New Directors: sitting on a ticking time bomb?

New directors can find themselves sitting on a time bomb if they didn’t do their due diligence ahead of taking the position. If you are a new director, this article can help you understand why.

Under the new Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, you can be made personally liable for a company’s GST liability. This Bill came into effect in March 2020.

You can be made liable within the first 30 days of your appointment

You will still be personally liable even if you resign within those first 30 days! You remain liable for the GST debt that existed before your appointment, and resignation as a director doesn’t prevent the issuing of a Directors Penalty Notice or a ‘DPN’.

Before you panic and wonder what kind of financial hell you might have gotten yourself into, it’s worth knowing that there are good reasons for the law.

Why the law was changed to make directors liable

new directors
Ticking time bomb?!

At least 70% of the small businesses in Australia have incurred a GST debt. To avoid that debt, some people shut down one company only to re-emerge as another. Bam! Tax debt gone. This is known as illegal phoenixing, which is precisely what the new laws address. You do have some defenses to the new ‘creditor defeating disposition’ – in addition to achieving ‘market value’ in business/assets disposals, a ‘better outcome’ under Safe Harbour under section 588GA of the Corporations Act is also a defence (which we specialise in here at TurnAbout AU…).

The trouble is, if you didn’t do your due diligence before you accepted the position, you might have inadvertently walked into a hornet’s nest. New directors should be ensuring the company has taken advice on the 2017 safe harbour (s588GA) before the expiry of the COVID19 safe harbour (s588GAAA) which expires in September 2020.

That due diligence means:

  • checking what tax liabilities the organisation is carrying, before you agree to become a director
  • ensuring that past reports to the ATO were completed correctly and on time
  • double-checking that the postal address held by ASIC for the organisation is the correct one.

The ATO has new powers to disclose overdue tax debt of over $100,000 to credit reporting bureaus (see our article).

The legislation expects that directors will make good business judgements

It expects that, as a director, you will leave your personal judgements out of the room, and that you will have an appropriate level of involvement in the business. As a director, you are the one who must decide whether the company is solvent (see our indicators of insolvency). If you happen to find yourself in receipt of a Directors’ Penalty Notice (or DPN), being a new director isn’t a viable defence.

So if you haven’t checked the company’s ability to pay its tax debts, today is the day to go and check!

Should you then determine that the company is not solvent, the very first thing to do is to seek good advice about what to do next.

With the right guidance, you will be able to avoid prosecution under the new phoenixing laws

This is why I offer free initial consultations to help you determine what steps to take next. Send me a confidential email at eddie@turnabout.com.au or get in touch with our head office in Adelaide.

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