With the Federal Government deficit at its highest since World War II ($86 billion for the 2019/20 financial year with projections of the deficit exceeding $184 billion in the 2020/2021 financial year) and with unemployment rates expected to rise, it is inevitable we will see a significant increase in revenue collecting activity being undertaken by the Australian Taxation Office (ATO).
As COVID-19 continues to cripple our economy and stifle Federal tax collections (tax receipts were down $31.7 billion in the 2019/20 financial year and are expected to be down by $63.9 billion in the 2020/21 financial year), losses to tax revenue will need to be mitigated.
The expansion of the director penalty regime (DPR) to now incorporate GST (from 1 April 2020), will certainly make it easier for the Commissioner of Taxation to collect additional revenue by pursuing directors who fail to cause their companies to meet their taxation obligations.
The DPR allows the Commissioner of Taxation to make directors of a company personally liable for specified taxation liabilities of their company through the issue of a Director Penalty Notice (DPN). Previously, the regime was limited to PAYG withholding and superannuation guarantee charge liabilities, but it has now been extended to include GST, wine equalisation tax and luxury car tax. DPNs have proven to be effective in the recovery of outstanding tax liabilities and their use is commonplace. They may also be used to find a liability upon which the ATO might then issue garnishee notices to a director's bank account (which require the bank to pay the director's tax debt directly to the ATO).
What obligations do directors have when it comes to the company's taxation affairs?
One of the fundamental roles of a company director is to cause the company to comply with all of its financial obligations. One of the most important obligations is the lodgement of returns and payment of tax (both on behalf of the company itself and to collect and account for employee taxes and superannuation).
The ATO has invested significant funds into technology and has more information than ever before about a company's financial performance and tax compliance. The ATO routinely 'benchmark' a company's tax performance against that of its industry peers. Accordingly, company directors need to be astutely aware of the taxation obligations of their companies. Transaction taxes and how they are dealt with is no longer left to the C-suite – they are issues which (have increasingly and) must feature as part of board papers of every director.
It is not enough for a company director to rely on expert advice, the advice of other directors or that of the chief financial officer. Directors need to monitor the financial performance of their company and keep up to date and routinely monitor its taxation obligations.
If you are about to become a director of a company, it is imperative to check for any unpaid or unreported PAYG withholding, GST or SGC liabilities. As a new director, you have 30 days, starting on the day of your appointment, before you become liable to director penalties equal to:
- all of the company's unpaid PAYG withholding liabilities
- all unpaid net GST, luxury car tax and wine equalisation tax liabilities
- all unpaid SGC liabilities.
However, as a new director, you will not be liable to director penalties for amounts due before your appointment if, within 30 days starting on the date of your appointment, the company does one of the following:
- pays their PAYG withholding, net GST and/or SGC debt in full
- appoints an administrator under section 436A, 436B or 436C of the Corporations Act 2001
- begins to be wound up (within the meaning of the Corporations Act 2001).
Given the risk exposure directors have (noting the limited defences available to directors are increasingly being rejected by courts), directors should take steps to ensure that the taxation affairs of their companies are in order and identify any potential exposure.
What do you if you receive a DPN?
If you receive a DPN, you should obtain immediate advice to understand the options available to you. Whilst there are defences available to a director to rely on to avoid the liability associated with a DPN, they are limited. There are also strict time limits that apply and failure to act within these could be disastrous.
Furthermore, directors must be careful not to expose themselves to breach of director's duties when articulating their defence, as a breach of a taxation obligation is capable of giving rise to a corresponding breach of a director's duty of care and diligence.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.