, where you are unilaterally making decisions about somebody else's exposure, that is problematic.

CHAIR: Turning to the situation of an insolvent business, is it clear where SG falls in terms of priority for dividends?

Mr Winter : Yes.

Ms Ferrier : In a pure corporate sense, yes. If the business operated through a trust structure, there has been recent case law that has effectively eliminated any priority that a corporate entity would have, and it has ranked employee entitlements as a whole, equally with trade creditors.

CHAIR: Do you believe there is a need for reform?

Ms Ferrier : Absolutely.

CHAIR: How long does it take, in your experience, for the ATO, once it receives funds, to deposit outstanding superannuation into employees' accounts?

Ms Ferrier : We have some examples going back a number of years. We have one from 2014, where it took a year from the time the ATO received the funds until they were deposited into the super fund. We have a regular liaison with the ATO on insolvency issues, and we have raised this as an issue, so they have been working on this. In some more recent examples we have seen periods between two and six months.

Senator HUME: Why is that the case?

Ms Ferrier : That is probably a question for the ATO.

Senator HUME: They have not given you an inadequate response?

Mr Winter : Not particularly.

Ms Ferrier : No.

Mr Korda : I think it goes to an in-principle thing. Let's call it a 'liquidator', particularly of a small business, liquidators are responsible for cleaning up the affairs of the company, and that includes making sure the employees get their entitlements. Why we would even have the tax office involved in that process is a mystery. You might as well leave it. We normally have the books and records, so we can contact the super fund. We are the best people to sort it out.

If we do that within—Narelle, correct me if I am wrong—three to four months, we send the thing to the super fund anyway. It is only if it is overdue by three or four months that it goes through the tax office. I do not know if it is the law or procedure, but, if I was the tax office, I would say, 'You just look after all the employee entitlements and send the money to the super fund when you've sorted it out.' It would be cheaper and easier for everybody.

Ms Ferrier : Just to add to Mark's point on that: whether there is a superannuation guarantee charge will also depend on how long the super has been outstanding prior to liquidation. But one of the big issues for insolvency practitioners is that lack of information. Quite often, it is the practitioner providing the information to the ATO so that the ATO can then prove the debt in the liquidation. That process—and we have got a lot of feedback from our members—can be lengthy and quite drawn out. As Mark says, if it is possible to correspond directly with super funds—and, as we discussed earlier, they are the best placed people to understand the history and the circumstances of the employees—then that would streamline that. In our submission, we talked about remitting the outstanding superannuation and the general interest charge directly to the super fund, and then, if there is an administration charge payable, that could go directly to the ATO.

CHAIR: What needs to change to allow that to occur?

Ms Ferrier : There would need to be legislative change to enable the payment directly into the super fund. As I understand it, at the moment, they are not able to accept the payment directly; it has to come via the ATO.

CHAIR: Have you had any experience with super funds and/or industry funds services in the insolvency process?

Ms Ferrier : ARITA has not had direct contact. Mark, I do not know if you have had any experiences.

Mr Korda : I do not usually need to deal with them. Normally, we have got the company's books and records, so we can see what has been deducted and we can work it out and tell them what they are owed. Remember, the super funds are sort of recipients of a calculation from the company. We stand in and replace the directors and do the same thing.

Mr Winter : The point should also be made that in a significant percentage of businesses in financial distress, particularly on the smaller scale, there is a distinct absence of books and records. Part of the role of the liquidator is to go in to reconstruct the financial affairs, to the best of their ability, to work out what those obligations are.

Ms Ferrier : I should add that that stage of the liquidation would only usually occur if there are actually funds available for creditors as well. If there are no funds in a liquidation, which is the vast majority of liquidations in the small to medium space, you would not get to that stage of calculating this superannuation.

CHAIR: Dealing with that type of situation and looking at the Fair Entitlements Guarantee, do you think the extension of that guarantee to include superannuation is a good idea or not?

Mr Korda : The Fair Entitlements Guarantee is like a policy issue. I think the very first one came up when we did Ansett. They put in an entitlements scheme for the Ansett employees. I guess there were two aspects: how do we give the employees liquidity—that is, the business closes down and they are owed their wages and pay in lieu of notice—and then there is what I call a last resort safety net. If there is money eventually in the company, then the safety net will get repaid. Do you understand that? You talk about liquidity and you talk about a safety net. If you talk about the safety net, I am not sure why you would distinguish between wages and superannuation. I see the nuances of one's retirement and one's wages, but if you argue that you are really a liquidity facility then you could argue that maybe you should not be. It is not a lot of money. We look at it like employees look at it: it is part of their wages, so why wouldn't they be covered? Of course, FEG has some caps and limits on what they should pay so that they can build those into the caps and limits. Broadly, it is hard to understand, if you are covering employee entitlements, why super would not be covered.

