An expansion of the director penalty regime is likely to take effect from 1 October 2019 due to the re-introduction of the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 to the House of Representatives.
Under current law, if a company does not pay its Pay As You Go (PAYG) withholding or Superannuation Guarantee Charge (SGC) liabilities, the ATO can recover these amounts from the directors of the company via a Director Penalty Notice (DPN). In situations where the company has not lodged a report, the ATO may make a reasonable estimate of the unreported amounts and pursue recovery of the estimate.
Should the new Bill pass as expected, the ATO will also be given the power to collect outstanding Goods and Services Tax (GST) liabilities (including GST instalments), or estimated GST when a return hasn’t been lodged. The estimated amount will be due and payable on the day the company was required to lodge its BAS.
The Bill also includes measures to expand the ATO’s power to retain refunds where there are outstanding tax lodgements.
Company directors are personally liable for their company’s liabilities
As a director, you are under an obligation to ensure the company can meet its financial obligations.
Where a company has an ATO assessed liability (such as PAYG, SGC and soon GST), each director has a personal obligation to ensure it is paid. Under the Director Penalty Regime, the ATO can make directors personally liable for the entire liability if the company fails to pay by the due date.
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.
Note that new directors can also become liable 30 days after their appointment where an amount is still outstanding. If you are about to become a company director, you should check for any unpaid or unreported PAYG, SGC or GST liabilities.
There are two types of DPN and the type that is issued depends on the specifics of the obligations directors have failed to meet:
Issued to a director who has lodged a return within three months of the due date but the PAYG and GST amounts remain unpaid.
Under a non-lockdown DPN, directors have the option to avoid personal liability if within 21 days the company:
- pays it debt or makes a suitable arrangement to pay it;
- appoints a voluntary administrator; or
- places 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.
The only option is to pay the debt within 21 days of the DPN being issued.
There is no 3-month grace period for SGC
On 1 April, 2019 the Treasury Laws Amendment (2018 Measures No. 4) Bill 2018 was passed to improve the integrity of the superannuation system. This included an amendment to the reporting timeframes for super and allows the DPN regime to impose an automatic Lockdown DPN on directors if a company’s SGC liabilities aren’t remitted within 28 days of a due date, usually the end of a quarter. The amendments were introduced to prevent directors avoiding personal responsibility for unpaid SGC debt by putting their company into administration or liquidation.
If you have a tax debt that you are unable to pay in full, we recommend early engagement with the ATO to discuss your payment options. As your tax agent, Marsh & Partners are able to assist with this and negotiate a solution on your behalf.
If cash flow is a growing concern in your business, it may be time to speak to a professional advisor to help get your finances back on track. You can contact our cash flow experts on 07 3023 4800 or at firstname.lastname@example.org