In terms of the governance implications arising from the 2018-19 Federal Budget, what has emerged as the key area of focus for Australian boards?
Probably the biggest change for director exposure is the inclusion of the GST in the director personal liability framework – that’s something that hasn’t been front of mind for directors, given that the penalty regime has previously only covered employee taxes such as the superannuation guarantee and Pay As You Go liabilities.
I’m not sure directors are aware that they can be personally liable, and just how easily this can happen. There’s a broad awareness that there is a personal risk, but I don’t know that many directors really understand how big a risk this is and how easily it can fall to them.
If you’re dealing with a board in crisis, is the degree of personal liability a surprise for directors? Is it enough of a deterrent to change behaviour at the boardroom level?
I think it is. The GST liability can be much, much larger in some organisations than the PAYG and superannuation guarantee obligations, because it’s 10 per cent of turnover – that can obviously present a really significant figure in comparison to what the employee deductions for superannuation can be, so the cumulative effect can be quite horrendous. Often boards in crisis are focused on saving the business, but what they don’t realise is that the back office is carefully managing cashflow and using the tax office as a bank, and by the time they realise it’s too late and they’ve got some really serious exposure.
Is there a chance that it could make boards less willing to take risks? What are the implications of that?
That could well be a likely outcome. There have been a couple of changes in this area. Insolvency laws are moving towards providing a defence mechanism, so that if you take reasonable steps and get an insolvency practitioner in early to give you advice on restructuring you may not be technically insolvent. That means boards might decide they’re prepared to run the business a bit further in order to see whether they can salvage something – the issue there is while they may not actually expose themselves to the insolvency provision by letting things run a bit further, they may end up facing a significantly bigger issue with a growing debt to the tax office.
Are we likely to see the Australian Tax Office take advantage of that increased scope around director liability?
In a word, yes. There’s nothing worse than getting a notice of demand in the letter box from the ATO, because it’s often the first time the directors become aware of a potential issue – and if the tax office can’t get the money out of the liquidator or out of the business, they will absolutely come after the directors.
What impact does this have on a current director, or somebody considering a directorship – does it change their due diligence before they make a decision, and would it deter people from taking a board seat?
In some cases, yes. Many directors take on the roles I think because they’re honoured to be asked, or they think there’s some kudos or glamour to the role, and as a result they go into it without doing really good due diligence. One of the key things we encourage aspiring directors to do now is to do that solid due diligence on amongst other things, the level of tax governance in the organisation. Whether we’re talking about general local compliance or international tax reporting requirements, if you get them wrong the penalties can be massive – they’re not just thousands or tens of thousands, they’re often hundreds of thousands of dollars and it can be quite devastating. For that reason, we really do encourage people to do their homework on this front and not just take on these roles with superficial due diligence. It’s great to say you understand the business and trust the people, but you really do need to drill down further and understand what sort of governance processes and structure they have in place.
Does this apply to not-for-profit organisations as well?
Yes – it applies to any director of an organisation, be that commercial or not-for-profit. If you are the director of a company, so if your not-for-profit is trading through some form of corporate structure, then you have exactly the same obligation as any other for-profit director.
Can directors protect themselves to an extent through insurance against this sort of issue?
No. Directors and officers liability insurance will generally cover you for legal fees and a court action for negligence, or similar – but it won’t cover you for fraud, and it doesn’t cover you for fines and penalties, and this is a fine or a penalty type of liability.
If you are on a board and have some concerns, or if you are doing some due diligence on an organisation, what should you be looking for and what questions should you be asking?
If we’re talking about a small not-for-profit for example, which can have fluctuating cash flows, we’d actually ask the Chief Financial Officer on every board agenda to note that the BAS statements have been lodged and all taxes have been paid – or if there are arrears, exactly what they are and where they reside.
In the case of larger organisations, where you have a solid management infrastructure in place, then you would expect – but you’d want to ensure – that the CFO or the CEO is asking those questions as part of their role. The audit committee or the finance and risk committee should also be diligent in making sure this is all being properly addressed.
What are the warning signs to look out for in terms of GST liability?
There are two. The first is obviously submitting the paperwork – if it hasn’t been submitted to the tax office, then you’re automatically in trouble. Further to that, if it has been submitted, it’s about knowing whether the tax has been paid. If it hasn’t, then you want to know there is a plan is in place to sort it out.
If there is a liability, how long do you have to figure out that plan and get it in place?
Once you’ve received the notice from the ATO advising the directors of their exposure, you get 21 days to act. So you either have to formally put a plan in place, or come to a resolution in that three-week period. But it’s important to realise that just having a repayment plan lodged and accepted doesn’t mean you’re out of the woods – the reality is that if the company breaches that payment plan, then the liability falls straight back on to the directors.