CHAIR: In a situation of the turnaround of a business, is the existence of that guarantee helpful?

Mr Korda : Maybe not. Let me take a real case example at the moment. We are looking after Arrium, the steel business. We have about 6,000 employees. The vast majority of those employees are union or would come within the safety net of the Fair Entitlements Guarantee if the whole thing collapsed. Mainly the employees there are focusing on turning around the company and fixing the company, and 'Let's find a buyer with some new capital', rather than worrying about what is going to happen to their entitlements. It has made the turnaround of the reconstruction of Arrium much, much easier. If we did not have that there—and the entitlements, if they closed the business down, might be $750 million—we think, 'We'll save the business and the vast majority of people will keep their jobs.' So, it is only a contingent liability. But you could understand that people in Whyalla, people out on the shop floor, with all their long service leave, all their redundancy, would be very, very concerned without the safety net.

It will not cost the government any money, so, from that point of view, it is making workouts and turnarounds much easier, because that issue is off the table. They are not sitting there worried that they need to bargain at the table to get their fair entitlements. So from that point of view it has been terrific.

Mr Winter : I think there is an extension to that, though, and that is around the moral hazard that is created in this space with some of the more outlandish claims that have had to be made against the Fair Entitlements Guarantee, where directors have failed to pay substantial amounts of employee entitlements. We see that there is quite significant notice of that behaviour being taken and being replicated in the phoenixing of business. And when you have landmark amounts such as we have seen in Queensland Nickel and indeed some of the public debate that happened in that area, where there was a presumptive view that employee entitlements would simply be paid by the government, that pushed people more and more into using employee entitlements as a lender of last resort facility, and that is deeply concerning.

So, as Mark says, there is distinct value in being able to give employees comfort that they are somewhat secure in those more difficult situations. But in terms of the greater issue around the moral hazard that is created, this again comes to our point around directors needing to be pursued for their failure to account properly for employee entitlements, including SG.

CHAIR: And what do you say about the level of penalties and other sanctions against directors?

Mr Winter : Generally we find them to be manifestly inadequate in terms of their enforcement. If you look at the successful enforcement outcomes from ASIC they are, unfortunately, few and far between, against directors. When you consider that there are some 10½ thousand insolvencies in Australia each year and there are some 14,000 recommendations that are made by registered liquidators for action to be pursued against directors as a result of failing to meet adequate standards, the numbers of enforcement activities are in the teens. So, there is a significant gap in that space in terms of holding people to account. If you look, as a comparative, at what Companies House does in the UK, their rigorous enforcement against directors sends a very strong market signal that you must obey the law and you must meet your entitlements.

CHAIR: What about the actual level of the fines themselves, quite apart from the enthusiasm of the regulator to pursue it?

Mr Winter : I am not sure that I can offer a detailed comment around the extent of the fines. The fact that so little action in itself is being taken is probably a greater issue. There is no market signal that you will be caught for this, let alone how hard you will be penalised. We saw one director strike off recently in a character who was facilitating business phoenixing, and I think his fine was $6,000, which is not even a single consulting engagement, and his business itself, where he was struck off from being a director for a number of years, immediately had his wife take over and the business has continued on. That is the type of activity that occurs without the signal that needs to be sent.

CHAIR: And my final line of questioning: what can be done to stop illegal phoenixing activity?

Mr Winter : Again, I would strongly commend to the committee the report from Professor Helen Anderson. It is the most thorough investigation of phoenixing in Australia. One of Professor Anderson's long-held views is that we need a director identification number. That is a policy that ARITA has adopted and strongly advocated for. We think more work needs to be done in terms of the rise of what are called pre-insolvency advisers—unregulated advisers who are going out and giving people advice about how they can structure their business to avoid their obligations. Quite clearly in that space we believe that regulation is needed, in the same way that if you give financial product advice you need an AFSL. We find it rather extraordinary that people are giving insolvency advice and are not either registered liquidators or lawyers.

CHAIR: Do you think there should be a focus on particular industries, such as construction?

Mr Korda : This phoenix activity—we have to watch the balance of how much regulation there is—is primarily a tax office issue. They are deducting Pay As You Go tax. All the suppliers are getting paid. That would be 30 or 40 per cent of someone's wage, and the super guarantee is another 10 per cent—so, 50 per cent of wages they do not pay to anybody. And it is hospitality; it is construction. The tax office has a debt collection problem, and they should be stamping out phoenixes, not the profession, because that is where the economic interest lies—in that not happening.

CHAIR: So, what is happening? Is it a resource issue for the ATO, or a lack of focus?

Ms Ferrier : The ATO has an anti-phoenix task force at the moment. So, they have action in this space, and they are working with ASIC on that. We understand that there is progress, but we have not seen the outcomes of that as yet.

