Tax Deductions on Expenses Incurred with Director Penalty Notices (“DPN”)

The DPN Regime was introduced by the Australian Taxation Office (“ATO”) in 1993 as a method to ensure corporate compliance with taxation liabilities. Under the DPN regime, directors could become personally liable for the company’s debts under certain circumstances. The primary objectives of the DPN regime were to ensure directors caused the company to meet its taxation obligations or if this was not possible, promptly seek professional advice with the view to placing the company into voluntary administration or liquidation.
Until recently DPNs had only applied to Pay As You Go (PAYG) withholding liabilities. However, in July 2012, the DPN regime was expanded to include Superannuation Guarantee Charge (“SGC”) liabilities.  The regime was also amended to make directors automatically liable for PAYG withholding or SGC where such amounts have been both unpaid and unreported for more than three (3) months after its due date (known as the lockdown provisions). Under the new DPN regime a director cannot avoid personal liability where they have fallen foul of the lockdown provisions by placing the company into Voluntary Administration (“VA”) or Liquidation. The clear emphasis here is that directors need to ensure that at reporting the company’s obligations on time to still avail themselves to being able to avoid personal liability by subsequently placing the company into either VA or Liquidation.

In the recent Administrative Appeals Tribunal Decision of James Gerald Michael Healy v Commissioner of Taxation ([2013] AATA 281), Senior Member C R Walsh was required to consider the tax deductibility of various expenses incurred by Mr Healy in defending and addressing a DPN (and also in annulling his bankruptcy). While Mr Healy was primarily unsuccessful on a technical aspect (the expenses were not in fact incurred by Mr Healy as his brother paid them), Senior Member Walsh analysed the ability of directors to claim a tax deduction for expenses incurred “in managing his or her own tax affairs and in complying with a legal obligation in relation to another taxpayer’s tax affairs.”

Senior Member Walsh explained that Section 25-5 of the Income Tax Administration Act 1997 (“ITAA”) provides for a taxpayer to deduct expenses incurred for “complying with an obligation imposed on you by a Commonwealth law, insofar as that obligation relates to the tax affairs of an entity.” The definition of tax under the Income Tax Administration Act 1997 was considered to be sufficient to encompass amounts due under the PAYG withholding regime. Under the DPN, Mr Healy’s obligation as a director was to:

  • Cause the company to comply with its tax obligations (by paying them)
  • Make an agreement to repay the company’s tax debt;
  • Appoint a voluntary administrator to the company; or
  • Place the company into liquidation.

As such, Mr Healy’s obligation would be “complied with” if one of the above events occurred. In Falcetta v Commissioner of Taxation (2004) FCAFC 194, the Full Federal Court were of the view that under Section 25-5 of the ITAA, expenses relating to, amongst other things, preparation of income tax returns, managing and complying with a DPN and obtaining legal advice on these issues would be deductible. In that case, Mr Falcetta incurred legal expenses in obtaining advice regarding the DPN for unpaid PAYG withholding debts of the company. The ATO Interpretative Decision (ATO ID 2004/831) on this authority suggests that the legal expenses will only be deductible under section 25-5 of the ITAA 1997 of:

  • It is complying with an obligation imposed on the taxpayer by a Commonwealth law that relates to the tax affairs of an entity; and
  • The advice is provided by a recognised tax adviser.

Based on these recent cases, it appears that directors have further incentive to seek prompt professional advice regarding any DPN received.

The ATO continue to use DPNs actively as a tax collection measure for companies, particularly those in the SME sector where non-compliance with PAYG withholding and SGC is more significant. Importantly DPNs are sent to the residential address of the directors as per ASIC records. So encourage your clients to open the mail they receive to their home address, rather than leaving it unopened on the kitchen bench as we have seen occur on a number of occasions which generally limits the options available to them.

If you would like to know more about DPNs please do not hesitate to contact us.

 

Insolvent Builders & Home Warranty Insurance (“HWI”)

For many individuals or couples one of the biggest purchases in their lives will be the construction of a new home. Unfortunately over the years there have been many residential home builders that have gone into some form of insolvency administration and ceased to trade, leaving home owners with an incomplete home and lots of worries.
We are frequently appointed as Voluntary Administrators or Liquidators to residential home builders where they are insolvent. In one recent matter, there has been an instance where the HWI policies were not adequate to cover all costs incurred in completing the homes. We highlight in this article some important considerations customers should give if such an event occurs.

