Director penalties and GST – some matters to know

by | Aug 19, 2019

It is proposed to extend the existing director penalty regime to enable the Commissioner to recover unremitted GST from directors. Presently, the regime allows the Commissioner to take recovery action against directors of non-complying companies for unpaid PAYG withholding and SG charge. Further, it is proposed that the Commissioner’s tax estimate collection power, which currently allows him to make and recover estimates of an entity’s PAYG withholding and superannuation guarantee (SG) charge, will be extended to GST liabilities.

The proposed changes are contained in the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019. The Bill also makes some other far-reaching changes to the Corporations Act 2001 that potentially extend a director’s liability for permitting the company to make creditor defeating dispositions.

This article explains the proposed changes to the Tax law.

Extension of the Commissioner’s power to make estimates of GST — Div. 268 of Sch. 1 to the TAA

The Commissioner will have the power to make and recover an estimate of a net amount of GST for a tax period (estimated GST). The Commissioner will be able to issue estimates to any taxpayer registered/required to be registered for GST, not just to a company.

The liability of a taxpayer to pay an estimate is created by the Commissioner issuing a notice to the taxpayer. It is a liability separate from the underlying liability to pay assessed GST. However, payment of an estimate will correspondingly be a payment of the underlying liability for GST and vice versa.

Extension of the director penalty regime to unpaid GST – Div. 269 of Sch. 1 to the TAA

The director penalty regime will be extended to allow the Commissioner to recover a company’s liability to pay net amounts of GST for a tax period (assessed GST), estimated GST, and instalments of GST from the company’s directors. The regime applies to companies registered under the Corporations Act 2001 and, more specifically, to ‘directors’ within the meaning of that Act.

Existing and intending directors should understand their obligations under the Tax law and the personal risks that they incur if they do not take appropriate timely action in circumstances where the company of which they are a director fails to comply with its obligations to account to the Commissioner for GST (or the other taxes to which Div. 269 Sch. 1 TAA applies). A ‘director’ includes persons who act in the position of director even though not validly appointed as such and a person in accordance with whose wishes the conventional directors are accustomed to act.

Persons who were directors on/after the last day of a tax period (the initial day) and were not ‘new directors’ (discussed below) will be personally liable, by way of a penalty, for the net amount of GST payable in respect of that tax period where the company has not paid the GST on/before the day on which payment is required under the GST Act (due day). The penalty arises automatically unless the company has gone into administration or liquidation on/before the due day.

Similarly, where a GST instalment for a quarter has not been paid on/before the day required by the GST Act (also ‘the due day’) and the company has not gone into administration/liquidation on/before that due day, a person who was a director on the last day of the GST instalment quarter (also the ‘ initial day’) and is not a new director incurs a penalty in the amount of the instalment.
A separate director penalty in the amount of the Commissioner’s estimate arises where:

  • a person is a director of the company on the last day of a tax period (also the ‘initial day’) and is not a new director;
  • the company has been given a notice of an estimate of GST for that tax period under Div. 268; and
  • the company has not paid the estimate by the end of day on which the notice was given (also the ‘due day’) or gone into administration/liquidation by that time. (Note that s. 268-15(4) provides that a notice ‘is taken to be given at the time the Commissioner leaves it or posts it’.)

A director penalty for an estimated amount in relation to a tax period can co-exist with a director penalty for an assessed amount in relation the same tax period, as the Commissioner can make an estimate ‘to the extent that the net amount has not been assessed before the Commissioner makes the estimate’ (proposed s. 268-10(1)(c)). Payment in respect of one penalty will reduce the other (s. 269-40 and s. 268-20).

‘New directors’ are persons who become directors after the due day. New directors incur a director penalty for the company’s outstanding liability to remit GST (or, as the case may be, a director penalty for previously estimated GST) if the company does not pay the relevant amount or go into administration/liquidation within thirty days of the person becoming a director.

