The Federal Government’s package of reforms aimed at addressing illegal phoenix activity is now law. One of the more significant measures under the reforms is the extension of the director penalty regime to include GST and other indirect tax liabilities of a company.
What is the director penalty regime?
The director penalty regime allows the Commissioner of Taxation to make directors of a company personally liable for specified taxation liabilities of the companies they represent through the issue of a Director Penalty Notice (DPN). Previously the regime was limited to PAYG withholding and superannuation guarantee charge liabilities, but has now been extended to include GST, wine equalisation tax (WET) and luxury car tax (LCT).
The expanded regime will commence from 1 April 2020, being the start of the first quarter after Royal Assent.
How will it work?
The changes allow the Commissioner to make an estimate of a company’s net amount payable of GST, WET and/or LCT in its business activity statement (BAS). If the Commissioner makes an estimate, the company is liable to pay that amount to the Commissioner and the directors have 21 days to ensure the amount is dealt with to avoid becoming personally liable.
An entity may reduce the amount of an estimate by making a sworn statement that the entity’s net amount for the tax period is less than the estimate. The legislation sets out the information that must be included in the statement.
What’s the impact on directors?
Company directors are now under an obligation to ensure their company pays an assessed net amount of GST, WET and/or LCT (including an estimate made by the Commissioner) or, recognising the company is insolvent and cannot pay the liability, put the company into administration or begin wind up action. That obligation begins on the day the relevant tax period ends. Directors that cease to be directors after this date are still subject to this obligation even if they cease to be directors before the due date of the assessment.
A director’s penalty arises when the director’s obligation is unsatisfied on the due date of the assessment. However, the penalty is only recoverable following a period of 21 days beginning when the Commissioner issues a director penalty notice to the director(s). The amount of the penalty is the amount of the company’s unpaid liability.
The penalty may be remitted if the director complies with the obligation to pay the outstanding assessment either before the director penalty notice is issued or within 21 days of the day the notice is issued. However, if the director complies with their obligation by placing the company into administration or beginning to wind up the company, the full amount of the penalty will only be remitted if this is done within 3 months of the assessment’s due date. Directors who fail to place the company into administration within 3 months of the assessment’s due date are likely to receive a lockdown DPN. This means the directors become personally liable to the ATO for the unpaid net amount and will not be entitled to remittance of the penalty even if the company then goes into liquidation.
Growing Too Fast Pty Ltd lodges its BAS on a quarterly basis. Its BAS for the quarter ended 31 December 2019 is due by 28 February 2020. Growing Too Fast lodges its December quarter return more than 3 months late on 30 May 2020 and it discloses a net amount payable of $50,000.
Liz is one of two directors of the company. The company has been having cashflow problems and doesn’t have the $50,000 to pay the ATO.
Liz resigns as a director on 30 May when the BAS is lodged and she becomes aware that the company is not in a position to meet its liability to the ATO.
Liz is under an obligation to ensure that the $50,000 liability is paid by the due date of 28 February or commence action to place the company into administration or to wind it up. This obligation commences on 31 December 2019, being the last day of the relevant tax period. Her resignation as a director does not release her from that obligation.
On 1 July 2020 the ATO reviews the company and issues director penalty notices to Liz and the other director. The Commissioner may commence recovery proceedings against the directors on 23 July 2020. The directors are unlikely to be entitled to remission of the penalty because they have not taken appropriate action within the prescribed time periods.
What should you do if you receive a director penalty notice?
If you receive a DPN you should obtain immediate advice to understand the options available to you. Given the strict time limits that apply, failure to act upon receipt may mean the option for remission of the penalty is lost.
Other recommended action
Regardless of the intention, the law as passed has the potential to impact legitimate businesses and will have broad ranging implications for all directors. It will impact how directors address and demonstrate oversight of their company’s GST and other indirect tax liabilities.
To deal with this new level of personal risk, directors should take the necessary steps now to ensure that the GST affairs of their companies are in order and identify any potential exposure. We recommend a GST health check that allows the interrogation of a company’s accounting system and BAS preparation process in order to identify GST risks and opportunities, and provide assurance to directors that their company is appropriately complying with its GST obligations.
For further information about the expanded director penalty regime or a Pitcher Partners GST health check and its benefits, please get in touch.