HWI is taken out by the residential home builder and is designed to cover customers. From 1 July 2010, the NSW Self Insurance Corporation, trading as the NSW Home Warranty Insurance Fund, took over as the sole provider of home warranty insurance in NSW. QBE Insurance (Australia) Limited and Calliden Insurance Limited were appointed as insurance agents of the NSW Self Insurance Corporation, through a contractual arrangement.

Importantly HWI provides a set period of cover for loss caused by defective or incomplete work in the event of the death, disappearance or insolvency of the residential home builder.

From 1 July 2002 a key element of a HWI policy is that it must indemnify beneficiaries (i.e. the customer) for non-completion of work due to early termination of the building contract. Insolvency of the residential home builder typically results in the termination of the building contract.

Critically from 1 February 2012, a HWI policy:

  • is required to be obtained where the contract price is over $20,000 or, if the contract price is not known, the reasonable market cost of the labour and materials involve is over $20,000; and
  • must provide cover of at least $340,000.

Relevantly claims for incomplete work are limited to 20% of the contract price (up to a maximum of the cover provided under the policy). It is this aspect that we believe is not always well understood by customers and indeed the residential home builder when insolvency occurs. We have set out below a recent matter we were appointed to highlight how HWI works when an insolvency event occurs resulting in the termination of the building contract.

Facts

  • Contract value for construction of home $300,000;
  • Costs paid as at insolvency event by home owner for first stages of construction $100,000;
  • Invoice issued by residential home builder for work completed but unpaid $25,000; and
  • Balance outstanding under contract at time of insolvency event / Liquidation: $200,000.

At the date of insolvency, the Insolvency Practitioner is often provided with a debtors listing relating to progress claims made by the residential builder. The recovery of each debtor is not always straight-forward and an accurate position regarding what the customer may owe (if any) can only be determined once the HWI is finalised. This can take many months to determine.

Given the above facts, the HWI and customer position unfolded as follows:

  • Following the liquidation of the residential builder, the customer lodged a claim under the HWI policy.
  • The Home Warranty Insurer arranged for an external consultant to inspect the dwelling to confirm / quantify the amount of works required to complete the contract.
  • The customer also had to prove to the Home Warranty Insurer the quantum of payments made to the residential home builder under the contract. In this case no “cash” payments had been made, but in circumstances where this occurs, this can create issues.
  • Three (3) quotes were obtained from different builders to complete the works. The Home Warranty Insurer then approved one of the builders to complete the works.
  • The certified costs to complete the dwelling were $250,000. Therefore, the customer paid the balance of the original contract price being $200,000 and made a claim for the additional $50,000 under the HWI policy.
  • In this case as the additional cost to complete the dwelling was less than 20% of the original contract price, the HWI covered the additional $50,000 that was required to complete the construction of the dwelling. Therefore there were no monies collectible under the outstanding progress claim in the Liquidation.
  • HOWEVER, if the certified costs had been for example, $285,000 (thus meaning the additional costs were greater than 20% of the contract price), then the customer would have had an uninsured loss to the extent of $25,000 that would have to be met from their own funds. In the particular insolvency administration concerned, there were 3 customers who ultimately had uninsured losses ranging from $25,000 to $60,000 per customer. Not insignificant!!

Unfortunately when an insolvency of a residential home builder occurs, it may take several months to work through this process and it will only be at the conclusion of the building contract once all of the costs are known, that the Liquidator would be in a position to determine if there is actually any debt owning by the customer.

It is important that customers get the right advice as to their position when their builder has been placed into some form of insolvency administration. We caution customers who want to go off miss-informed and complete the dwelling themselves as once this occurs they are likely to jeopardise any ability to claim on HWI.

 

Strengthening Our Presence in Greater Western Sydney – Narellan Office

We are excited and pleased to announce the opening of our new South West Sydney Office at Narellan. Daniel Soire, a Principal of Jones Partners and a Registered Liquidator, is a local Macarthur resident and will be supervising the Narellan office.
For many years now, Jones Partners has truly valued the importance of being accessible to professional advisors and business owners and individuals throughout Greater Western Sydney (“GWS”). The GWS region is a very significant contributor to the States GDP and has a huge diversity in the range of businesses that operate within it. Our continued presence (via our Norwest Business Park Office) has enabled us to develop strong relationships with other professionals such as accountants, lawyers and financiers, as well as and importantly assist business owners and individuals in this region who may get into financial difficulty. Having a very strong and keen interest in what happens in the region also helps us to understand the factors that can affect SME businesses as well as individuals.

