Director Penalty Law Changes - Reality Now Bites
Critics of the legislation enacted last June claim that henceforth interest in starting and running a business – particularly if it’s small to medium sized - are significantly lessened. This consequent drop in business activity and investment will, they say, affect negatively every aspect of the national economy, including employment and GDP.
What is immediately relevant is for company directors and their advisers to understand the changes, deal with them, or suffer the very serious consequences of lack of awareness and inaction.
So What's Changed?
In the past directors could be held personally responsible for companies’ unpaid PAYG taxes. They still are, but liability has been extended, former ways out of trouble blocked and stricter time limits will be enforced for settling the debt.
The Law Now:
- Extends a director’s liability to superannuation;
- No longer necessarily protects the personal assets of directors who put companies into administration or liquidation;
- May also include spouses and other associates of directors in matters of liability; and
- Includes many changes that are retrospective.
The ATO will now estimate the liability of a company’s superannuation guarantee charge (SGC) and make directors responsible for any part of that amount unpaid or unreported to the ATO three months after the liability existed. This can happen even though a director has attempted to meet obligations by way of an administration or winding up of a company.
The new law aims to ensure directors satisfy tax liabilities promptly, or if they can’t, they at least report their tax indebtedness to the ATO.
The New Procedure
Suppose a company has a tax liability that hasn’t been reported to the ATO or remains unpaid three months after the due date. Automatically directors of that company are liable for a penalty equal to the amount of tax not remitted or for an amount that will be estimated by the ATO.
But first, the amended law under Section 269-25 requires the ATO to issue a director penalty notice (DPN) to each and every director on whom it proposes to enforce liability personally. If a director has given the ATO the address of the company’s registered tax agent, then the DPN can be served simply by leaving a copy at that address or posting one there. If 21 days later the ATO is still owed money, the Commissioner of Taxation can take action against the director to recover it.
Accordingly, if the ATO issues a DPN to a director who hasn’t lodged all returns and superannuation statements within three months of the due date, the director can’t avoid the director penalty and personal liability for that company’s unpaid PAYG and superannuation debt by placing the company into voluntary administration or liquidation.
However, if the same director with the same outstanding tax debt hadn’t received a DPN, and the company had appointed a voluntary administrator or liquidator, that director would still be regarded as personally liable for director penalties. But the ATO must issue a DPN before such an appointment, for the penalties to be enforceable.
We are now becoming aware of the ATO issuing DPNs once a company has been placed into liquidation. We believe all directors should without delay review the current state of their companies’ lodgements and general taxation situations, before deciding whether liquidation is appropriate in their particular circumstances.
The attached ATO document at the botom of this page clearly sets out their intent.
Questions are now being raised widely among business managers and their advisers throughout Australia like: “Does lodging outstanding tax returns more than three months past the due dates absolve directors of personal liability? Can directors escape personal liability if all lodgements are brought up to date before the ATO issues a DPN?”
As we see it, the answer in both instances is “no”, but should anything occur to change our opinion we will update subscribers to our newsletters thereafter.
Meanwhile, here’s the content of the S 269-25 Notice, referred to above.
The Commissioner must give notice of penalty
(1) The Commissioner must not commence proceedings to recover from you a penalty under this Subdivision until the end of 21 days after the Commissioner gives you a written notice under this section.
(2) The notice must:
(a) set out what the Commissioner thinks is the unpaid amount of the company‘s liability under its obligation, and
(b) state that you are liable to pay the Commissioner, by way of penalty, an amount equal to that unpaid amount because of an obligation you have or had under this Division; and
(c) explain the main circumstances in which the penalty will be remitted.
(3) To avoid doubt, a single notice may relate to two or more penalties, but must comply with subsection (2) in relation to each of them.
When notice is given
(4) Despite section 29 of the Acts Interpretation Act 1901, a notice under subsection (1) is taken to be given at the time the Commissioner leaves or posts it.
Is Your Company Unviable?
The ATO is becoming increasingly aggressive towards companies that appear to be unviable, particularly those that have unpaid tax debts and are trying to stay in business by undercutting rivals’ pricing.
The then ATO Commissioner Michael D’Ascenzo has justified this by stating publicly he doesn’t believe insolvent businesses should be allowed, by undercutting, to threaten the profitability of businesses that are meeting their tax obligations.
Small businesses owe more than $3bn to the ATO and the debt is increasing.
Mr D’Ascenzo has assured a business consultative committee that where the ATO doubts a business’s viability, there will be goodwill extended by tax officials to “get that business over the line”. When there is a succession of defaults on agreements with the ATO to settle debt, the ATO will pursue defaulters in fairness not only to business people who meet their obligations under the Tax Administration Act, but also to all taxpayers.
Anyone who is a company director should immediately make themselves aware of these tax law. Directors should not delay in conferring with their accountants and financial advisors about this new tax law and its implications.
