Tax Changes - Expansion of Director Liability Provisions

In the May 2011 Federal Government budget, the Government announced further measures to strengthen the Taxation Legislation to counter “fraudulent corporate phoenix activity”. The Government describes this activity as involving:

“a company intentionally accumulating debts to improve cashflow or wealth and then liquidating the company to avoid paying the debt. The business is then continued as another corporate entity, controlled by the same person or group and free of their previous debts and liabilities.”

The Taxation Administration Act, 1953 (“TAA53”) is expected to change as follows:

• Extending Director Penalty Notice to include SGC
The provisions governing Director Penalty Notices (“DPN”), will extend to Superannuation Guarantee Charge (“SGC”) amounts. As you would be aware, SGC amounts are only due to be reported and paid to the Commissioner when the employer has not paid the superannuation amounts to a compliant superannuation fund within twenty-eight (28) days of the end of each quarter;

• Automatic liability for a director
Where PAYG tax withheld and SGC amounts are unreported (and unpaid) for more than three (3) months after the returns/activity statements were due for lodgment, the Commissioner will be given the power to commence recovery action against company directors personally without prior notice.

This change is significant as it will mean that company directors will no longer need to be served with a DPN to be personally liable. Under the automated liability provisions, once the three (3) month window has passed (for the lodging of returns), appointing a Liquidator or Administrator to a company will not extinguish the directors’ personal liability.

• Refusal to allow PAYG credits
The Commissioner will also have the discretion to prevent directors and their associates¹ from obtaining taxation credits for PAYG withheld amounts in their personal taxation returns where the directors’ companies have failed to pay the withheld amounts to the Commissioner.

In relation to DPN’s being extended to cover unpaid SGC amounts, for directors to avoid a penalty and personal liability, they must first ensure the SGC is reported to the Commissioner, otherwise they will be at risk of the automatic liability provisions. Once a debt has been reported, the only way a director will attract personal liability is if he fails to respond to a DPN. Readers will recall that those directors who are served a DPN must, within twenty-one (21) days of issue of the DPN (not service) either:

(a) Pay the debt;
(b) Appoint an Administrator to the company; or
(c) Appoint a Liquidator to the company.

Where a director appoints a liquidator or voluntary administrator after the three (3) months elapses, the director is taken as not having remitted their director penalty. In these circumstances, even where the company is in liquidation or voluntary administration, the only way the director may extinguish their penalty is to pay the penalty themselves.

It is expected the above changes to the law may be in effect by November 2011.

There are transitional provisions. The proposed transitional provisions provide that automated recovery provisions apply to director penalties in existence before commencement of the new law if those penalties were not extinguished before commencement.

For example, if Company A has PAYG unreported for more than three (3) months (after due date for reporting) at the time the new legislation commences, Company A’s directors will be automatically liable for the PAYG at the date the new law commences. In this scenario, to avoid automatic liability applying to the directors for unpaid PAYG at the commencement of these changes, directors must either:

a) Pay the outstanding PAYG; or
b) Lodge outstanding BAS returns so that unpaid PAYG is at least reported (thus avoiding the automatic liability provision); or
c) Place the company into liquidation or voluntary administration before the amendments commence.

The amendments to extend the penalty regime to SGC only apply to SGC lodgments occurring on or after the commencement of the amendments.

Once the proposed changes are in place directors will be under even more pressure attempting to manage their taxation liabilities. To avoid personal liability it is important for directors of companies with any taxation liabilities to act early and seek advice where there are cashflow concerns in meeting a company’s taxation and superannuation obligations.

¹ An "associate" is defined in Section 995-1 of the ITAA 97 as having the same meaning contained in Section 318 of the Income Tax Assessment Act, 1936