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Managing ‘sleeper issue’ of directors’ GST risks

Jim Koutsokostas

A major “sleeper issue” has the potential to catch out directors of SMEs and start-ups: the proposal to make directors liable for outstanding GST liabilities under the director penalty notice regime, writes special counsel Jim Koutsokostas.

It’s a big risk for company directors, because GST liabilities are arguably more pervasive than pay as you go (PAYG) and superannuation guarantee charge (SGC) liabilities. The consequences for a director of a non-complying company can be severe — including bankruptcy.

As such, directors should be aware of their obligations and responsibilities under these proposed measures.

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Having lapsed with the calling of the federal election, the extended director penalty measures were reintroduced in July 2019, after being first announced in the 2018 budget; this was part of a reform package to the corporations and tax laws aimed at combating illegal phoenix activity.

The director penalty provisions to GST will be in addition to PAYG withholding and SGC amounts, to which the provisions currently apply.

New directors beware!

Director penalty notices (DPNs) can be issued to new directors.

If a company has an outstanding GST liability, it is proposed that a new director will become personally liable for a penalty equal to the amount of that obligation unless, within 30 days of their appointment, the company pays its outstanding debt, appoints an administrator or begins to wind up the company. (The same requirements apply to outstanding PAYG withholding or SGC obligations.)

Even if the director resigns within the 30-day period, they will remain liable for the unpaid debt due before their appointment.

Resigning as a director will not prevent a DPN being issued — whether you are a new director or an existing director.

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But it wasn’t my fault

A director has three defences to a DPN.

First, illness or another good reason that would have made it unreasonable to expect the director to take part in managing the company.

This defence, however, is not available where a sole director has made little effort in discharging their responsibilities. For example, leaving the responsibility of a company’s financial affairs to another director is not a “good reason” for non-participation in a company’s management.

Additionally, any illness must be debilitating to qualify as a defence. For example, a combination of high blood pressure, high sugar levels, high cholesterol and cataracts has previously been determined as being insufficient.

Secondly, the director took all reasonable steps to ensure that:

  • the company complied with its obligations;
  • an administrator was appointed to the company;
  • the company had begun to be wound up;
  • or there were no reasonable steps the director could have taken.

Relying on the assurances of the CEO or CFO that the company’s liabilities are in order would not be sufficient for a director to avoid responsibility.

Thirdly, if the DPN relates to an SGC liability, the company took a reasonably arguable position as to how the SGC legislation applied, the position was in accordance with the law and the company took reasonable care in applying that law.

Recovery by the ATO

If a DPN has been issued, and there are no defences, what can the ATO do?

The ATO has the power to issue a garnishee notice to a third party, which requires the party to pay that amount directly to the ATO (where that third party owes money to the company or the director).

A garnishee notice can ask for a percentage of wages or may seek a lump sum. For individuals, that may mean the ATO issuing a garnishee notice to a director’s employer or to the bank with which the director has an account.

The ATO can also offset existing tax credits against a DPN liability. For example, if the director has an income tax refund owed to them, that amount can be offset against the DPN liability.

Regarding court action, the ATO cannot commence proceedings to recover a penalty until the end of 21 days after the DPN is given to the director.

Finally, the ATO cannot take steps to recover a penalty where the company has entered into a payment arrangement with respect to a DPN liability.

Practical actions

Directors of SMEs and start-ups can take a number of steps to manage a DPN liability risk:

  1. Do your due diligence before becoming a director. That includes checking whether the company has PAYG withholding and SGC (and GST) liabilities. If it does, the director can become personally liable for these, as well as any similar debts the company may incur during their term as a director.
  2. Ensure reporting is done on time. If not, personal liability under a DPN cannot be avoided.
  3. Ensure the director’s postal address is current on the ASIC register. The ATO uses the ASIC-registered address when posting a DPN. It is not a defence to argue that a DPN was not received because the ASIC register was not current.
  4. Make sure the DPN is correct. Check dates, particularly the period of a person’s directorship and corresponding withholding periods, to confirm whether the DPN was validly issued to the right director. Also check the liabilities match the amounts reported or the ATO’s estimates.
  5. Contact the ATO and seek to negotiate a payment plan for an outstanding debt.

Ultimately, prevention is better than cure. Ensuring the timely reporting and payment of a company’s tax liabilities is crucial. A director’s solvency may depend on it.

Jim Koutsokostas is a special counsel at Hall & Wilcox.

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