Mr Winter : Clearly there is scope for more work to be done in this space—absolutely.

Senator HUME: As far as I can see, this issue of nonpayment of superannuation guarantee falls into three silos: one is insolvency, one is deliberate fraud—and that I suppose is where the issue of pheonixing can come in—and the other is this sort of administration error and/or burden. And that is where I think this argument of lender of last resort might come in, and also issues of cashflow management and the regulatory and legislative opportunity to do that. And I think they are three quite separate issues.

Mr Korda, I get a sense that the companies you are dealing with are much larger and you tend to be, by virtue of the capacity in which you appear today, involved in that insolvency space, as opposed to that administrative error or administrative burden silo. But I am interested in this argument about super funds being paid with payroll. I would have thought that one of the most vociferous advocates for that would be the super funds themselves, yet they are not. Why do you think that is?

Mr Korda : Maybe they have not thought about it that much. I do not know.

Senator HUME: They have not thought about being paid fortnightly into their fund instead of quarterly? I would have thought, in the same way that—

Mr Korda : If I were in their marketing department, that is what I would be saying!

Senator HUME: Well, that is exactly right. I think there must be a puzzle piece missing here as to why the superannuation funds are not pushing to be paid more often, are not pushing to be paid with the payroll cycle. I can only think that perhaps they administratively cannot handle that many transactions.

Mr Korda : Well, if the money comes in they will find a way.

Senator HUME: I would have thought so, too.

Mr Winter : I would agree with Mark. I think the reality is that they are largely a receipt taker in that regard. I do not know that they have turned their mind to the challenges of how they might otherwise administer it. But in my experience, you send the money in and it gets receipted. Indeed, I run a small business myself, at the end of the day. I have 14 staff, and each month we tick off the amounts and send them through to the super fund and they are nicely and easily paid.

Senator HUME: Do you think that if the superannuation funds received superannuation guarantee with payroll then (a) you would see the nonpayment of superannuation guarantee immediately but (b) it would be more burdensome for them to follow up?

Mr Korda : If you have a layer—it always gets paid with wages—you actually have a first line of defence. The employees will know that it has not been paid, because you have to say it is paid not deducted. So you have the first line of defence, which is the employees. It would probably be good for the employees to go to their super fund rather than the tax office. I do not understand the history of why the tax office is part of the whole process, other than the corollary that it is deducted like pay-as-you-go tax deductions.

Senator HUME: I would have thought that it is because the superannuation fund has no obligation to work out the accuracy of the amount of superannuation that has been paid, just that it has been paid, whereas the ATO is the one that can corroborate superannuation guarantee data with earnings.

Mr Korda : But your first line of defence would be the individual employee and their unions, and then maybe the super fund.

Senator HUME: One of the solutions that has been put forward is that the ATO takes all the administrative burden, that the ATO becomes the clearing house for all superannuation—it is paid with wages, but it is paid directly to the ATO, and then the ATO pays all the superannuation funds. So the superannuation funds only receive the superannuation guarantee from one source. Do you have a comment on that?

Mr Korda : The nice thing about that is you go, 'Okay, here's your BAS; it has GST, pay-as-you-go and super all wrapped up.' But of course it does not have the payment of net wages, does it? So the employee is getting the net wages—they always know when they are getting them because they go into their bank account. The only thing missing is they do not know that their super is being paid, whereas the tax office wants to look after pay-as-you-go and GST. There has to be some cash-flow timings on those, because, if that was all brought forward to daily or weekly, then there would be horrendous cash-flow problems, which I do not think there are with super. Wiser people will know the detail.

Ms Ferrier : In terms of what Mark is saying there about being able to report and pay it to the ATO as part of your GST or PAYG as well, both of those liabilities are extensive liabilities—unpaid amounts in liquidations as well. Having to report it through to the ATO and remit it to the ATO as part of your GST—we see significant GST debt as well in liquidations—I am not sure necessarily solves the nonpayment of superannuation, because if they are not paying their superannuation then they are more than likely not paying their GST and PAYG as well.

Mr Korda : And you want to divorce the payment to the tax office from the payment to employees of their after-tax wages and their super. The rest the tax office can negotiate. You think of, every month, all those deductions—I do not know how many employees there are—going in to the tax office and having to go out again. I do not think that is a very good idea. I think it should go straight to the super fund, and maybe they have some obligations to follow up when they are not receiving it.

Senator HUME: Actually one of the witnesses today suggested that we should enhance the enforcement powers of unions or superannuation funds to follow up on nonpayment of the superannuation guarantee. I have a natural hesitance towards increasing anybody's enforcement powers, but do you have a comment to make on that?

