Company directors can now be held personally liable for unpaid GST, LCT, WET as well as Superannuation & PAYG.
One of the attractions of operating through a company is the separation a company can provide between the business operations and assets and the personal assets of the directors. This is often referred to as the corporate veil.
For some time, company directors have not been able to benefit from the corporate veil in relation to unpaid employee superannuation and PAYG obligations. If a company is delinquent in meeting these obligations, the directors could be held personally liable.
From 1 April 2020, under recently passed legislation, company directors can now be held personally liable for unpaid Goods & Services Tax (GST), Luxury Car Tax (LCT) and Wine Equalisation Tax (WET) in addition to superannuation and PAYG. Personal liability for a GST debt can arise only three months after it falls due.
Personal liability can be avoided by one of these three things happening:
- Pay the debt to the ATO.
- Have the company enter into a payment arrangement with the ATO.
- Appoint a liquidator or administrator to the company.
Figures for the 2018 financial year showed that the ATO was owed approximately $24 billion in outstanding tax debts. Approximately two-thirds of this was small business debt. This, combined with what is known as illegal phoenix activity, is one of the key motivators for this change.
Director Penalty Notice (DPN) example
The ATO collects these debts by issuing a ‘Director Penalty Notice’ (DPN). Timing around DPN’s is both particular and important. The following example is provided by the Treasury in the explanatory memorandum to Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019:
- A company’s June business activity statement (BAS) is due on 28 July 2019.
- The company lodges their June BAS on 1 November 2019 (over 3 months late) with $100,000 owing.
- Two company directors have an obligation to ensure the BAS is paid on time or enter the company into administration or wind up. This obligation begins on the last day of the quarter (30 June 2019).
- One director resigns on 20 July 2019. This resignation does not affect their obligation in relation to the company’s liability.
- The company is never in a position to pay the $100,000. Therefore, both directors were required to place the company into administration or begin winding up. This should have happened before the due date of the BAS (28 July 2019), so director penalties apply from this date.
- The Commissioner issues DPN’s to both directors on 1 February 2020 and may commence recovery proceedings on or after 23 February 2020.
- The director penalty can be remitted if the director complies with the obligation before the notice is issued or within 21 days of the day the notice is issued.
Personal risks of being a company director have just increased. Clearly for any existing appointments, checking that payments are up to date is important and if they are not, taking the appropriate action should be a priority.
For any roles being considered, an important part of due diligence before accepting directorship will be reviewing compliance with superannuation, PAYG and GST/BAS lodgements, along with the ability to pay these on time.