In effect, under the proposed changes, a company’s directors are giving a personal guarantee that their company will remit GST to the Commissioner.

Resignation as a director after the initial day does not relieve a director of liability. Note also that the Bill includes separate amendments that will prevent directors from backdating resignations or leaving a company without a director.

Understanding what is required of directors

The time-frames for taking action

Directors need to be aware of the statutory time-frames for action which leads to relief from personal liability for assessed GST/estimated GST for a tax period. If they await receipt of a director penalty notice (DPN), they may be out of time to obtain relief.

Broadly speaking and subject to one qualification described below, where the director penalty is for the net amount of GST payable in relation to a tax period, the level of relief for directors depends on whether the company:

  1. goes into administration/ liquidation before the earlier of: (i) the expiration three months after the due day and (ii) the expiration of 21 days after the issue of the DPN; or
  2. has actually lodged its BAS within that three-month period and has gone in to administration/ liquidation before or within 21 days after the issue of the DPN.

Case (a) leads to full relief. Basically, Case (b) provides relief to the extent that the corporate liability for the net amount for the tax period has been disclosed to the Commissioner in the three-month period.

The qualification mentioned earlier arises where a person becomes a director within the specified three-month period. In lieu of that three-month period, there is a substituted a period of three months after the day the person became a director. However, action prior to the earlier of expiration of the substituted period and expiration of 21 days after issue of the DPN to the later-appointed director will only protect the later-appointed director. The other directors must rely on action within the primary period.

Again broadly speaking and subject to a qualification corresponding to the one above, where the director penalty is for estimated GST referable to a tax period, relief from the penalty depends on whether the company goes into administration/ liquidation before the earlier of: (i) expiration of three months after the date on which the BAS for the underlying GST should have been lodged and (ii) expiration of 21 days after the issue of the DPN. Where the company meets the requirement, directors obtain full relief from liability from estimated GST.

The expression in point (i) summarises the formulation in the Bill. Effectively, it aligns the three-month action window for estimated GST with the three-month action window applicable in each of Cases (a) and (b) for assessed GST. Forward planning should be considered, as the window may have closed prior to the notice of estimate being issued.

It will be noted that relief from a director penalty for estimated GST is prima facie less generous (absence of a counterpart to Case (b)) than relief from a director penalty in relation to the underlying liability for assessed GST. However, a director actually avoids a penalty for an estimate through the company’s timely lodgment of a BAS. Lodging a BAS for the tax period creates a deemed assessment of GST and proposed s. 268-10(1)(c) denies the Commissioner power to make an estimate to the extent of an assessment.

It follows from the foregoing, that lodging a BAS on time, even if payment is not made, gives a director a period of 21 days after issue of DPN in which to place the company in administration/liquidation in order to be relieved of penalty for both assessed GST and estimated GST to a potentially significant extent.

In relation to director penalties with respect to GST instalments, full relief is available provided the company goes into administration/liquidation before or within 21 days after the Commissioner gives the director penalty notice.

Although Div. 269 provides some defences to director penalties, these have limited scope.

Due diligence before becoming a director

Clients often ask their accountants and other professional advisers to become directors of their investment/trading companies and corporate trustees (professional directors). This includes companies which are passive investors, which have not been subject to taxes within the existing ambit of Divs. 268 and 269.

Professional directors may be alert to the prospect of personal liability as a director of an active corporate client, especially where there are employees. However, with the extension of Div. 269 to GST, directors of passive investors will also need to pay closer attention to their company’s day-to-day affairs, as distinct from merely ensuring compliance with the more general rule against insolvent corporate trading.

In the course of treating trusts as taxable/accounting entities, there is a tendency to overlook the principles that the trustee is the legal entity liable to pay the tax and the ATO recognises (e.g. see PS LA 2012/2 at para. 41) that Div. 269 applies to directors of corporate trustees. Directors of retiring corporate trustees, being dependent on the incoming trustee meeting any outstanding BAS lodgment/payment obligations, will especially need to monitor incoming trustee compliance.