Mr Winter : I think enforcement powers being handed over to third parties is always fraught, and I think you are better to ensure that the enforcement powers that already exist amongst regulators are properly discharged and properly resourced. That, to be honest, is a greater challenge for government than trying to expand in other areas.

Mr Korda : So maybe if it is being paid at the same time as the wages are being paid, you may have shrunk the problem so much that you do not need to worry about putting all these layers on top of it. Maybe it is a staged process and you see how you go. That is what I would recommend.

Senator HUME: There was something in ARITA's submission that I wanted to ask for a little clarification on. It was:

Steps need to be taken to directly link tax and SG obligations for both reporting and payment …

I think we have touched on this. And you said:

Reporting alone under Single Touch Payroll will not resolve problems with non-payment of SG …

Single-touch payroll does seem to be a useful tool, but in my mind it was more the size of the organisation because single-touch payroll only applied to large organisations as opposed to small organisations. That was the problem. But you are suggesting it is more because tax and SG obligations are not paid at the same time, and that is a problem. Is that correct?

Ms Ferrier : Yes. Again, looking at it from a purely insolvency space, you can get away with reporting and still avoid your director penalty notice and personal liability. So you can report in and still have some protection yourself, but the nonpayment can still go unenforced; that will remain unpaid in the insolvency situation but the director will not be exposed to that personal liability.

Mr Winter : It is actually taking part of that enforcement toolkit away by facilitating notification separate to payment.

Senator HUME: Okay, good point. The previous witness, who we had by teleconference from the small business ombudsman, suggested that there was in fact a disincentive for small businesses to flag that they were potentially in financial difficulty or needed to go onto some sort of payment plan with the ATO—that rather than being acknowledged as being good corporate citizens for saying, 'Look, I'm in a bit of trouble but I can get out of this; let's work together,' that in fact it works in reverse. Potentially financial institutions might respond to that poorly, so it is better to keep your potential insolvency close to your chest. Do you have a comment on that? Whether there should be a carrot-and-stick approach or whether there should be some sort of acknowledgement for good corporate behaviour as opposed to—

Mr Winter : I think this comes to Mark's earlier point around the ability to negotiate with creditors in order to turn around your business. There is legislation being drafted around safe harbour opportunities at the moment for businesses to have provisions in which they can negotiate that in an environment which is somewhat protected. But in terms of the ability of the ATO to negotiate, and their willingness to negotiate, with distressed taxpayers, I think we see plenty of evidence that they are a willing participant in that discussion because they are well aware from being the most active creditor in the market that negotiating with people who are in distress is more likely to return a payment of their obligation than not. I think you will find that all sophisticated creditors take that approach.

Ms Ferrier : And certainly we would support earlier intervention in financial distress. The vast majority of small-to medium-sized liquidations are well and truly past the ability of being able to be saved by the time they seek professional advice. So we would prefer to see earlier intervention by businesses when they start to experience financial distress.

Mr Winter : Indeed, one of our overarching commentaries of what happens in the market is that large firms tend to pull the pin too soon and small firms tend to pull the pin far, far too late. That becomes a real challenge in that space. Small businesses tend to ignore the signs of financial distress and therefore it makes it very hard for those opportunities to turn them around to be successful.

Senator HUME: Thank you.

CHAIR: Further to that issue we were talking about of single-touch payroll. In your submission you said:

Single Touch Payroll reporting may actually undermine the effectiveness of other recovery processes such as Director Penalty Notices …

and that the only way to address that is that it includes both payment and reporting. Would you like to elaborate on that a bit further?

Mr Winter : I think that goes back to the point we were just making to Senator Hume: if you simply notify, you are discharging significant responsibility that could be attached to the potential of that director penalty notice and you can still carry forward that debt without payment. So there is actually a wedge opportunity there to use the notification to reduce your own personal liability without addressing the actual liability for the payment itself.

CHAIR: Okay. That issue, of itself, does not suggest that the single-touch payroll, on its current format, is not a useful innovation, I take it. You—

Mr Winter : Oh, not at all. We support single-touch payroll and, indeed, would support its even wider use. I think that goes to Mark's core point: if you are running a business effectively, no matter what size, and you are sending your payments through on staff for their salaries then the ability to bring all of that together as one is an efficient process and it avoids some moral hazards.

CHAIR: What are the barriers to including payment as part of the single-touch payroll?

Mr Winter : Again, Mark made the point around being able to manage large amounts of PAYG and some cash flow issues but I guess those are different matters to the superannuation payment, which is of course an employee's money at the end of the day. So I do not think there are any significant barriers to bringing them together.

CHAIR: Thank you very much for appearing before us today. At this point the committee will suspend for lunch and resume at 1.15 pm.

Proceedings suspended from 12 : 21 to 13 : 14