Info News

DIRECTORS’ PENALTY REGIME

In 2012, Directors’ penalties were extended to unpaid superannuation guarantees (“SCG”) as well as unpaid PAYG amounts. This meant that the ATO could issue a Director Penalty Notice (“DPNs”) for these liabilities.

As of 1 April 2020, the ATO can now also issue DPNs for unremitted GST, wine equalization Tax (“WET”) and Luxury Car Tax (“LCT”) – we can call it “net GST”.

DPNs are now of two types:

1 - Lockdown DPNs - these will be issued if the PAYG or net GST is unreported and unpaid within 3 months of the due date (or 1 month and 28 days from the end of the relevant quarter for SCG obligations). The ATO can estimate the outstanding liability for the purposes of the Lockdown DPN. The only option here is to pay within 21 days. Putting the company into voluntary administration or commencing the wounding up process will not suffice to avoid liability. The obligation becomes personal to the director.
2 - A non-lockdown DPN will be issued if the PAYG or net GST is reported within 3 months of the due date (or 1 month and 28 days for SCG obligations) but the amount remains outstanding. In this case, the debt can be paid within 21 days, or the company can appoint an administrator or the company can begin to be wound up within that 21-day period.

If the debt remains unpaid under a DPN the ATO can recover it in one of the following ways:

1 - A Garnishee Order, for example to a bank to transfer money to the ATO from a director’s bank account; or
2 - Commencing legal proceedings; or
3 - Offsetting tax credits.

PAYG withholding non-compliance tax

Even without issuing a DPN, the ATO can recover monies in other ways, for instance, by making directors and their associates liable to PAYG withholding non-compliance tax (“NCT”) - effectively reducing the director’s credit entitlements - where the company has failed to remit amounts withheld. In this way, directors (and their “associates”) will not be able to access PAYG credit in their own tax returns where a company has not paid the ATO.

“Associates” of directors include certain relatives, such as partners, spouses and children. They can be held personally liable to pay NCT from their own personal tax accounts if they do not:

1 - Influence the director to report and pay outstanding tax to the ATO, appoint a liquidator or administrator; or
2 - Inform or report the director for the non-payment of tax to the ATO, ASIC, the Police or the Minister;

What should directors do:

1 - Get all outstanding company returns up-to-date now.
2 - Keep all company returns going forward up-to-date and lodged within 3 months of their due date;
3 - Comply with their GST and other reporting requirements to reduce the risk of personal liability.
4 - Monitor payment obligations on an ongoing basis, especially in larger corporations where directors may not have direct oversight in monthly or quarterly compliance activities.
5 - If a return is lodged but not paid on time, the ATO is a required to issue a Director
6 - Penalty Notice. However, if a company is placed into liquidation or administration before the DPN expires, personal director liability can be avoided.
7 - If a director receives a DPN they should get urgent advice in order to avoid personally liability.
8 - The ATO has indicated that it will not provide interest and risk-free financing options for directors. It is likely therefore that businesses which are struggling with no other viable financing options will in the future seek to rely more heavily upon free finance, effectively by stringing out suppliers and creditors. To avoid loss, all businesses should:
a - Insist upon personal guarantees from the directors of companies to which they provide credit;
b - Limit the credit limit on any company they deal with;
c - Enforce all credit limits strictly;
d - Review debt collection procedures and policies generally;
e - Recover debts in a timely fashion.

COMBATING ILLEGAL PHOENIXING

In addition to the new director obligations outline above, there are also new laws introduced by the ATO on 18 February 2020 which carry high penalties, both civil and criminal, for illegal phoenixing. The new laws:

1 - Prevent directors from backdating resignations or ceasing to be directors where this would leave a company without a director who can be prosecuted.
2 - Expand the ATO’s powers where there are outstanding tax lodgments to retain tax refunds owing to directors.
3 - Introduce the concept of ‘credit defeating disposition’ giving powers to creditors and to ASIC in situations where assets have been transferred out of a company or for a lesser value than the asset was really worth in order to prevent the asset from being available to creditors in the winding up of the company or with the intention of delaying or hindering this process.