When did you sign to agree to be personally liable for your company’s tax debt?
It’s a rhetorical question – you didn’t. Directors of companies may become liable personally to the Australian Tax Office (“ATO”) under a Directors Penalty Notice (“DPN”) pursuant to the Taxation Administration Act 1953 (Cth). In terms of risk exposure, tax debt is of serious note to directors. The owners of smaller and family businesses need be equally concerned as it is critical to be aware that it brings into jeopardy personal assets which are used in payment of company debt. 
Serious – are you in receipt of a Directors Penalty Notice?
Directors who have lodged business activity statements or instalment activity statements but who have failed to make payment of the PAYG withholding and Super Guarantee Charge (“SGC”) will receive a notice that provides 21 days for action to be taken (for the notice to be cancelled).
Critical – are in in receipt of a ‘Lockdown’ Directors Penalty Notice?
Directors who have failed to lodge business activity statements or instalment activity statements, within three months of the lodgement due date, will receive the Lockdown DPN. In this instance, the Directors become automatically liable to the ATO for the unpaid PAYG withholding and SGC debts.
Also – PAYG withholding non-compliance tax
The Pay As You Go Withholding Non Compliance Tax Act 2012 permits the ATO to pursue directors for an amount related to the unpaid PAYG withholding liabilities.
Tax Debt. Who can be made liable, for what amount and when?
Directors (including an associate) becomes liable:
- if they were involved when the company failed to pay the withheld amounts on the due date
- if they became a director after the due date but remained a director for a period of 30 days afterwards
- for the lessor of the amount of tax withheld from payments made to the individuals by the company in the year or the PAYG withholding liability for payments made during the year.
Section 995-1 of the Income Tax Assessment Act (“ITTA”) defines an ‘Associate’ as the same as defined by section 318 of the Income Tax Assessment Act – to include those related by blood (natural relation) or by law.
Important – ensuring compliance with SGC obligations
The SGC must be paid when:
- the company lodges the quarterly super guarantee statement, or
- the ATO quantifies an unreported SGC shortfall.
SGC obligations are payable on the same day a company lodges its quarterly superannuation guarantee statement with the ATO (this is generally 1 month and 28 days after quarter end). Under section 33 of the Superannuation Guarantee Act, the ATO can agree to payment later in time.
Directors may receive a DPN at the end of the lodgement date (or the agreed lodgement date) if they have not lodged the superannuation guarantee statement and paid the corresponding SGC by the end of that day.
What’s in Store for the Future?
The Government is undertaking multiple initiatives for which directors will need to be aware.
In September 2017 the Australian Government released a consultation paper setting out proposals to address illegal phoenixing activity. Amongst proposals, include measures to:
- improve the targeting of high risk entities;
- limit the backdating of director appointments and resignations;
- extend tax promoter penalty laws to promotors or facilitators of illegal phoenixing activity;
- expand DPNs to include GST (goods and services tax);
- strengthen the effectiveness of the tax security deposit regime;
- in certain situations, reduce the period to act on a DPN from 21 days to zero days; and
- provide the ATO with the power to withhold any taxation refunds that might be due to the company.
ATO to Improve the Transparency of Tax Debts – ‘naming and shaming’ those with tax debt
Whilst the disclosures are still subject to consultation and royal assent, the ATO only intends to disclose tax debts where a business meets certain criteria:
- an Australian Business Number (ABN) is held;
- a tax debt of $10,000 or more is overdue by more than 90 days; and
- there has not been any active engagement with the ATO to manage the tax debt.
In a similar fashion to a DPN (non-lockdown), the ATO give 21 days’ notice to a business if they meet this ‘reporting criteria’. On expiry of the 21 days, the tax debt information will be reported to credit reference bureaus.
At present, it is speculated that the following is likely to be included in the legislation:
- Defaults will be updated but remain on reports following a dispute, repayment arrangement or full payment is made (although currently the intention is for defaults to be removed as if it never occurred).
- Defaults may only be removed if it is established that it was an error or the ATO is satisfied exceptional circumstances prevented the tax payer engaging prior to the listing.
- All possible steps to encourage engagement be taken by the ATO in the 21 days’ notice period prior to reporting to credit reporting bodies.
- Flexibility will be afforded to the ATO, so this measure can be used in conjunction with targeting illegal phoenix activity.
Moving Towards a Rescue Culture – Honest & Diligent Directors
The 2017 year has been one of significant legislative change in Australia; both for directors of companies and personal & corporate professional advisors alike. 
- Commencing with the staggered introduction of the Insolvency Law Reform Act 2016 (Cth) on 1 March 2017 and, on 1 September 2017, amending the Corporations Act 2001 (Cth) and the Bankruptcy Act 1966 (Cth) by adding Insolvency Practice Schedules to the Acts. The main changes of this is procedural and likely to add to the already burdensome compliance and overhead costs in formal insolvencies (external administrations). A significant change is that creditors are now empowered to direct registered liquidators in ways that are substantially more proactive. They have power to remove registered liquidators from the administration, request reasonable information and a review of the external administration or estate.
- The ASIC Supervisory Cost Recovery Levy Regulations 2017 became effective on 1 July 2017 and aims to recover ASICs costs in regulating company auditors, financial advisors, registered liquidators and security dealers (to name a few). A whopping $246m is expected to be recovered by ASIC from this initiative.
- The Treasury Laws Amendment (Enterprise Incentives No. 2) Act 2017 introduced ‘safe harbour’ for directors and a stay on ‘ipso facto’ clauses being enforced (effective 2018). The new sections 588GA and 588WA of CA 2001 provide directors with protection from the insolvent trading provisions, provided there are genuine turnaround strategies that are reasonably likely to lead to a better outcome for the company.
- On 19 October 2017 the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 was introduced into Parliament. A bankrupt will be automatically discharged one year after the date of filing of their Statement of Affairs (list of assets and liabilities). This is provided the Trustee has not objected to discharge. As occurred in the UK, the current bankruptcy discharge term is to be reduced from three years to just one year (following the filing of the Statement of Affairs).
Would you like a summarised explanation of this article in plain English?!
Never has there been a more important time to stay vigilant and informed as both a business owner and an advisor. We would be delighted to discuss with you in more detail the practicality of these changes and their impact on the smaller, medium or family owned business community.
Copyright 2017 – Griffith
