Tuesday, 14 April 2020

From 1 April 2020, there have been legislative amendments to the Australian Tax Office’s (‘ATO’) Director Penalty Regime to include Goods and Services Tax (‘GST’), Wine Equalisation Tax (‘WET’) and Luxury Car Tax (‘LCT’) debts incurred by a Company, in an effort to eliminate illegal phoenixing of company debt in Australia. 

This new era of debt recovery by the ATO comes at a time when most directors are grappling with the financial and operational effect of COVID-19 to their business and general economic uncertainty. 

Previously, Director Penalty Notices (‘DPNs’) were only issued for debts relating to Pay As You Go Withholding (‘PAYG’) and Superannuation Guarantee Charge (‘SGC’) obligations. 

The Single Touch Payroll initiative has provided the ATO further transparency into the statutory debts of a company, allowing earlier action to recover monies owing and issuing DPNs, if warranted. However, where necessary, the ATO can issue DPNs based on estimates. 

Last year, there was also an amendment to the reporting timeframes for SGC which resulted in the three month grace period for lodgements that applied to SGC amounts incurred before 1 July 2018 no longer being available. Now, if the SGC liabilities are not reported by the due date, only payment of the unreported amount will remit the penalty. The intent of this amendment is to reign in those directors of particularly large entities that utilised the previously available time period to accrue substantial SGC debt and then liquidate the company. 

This was a significant change to the DPN system strengthening the integrity of the SGC system, and, in our opinion, rightly so as ultimately the SGC relates to an asset of employees of the respective companies. Please note however, due to COVID-19, companies can currently elect to apply to the ATO by 7 September 2020 to vary their terms of payment relating to SGC liabilities. There is also the ability to avoid other penalties and interest under the current ATO SGC amnesty. 

In summary, the new era of the Director Penalty Regime is strict and has allowed the ATO greater recovery powers against directors in an effort to stamp out illegal phoenixing activity in Australia. With all the publications and newsfeed on COVID-19, there is an avalanche of information for a director to currently review, digest and implement from a strategic perspective. It can be easy to overlook the basic fundamentals of the business. ATO lodgements and remission of the debts are one of those rudimentary elements of running a business that needs to be continually complied with by management of the company and reviewed by its directors.  

Some key considerations for directors with respect to ATO debt of their company in today’s environment are: 

  • Be aware of the financial capacity of the company to remit debts owing to the ATO, particularly given COVID-19 related long-term financial effects on the company. 

  • Ensure accurate ATO debt reporting. 

  • Ensure lodgement compliance of all BAS, IAS and SGC documents by due dates, particularly SGC given the special rules that apply in this area. 

  • If the resulting debt from BAS and IAS lodgements cannot be paid, then authorise lodgement of the forms in any event by the due dates. 

  • Ensure SGC liabilities are paid by due dates. 

  • Be aware of what relief the ATO is currently making available to companies relating to payment deferrals due to the effect of COVID-19 and utilising these avenues, where needed. 

There are defences available to a director to rely on to avoid the liability associated with a DPN, however one must be careful not to open themselves up to breach of duty when articulating their defence.  

Below is a flowchart of the consequences for a director when the company fails to extinguish ATO debts and the options available to that director. Failure by a director to comply with a DPN can result in fines, or prison time, or both. 

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