Generally, the unpaid debts of a company are not recoverable against the company’s directors.
However, with effect from 1 April 2020, the Commissioner of Taxation (the Commissioner) will have new powers that allow him to cut through the company veil and recover unpaid indirect taxes such as GST, wine equalisation tax and luxury car tax (collectively, net amounts) from the directors of the company personally.
To complement this new collection power against directors, the Commissioner will also be entitled to issue an estimate of what he believes is the correct net amount – in the event that an entity fails to lodge its business activity statement (BAS) by the due date.
While the primary policy intent of the new laws is to combat directors partaking in illegal phoenix activity, the law itself is not limited to these scenarios. Instead, these new laws apply to all company directors, even those not engaged in illegal conduct and those who may have missed a lodgement for genuine reasons.
As such, all directors, particularly non-executive or new directors of a company, need to be fully aware of their personal responsibilities and potential liabilities, in the event that their company fails to lodge their BAS on time and/or fails to pay the net amount reflected in their BAS by the due date.
Background and key changes
The Treasury Laws Amendment (Combatting Illegal Phoenixing) Act 2020 extends the Commissioner’s ability to issue a “director penalty notice” (DPN) to GST and other indirect taxes which allow the Commissioner to collect either the actual or the estimated net amount personally from company directors in certain circumstances.
Previously, the Commissioner was only entitled to issue a DPN for unpaid and reported/non-reported superannuation guarantee charges and pay-as-you-go withholding liabilities.
The changes are part of a suite of amendments by the Government in an attempt to overcome significant revenue losses from so-called “phoenix activity” within the GST system, including:
- the GST withholding regime affecting the residential property sector; and
- the compulsory “reverse charge” regime affecting the valuable metals industry.
To ensure companies and directors cannot deliberately or inadvertently avoid the new laws by simply not lodging the BAS, the Commissioner is also empowered to issue assessments for unreported net amounts based on a reasonable estimate.
The amount estimated by the Commissioner is recoverable as a debt due and payable and is provable in the event of a bankruptcy, thereby protecting the Commissioner’s position as a creditor.
It is important to note that, unlike the Commissioner’s ability to issue a DPN, which is limited to companies, the Commissioner can issue an estimate of an unreported net amount for any type of entity, such as an individual, a trust or a partnership.
Therefore, it is important to note that the Commissioner’s power to issue an assessment based on an estimate is very broad and can apply even when a genuine business, no matter what the legal form, is late in lodging its BAS.
How will the measures work?
Critical features of the new laws are:
- The Commissioner will be entitled to issue a DPN for an assessed net amount (whether as a result of the company lodging its BAS or as a result of an assessment issued by way of an estimate) if it remains outstanding after the due date. This date is generally 21 days after the end of the month for monthly taxpayers and 28 days after the end of the quarter for quarterly taxpayers.
- The effect of the DPN is that the director will be personally liable for a penalty, which will be an amount equal to the company’s unpaid net amount as assessed.
- The director will have 21 days after the DPN is issued to satisfy the liability, appoint an administrator or begin to wind up the company.
- Payment by the company of its assessed net amount, or payment of the penalty by the director under the DPN, will satisfy the other (i.e., the Commissioner can, in effect, only recover one round of assessed GST / penalty amount against the company or director).
- Penalty amounts under a DPN can be “locked down” (i.e., cannot be remitted) against a director where the company fails to lodge the relevant BAS within three months of its due date, even if the company is later put into administration or liquidation. In other words, directors must ensure they put a company into administration or liquidation within strict time limits otherwise the director will be permanently liable for the unpaid GST of a company.
- New directors will also be affected as the amendments allow a director to be issued with a DPN for historic GST liabilities if the debt is not paid within three months of a new director’s appointment. This highlights the importance of new directors ensuring they conduct comprehensive due diligence before taking on the position, as now they may be taking on personal liability for a company’s GST debts.
- Where an entity has been issued with an assessment based on an estimate, the payment of the estimate is deemed to be payment towards the actual net amount and vice versa.
- There are limited defences that directors can claim if subject to a DPN. These defences include that the director was unable to comply with the obligation due to illness (or other good reason) or that the director took all reasonable steps to comply with the obligation. A director can also claim a defence to the extent the penalty was due to the company adopting a reasonably arguable position or the company took reasonable care in connection with applying the indirect tax law.
Top tips offering directors protection
- An obvious effect of the measures is that directors will have personal financial exposures for the company’s GST and indirect tax obligations, akin to a personal guarantee to the Commissioner that net amounts of the company will be paid. This dictates a need for directors to undertake regular and thorough GST health checks of day-to-day lodgement and payment processes, and the company’s broader tax risk management framework, to ensure obligations are being met on-time and in full.
- New directors should ensure they undertake thorough due diligence of any potential director appointment as they will effectively inherit that company’s historic unpaid GST liabilities within three months after appointment.
- Directors should ensure contact details with ASIC are current as any DPN will be issued to the address held by ASIC. The 21-day clock for a DPN counts from the date it is issued to the address on the ASIC file, regardless if those details are out-of-date.
- Once a DPN is received, it is important for directors to act quickly to mitigate the risk that a penalty will be “locked down” against them personally and not able to be remitted.
For more information
If you have any questions or require further information regarding unpaid indirect taxes, please contact your local RSM office today.