Directors Personally Liable for GST

Directors can already be held personally liable for Pay-As-You-Go [“PAYG”] and Superannuation Guarantee Charge [“SGC”] liabilities of a company in certain circumstances via the Director Penalty Notice [“DPN”] regime. 2020 is very likely to see legislation passed in the Senate to extend the DPN regime to include personal liability for GST as well.

Why has this occurred?

The Federal Government has been continuing to monitor the extent to which unpaid taxes, in particular GST (which commenced in 2000) are prevalent in illegal phoenix activity and also more generally the insolvency of externally administered companies.

Illegal phoenix activity has been on the Federal Government’s radar since the 1990’s, when even at that time, it was looking at ways to curb the incidence of such activity and the cost to the Federal Government in terms of lost revenue collections.

Illegal phoenix activity involves a financially distressed company (let’s say old company) transferring all of its assets for zero or less than market value to a new company (of which typically there is a relationship by way of directorship and / or shareholders), thus enabling the same business to be operated via the new company whilst leaving all of the pre-existing liabilities in the old company.

Whilst the Treasury Law Amendment (Combat Illegal Phoenixing) Bill 2019 was first introduced in February 2019, it lapsed with the dissolution of Parliament and the calling of the Federal Election. Subsequent to the Federal Election behind us, the Bill was re-introduced in July 2019. The current Bill largely replicates the former Bill in that it seeks to combat illegal phoenix activity and reduce the harmful effects of such activity on the Australian economy.

Why GST?

As already mentioned, the DPN regime already exposes directors to personal liability for PAYG and SGC liabilities if certain circumstances are met. The rationale here was that the Federal Government viewed that PAYG and SGC elements were effectively part of an employee’s remuneration package and a company ought not be deriving a financial advantage by non-payment of same.

Through continued information gathering by the Federal Government, it is believed that recalcitrant business operators (particularly where illegal phoenixing is thought to have occurred) are now exploiting the current gap that exists where there is presently no personal liability exposure of directors regarding GST liabilities of a company. Companies typically act as an agent for the ATO in collecting GST and are required to remit same (net of any input tax credits they are allowed to claim) to the Federal Government.

How will it work?

The existing DPN regime will be used. Therefore, there is still the ability for directors to mitigate their exposure for PAYG, SGC and GST (once legislation is enacted). However, the key point is and has been for some-time that they must ensure at a minimum that returns are lodged (ie BAS’s, SGC statements) within the required timeframes. If they comply with the lodgement on-time aspect and cannot ultimately afford to repay such liabilities, then there is still the ability for directors to cause the company to be placed into external administration (ie voluntary administration or voluntary liquidation) and as such these liabilities will be quarantined within the external administration of the company – ie not passed through to the directors. It is when the tax liability is both unreported and unpaid more than 3 months after the relevant due date that there can be no remission or avoiding of the personal liability – see below example:

  • Emma and Julie are directors of Swift Supply Pty Ltd (“SS”). SS is required to pay and report GST on a quarterly basis.
  • SS is required to lodge its return for the quarter ending 30 June 2019 by the due date of 28 July 2019.
  • SS lodges its return more than 3 months late on 1 November 2019. The return gives rise to a liability for SS to pay an assessed net amount of $100,000. The due date for the payment is 28 July 2019.
  • Emma and Julie are under an obligation to ensure SS pays the liability, enters administration or begins to be wound up. The obligation begins on the initial day, the day the tax period ended (30 June 2019).
  • SS is never in a position to pay the liability. As such, both Emma and Julie were required to place the company into voluntary administration or begin winding it up. As this does not happen on or before the due date of 28 July 2019 and the director penalties begin to apply from this date.
  • The ATO issues DPN’s to Emma and Julie on 1 February 2020. The ATO may begin recovery proceedings on or after 23 February 2020.
  • A penalty may be remitted if the directors comply with the obligation before the DPN is issued or within 21 days of the day the notice is issued. However, if the director complies with their obligation regarding an assessed net amount by placing the company into voluntary administration or beginning to wind up the company, the full amount of the penalty is only remitted if this is done within 3 months of the relevant due date. The end of the 3 month period is the lockdown date for the penalty.
  • Where the company enters administration or begins to be wound up after the lockdown date, only the amount of the company’s assessed net amount liability that was calculated by reference to information reported to the Commissioner before the end of the period 3 months after the due date is remitted.
  • If the assessed net amount is based on a return lodged after the lockdown date, a default assessment or an amended assessment issued by the Commissioner, this may result in the penalty being locked down in whole or in part and not being remitted.
  • Emma and Kerrie place SS into voluntary administration on 10 February 2020. Emma and Julie, satisfy the first condition to have their penalties remitted because their obligation is satisfied on 10 February 2020, before the end of the 21-day period on 22 February. However, because SS entered voluntary administration more than 3 months after the company’s due date of 28 July, the penalty is locked down. The entire amount of the penalty is locked down because the company’s GST return for the June quarter was more than 3 months late.

In preparation for the current Bill being passed by the Senate in 2020, it is timely for directors to review the position in relation to their tax compliance strategy with their external accountant or professional advisor. While I understand at times tax compliance is well down the priority list of things to do for SME businesses, lodgement of returns within the required timeframes can significantly mitigate personal liability.

Other changes in the current Bill regarding directorships?

A further item mentioned in the Bill relates to changes in order to prevent directors from backdating resignations or ceasing to be a director when this would leave a company with no directors. Once introduced the new provisions will prevent the resignation of a director that is reported to ASIC more than 28 days after the purported resignation unless it is approved by ASIC or the Court.

Example:

  • Bill is the sole director of Panorama Designs Pty Ltd (“PD”), a building company that is insolvent.
  • On 10 July 2019, PD borrows $50,000 it claims is for the purpose of finalising the construction of a small apartment complex.
  • On 15 July 2019, PD transfers the $50,000 and other assets to another company, Panorama Designs (No. 2) Pty Ltd, of which Bill is also a director.
  • On 20 October 2019, the creditors of PD commence proceedings to have a liquidator appointed to the company. On 1 November 2019, PD lodges a notice with ASIC that Bill resigned from the company and was replaced by Theo on 1 July 2019.
  • Bill claims that he should not be held accountable for the misconduct that occurred in July 2019 as he was not a director. However, the new provisions will mean that Bill’s resignation is taken to be effective from 1 November 2019 unless ASIC or Court approval is obtained for the earlier date.

Once the current Bill passes the Senate, I will update readers and also discuss in more detail the new voidable transaction provisions that  attempt to prevent creditor defeating dispositions.