A Bill with big consequences for company directors was introduced to the House of Representatives on 13 February 2019. It was quickly referred to the Senate Economics Legislation Committee (“the Committee”) on Valentine’s Day. The Committee is scheduled to report on the Bill on 26 March 2019.
The Bill is the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019. The House of Representatives has only 7 scheduled sitting days in April before it is expected the Federal election will be called. There is accordingly a high probability the Bill will not be considered before the House is dissolved and will ultimately lapse.
Extending the estimates regime
The ATO will be allowed to make estimates of the net amount of an entity’s GST liability including LCT and WET liabilities. The making of the estimate will result in the entity being liable to pay this amount. The estimate of the net amount will be deemed to be assessed and thus collectable.
PUNCTURING THE CORPORATE VEIL
The existing director penalty regime will be expanded to allow recovery of director penalties for assessed net amounts and GST instalments.
The director penalty regime currently applies to:
- PAYG withholding amounts
- superannuation guarantee charges
- estimates of PAYG withholding amounts and superannuation guarantee charges.
Company directors are under a general obligation to ensure the company satisfies its liability for the above liabilities or recognises the company may be insolvent and appoints an administrator or is wound up.
Directors are subject to a penalty equal to the company’s obligations if their obligation is unfulfilled by the due date. The penalty cannot be recovered from the director until 21 days after the ATO issues and serves a director penalty notice on the director. The director’s personal liability could be described as contingent until the expiration of 21 days after the issue of the director penalty notice.
Payment by a director of the penalty or the company of its obligation satisfies both obligations.
The existing director penalty regime will be expanded to allow recovery of director penalties for assessed net amounts and GST instalments. For assessed net amounts the director’s obligation begins on the day the relevant tax period ends, and for GST instalments it begins at the end of the GST instalment quarter. The penalty arises when the director’s obligation is unsatisfied on the due date.
DIREctor resignation issues
The Bill provides if a director’s resignation is reported to ASIC more than 28 days after it purportedly occurred, the resignation will take effect on the day it is reported to ASIC. Further, a director may not resign or be removed by a resolution of members if doing so will result in the company not having a director.
are these changes a big deal?
Put simply if enacted they are a big deal.
The director penalty regime when introduced in 1993, was the trade-off for the ATO surrendering their statutory priority for unremitted group tax (PAYG) deductions. It was also envisaged the regime would encourage early action by directors of financially distressed companies to take advice and implement restructuring options utilising the new voluntary administration regime.
Regrettably, timely action to address solvency issues by company directors is still rare. Directors are still reluctant to confront the issue in a timely manner and often find themselves utilising the Commonwealth as a lender of last resort by failing to comply with their obligations to ensure the company pays its tax withholding obligations. The extension of the penalty notice regime to GST will, in our opinion, have a substantial impact on the decision making of directors. GST liabilities can and are deferred and the funds are used to assist in meeting working capital obligations with little fear of personal recourse by some company directors. For many companies, its GST remittance is one of the largest regular cash outflows paid by the company.
The imposition of personal liability on directors for this obligation may lead to a more proactive response from company directors to solvency issues.
Directors now have an additional tool to deal with solvency issues if they act proactively. The safe harbour defence to insolvent trading may be utilised before receipt of a director penalty notice. The safe harbour can be used for affecting a restructuring that is reasonably likely to provide a better outcome than an immediate winding up or the appointment of an administrator. However, directors must be mindful that affecting a safe harbour plan will not protect a director from personal liability if a director penalty notice is issued by the ATO.