The Federal Government’s Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 has received Royal Asset and is set to commence from 1 April 2020. One of the more significant measures under the reforms is the extension of the Director Penalty Regime to include Goods and Services Tax (GST), Luxury Car Tax (LCT) and Wine Equalisation Tax (WET) obligations.

DPNs have, until recently, been restricted to debts relating to Pay As You Go (PAYG) withholding and Superannuation Guarantee Charge (SGC) obligations.

If you are a director of a company, or are contemplating taking on a directorship, you need to be aware of the increased risk now posed by these developments.

What is the Director Penalty regime?

As a company director, you are under an obligation to ensure the company can meet its financial obligations. You can read more about company director duties and obligations in this article.

For some years now, the Australian Tax Office (ATO) has had the power to make directors personally liable for certain debts of the company by issuing Director Penalty Notices. This is a significant shift from the concept of limited liability of individuals associated with companies.

Currently, if a director fails to meet their PAYG or SGC reporting and payment liabilities in full by the due date, they become personally liable for director penalties equal to the amount owed.

From 1 April 2020, the regime will extend to include GST, WET and LCT liabilities. This change means uncooperative directors will no longer be able to exploit the current gap that exists in relation to GST (and other indirect taxes) liability.

Before the ATO can recover director penalties they must issue a Director Penalty Notice (DPN) stating the unpaid amounts and remission options available. Once issued, payment of either the penalty or the company’s liability will satisfy the obligation but either party only has 21 days from the date of notice to achieve this. Failing to comply will lead to further recovery activity which may include issuing garnishee notices, offsetting personal tax credits or initiating legal proceedings.

There are two types of DPN and the type that is issued depends on the specifics of the obligations directors have failed to meet:

1. Non-lockdown DPN

Issued to a director who has lodged a BAS within three months of the due date but the PAYG and GST amounts remain unpaid.

Under a non-lockdown DPN, directors have 21 days from the date of the DPN to exercise one of 4 options:

pay the debt in full
put the company into administration
Appoint a Small Business Restructuring Practitioner (SBRP)
put the company into liquidation

2. Lockdown DPN

Issued to a director who has failed to lodge a return within three months of the due date and failed to pay the PAYG and GST amounts. Or, if a company’s SGC liabilities aren’t remitted within 28 days of a due date, usually the end of a quarter.

The only option for directors to avoid personal liability is for the company to pay the debt within 21 days of the DPN being issued.

DPNs can be issued on estimates of GST liabilities

From 1 April 2020, new legislation also allows the ATO to estimate GST liabilities and issue DPNs based on estimates. These types of DPN will most likely be Lockdown, as the GST will not have been reported to the ATO within three months.

New directors

Recently appointed directors can be held personally liable for historical SGC, PAYG and GST liabilities if they remain unpaid and unreported within 3 months or more after the date of the appointment. If you are about to become a company director, you should check for any unpaid or unreported ATO liabilities before your appointment.

Our advice

It is important that directors pay close attention to their company’s reporting and payment obligations to ensure they don’t get caught out. In the case of large companies, where directors may not have direct involvement in the company’s tax compliance obligations, it is crucial they:

make themselves aware of the financial position of the company
take action to ensure that all relevant tax related liabilities are reported and paid on time
emphasise the potential consequences of non-compliance to key personnel of the business

Note that a tax obligation begins on the day the relevant tax period ends, not on the due date of the assessment. Directors that cease to be directors after the date the tax period ends, but before the due date of the assessment, are still subject to the obligation.

Further help

If you have a tax debt that you are unable to pay in full, you should obtain immediate advice to understand the options available to you.

If cash flow is a growing concern in your business, it may be time to speak to a business improvement specialist to help get your finances back on track. You can contact our cash flow experts on 07 3023 4800 or at mail@marshpartners.com.au

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