The new Narellan office puts us closer to fellow professionals and SME businesses and individuals when they need expert insolvency, restructuring or bankruptcy advice in South West Sydney. We believe this proximity and not “the ivory tower” approach is what such stakeholders are seeking when looking for specialist advice in corporate and personal insolvency and restructuring.

Our continued and sincere focus throughout the GWS region reflects the importance we place on ensuring that SME businesses and individuals in this region get the “right advice” when they may be in financial difficulty. Jones Partners are a Chartered Accounting Firm that specialises in the provision of corporate and personal insolvency and restructuring services. For more information go to jonespartners.net.au

Strengthening our Presence in Greater Western Sydney

For many years now, Jones Partners has truly valued that importance of being accessible to professional advisors and business owners and individuals throughout Greater Western Sydney (“GWS”). The GWS  region is a very significant contributor to the States GDP and has a huge diversity in the range of businesses that operate within it. Our continued presence (via our Norwest Business Park Office) has enabled us to develop strong relationships with other professionals such as accountants, lawyers and financiers, as well as and importantly assist business owners and individuals in this region who may get into financial difficulty. Having a very strong and keen interest in what happens in the region also helps us to understand the factors that can affect SME businesses as well as individuals.
To further build on our presence and focus in the GWS region, we are excited and pleased to announce the opening of our South West Sydney Office at Narellan. As with our Norwest Business Park Office, the new Narellan office puts us closer to fellow professionals and SME businesses and individuals when they need expert insolvency, restructuring or bankruptcy advice in South West Sydney. We believe this proximity and not “the ivory tower” approach is what such stakeholders are seeking when looking for specialist advice in corporate and personal insolvency and restructuring.

Our continued and sincere focus throughout the GWS region reflects the importance we place on ensuring that SME businesses and individuals in this region get the “right advice” when they may be in financial difficulty. Jones Partners are a Chartered Accounting Firm that specialises in the provision of corporate and personal insolvency and restructuring services. For more information go to jonespartners.net.au

Small Business Survival Tips

On 28 August 2013, I hit the airwaves on Eagle Radio – which is Australia’s first and only radio station dedicated to empowering small businesses. As an Insolvency Practitioner that specialises in advising small to medium sized businesses when they are in financial difficulty I highlighted what are the key ingredients that keep a small business afloat. Unfortunately many small businesses don’t make it through the early years of their commencement and can end up in liquidation.
There is no doubting that small business is a vital ingredient as part of a thriving Australian business community. Running a small business carries risk, but also enormous opportunity if managed correctly. Click on the link below to listen to the interview.

Radio Interview

If would like to discuss any aspect of the interview, please don’t hesitate to drop me a line.

All the best.

 

 

 

 

 

Director Penalty Notices

In June 2012 there were changes to the Director Penalty Notice (DPN) regime. Most importantly such changes now expose directors to automatic personal liability where either PAYG or SGC obligations remain unpaid and unreported for more than 3 months after the due date. Whilst the ATO will still have to send a DPN to recover on the debt – the director can no longer avoid personal liability in such circumstance by voluntary administration or voluntary liquidation. The important message is that at an absolute minimum directors should ensure that they comply with reporting obligations on-time.
Unfortunately there is still a status quo position being adopted by some directors and advisors. If you do receive a DPN, it is critical to seek professional advice urgently so that it can be determined what type of DPN you have received.

Liquidation is NOT a dirty word!

Whilst the term liquidation is frequently used, for many company directors or business owners it is still not always well understood and indeed feared. Whilst this is understandable, it is important to understand that this can also be a final part of the overall strategy when it is determined that a business (or company structure) is wound up. Critically directors and business owners need to seek professional advice (from appropriately qualified people – not unqualified consultants!!!) when they know the business is not heading in the right direction. In the main business failure is largely due to “micro” effects on the business, rather than “macro” factors as is sometimes reported. There is also the important consideration of trading whilst insolvent that directors unnecessarily expose themselves to when continuing to operate a business that is in financial distress. Take the pressure off yourself and get professional advice at the earliest possible stage so they can help you keep things under control.