Professional directors should consider how they will approach the prospect of a future imposition of director penalty, particularly where there may be Board tensions with shareholders/beneficiary directors being more willing to accept the risk of a director penalty ‘guarantee’ in view of their expectation of ultimate commercial benefits that will not be derived by the professional director. With a vested interest in the continuity of the company, shareholder/beneficiary directors may resist a professional director’s desire to avoid personal liability by placing a solvent company (with a short-term cash flow impediment precluding immediate payment of GST) in administration/liquidation.

Apart from close consideration of the ‘reasonableness’ defence, this might include consideration of reaching an upfront understanding with the other directors and which would enable the professional relationship to continue in the aftermath of DPN circumstances arising.

A practical approach

Persons contemplating becoming a director need to be aware of the desirability of undertaking due diligence with respect to GST before accepting appointment. It seems preferable to have the choice of declining appointment where there are outstanding GST obligations for which they may become personally liable rather than having to rely on relatively tight windows within which the company has to go into administration/liquidation.

All directors will need to be aware of their potential liability and the need to monitor their company’s GST compliance in a timely way. In the absence of tailored information flow, it is to be expected non-executive directors will be especially vulnerable.

Directors will require understanding of when GST is payable in their company’s circumstances, timely notice of any anticipated problem, and timely receipt of advice on actual non-compliance. All directors will need to ensure management alerts them immediately to any receipt of a notice of GST estimate, as its receipt indicates an existing problem as well as giving rise to a director penalty in its own right.

While the extension of Div. 269 to include GST will expand the set of companies/corporate trustees that need advice in relation to director penalties, advisers may want to take the opportunity to review the sufficiency of arrangements for director oversight of all taxes within the ambit of Div. 269. For instance, it is anticipated that the relatively recent expansion of Single Touch Payroll will intensify ATO scrutiny of timely payment of superannuation contributions and directors need to be aware of the stringent time-frames within which to obtain relief from director penalties for superannuation guarantee charges.

All taxpayers, and not just companies and their directors, need to be aware that estimate notices require immediate attention. The Commissioner is able to take court proceedings against taxpayers to recover the estimate. (Where a director is not relieved from the relevant director penalty, the Commissioner can also take proceedings to recover the estimate from the director following the elapse of 21 days after issue of the DPN.) Unpaid estimates attract GIC, although payment of this GIC also reduces GIC on the underlying unpaid assessed GST (and vice versa).

As estimates will be based on limited information available to the Commissioner, it is to be expected that these will be inaccurate. However, inaccuracy does not preclude recovery action. Div. 268 prescribes time-frames and processes for correcting an inaccuracy. Because the processes require statements on oath, access to reliable business transaction records will be critical.

As a further practical observation, all taxpayers should be mindful that the Commissioner’s estimation power appears to enable an estimate to be raised where he considers there is a shortfall in disclosure of GST in a BAS.

Conclusion and implementation date

In conclusion, as a stand out practical matter, directors will likely need to act without awaiting the issue of a DPN – it may be too late to seek relief when a DPN issues. It is also worth emphasising that the Commissioner considers that the director penalty regime extends to directors of corporate trustees.

The proposed changes are scheduled to commence from the beginning of the first quarter (1 January; 1 April, 1 July or 1 October) to occur after the relevant Bill receives Royal Assent. In the circumstances, it might be prudent to anticipate the Bill will be passed and the changes operative from 1 October 2019.

The changes will not have retrospective effect. They apply (Item 22 Sch. 3 of the Bill) to ‘net amounts and assessed net amounts for tax periods that start on or after’ the specified commencement date and to ‘GST instalments for GST instalment quarters that start on or after’ that date.

Editor’s Note: Webb Martin Consulting Pty Ltd is able to assist you in relation to your preparation of advice that alerts clients to the proposed director liability for GST and/or director liability for taxes already within Div. 269 and to practical protective action that should be taken.

This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

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