From 1 April, the Australian Taxation Office (ATO) will wield new powers to personally penalise directors for their company’s non-payment of GST.
Rigby Cooke Lawyers tax counsel Tamara Cardan said the new powers significantly lift the corporate veil and will affect many businesses and their directors.
“This change will come as a surprise for many small businesses as it gives the ATO significant power with respect to GST liabilities,” Ms Cardan said.
“It is a pretty extreme change, a fact that is supported by the Senate’s amendments to the legislation requiring an independent review of the measures after five years.”
The changes, included in the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020, give the ATO powers to hold directors personally liable for unpaid GST, expanding the Director Penalty Notice (DPN) regime, which had previously principally applied to a company’s unpaid pay-as-you-go (PAYG) withholding and superannuation guarantee liabilities.
Ms Cardan said the new powers present significant risks for company directors, particularly passive directors.
“It is common for businesses, particularly small and medium-sized businesses, to struggle with GST liabilities due to cash-flow issues,” Ms Cardan said.
“It is also fairly common for passive directors to not be actively involved in their businesses.
“In light of these new powers to penalise directors and hold them personally liable for unpaid GST, I think it will be very risky to be a passive director.”
Under the new regime, those who are directors of a company on the last day of a tax period or GST instalment quarter (the “initial day”) will automatically become personally liable for any GST liabilities for that period which are not paid by the “due day”.
Ms Cardan explained that directors who are aware of outstanding liabilities must ensure that their companies notify the ATO before the “lockdown date”, three months after tax instalments are due, in order to be able to achieve remission by placing the company into administration or liquidation.
She said that the changes present real and significant risks of directors being personally held to account for inadvertent oversights and systemic errors within the business.
“Directors will need a better understanding of the operation of the GST system overall, and be actively involved in their companies, to ensure that GST liabilities are being properly reported to the ATO,” Ms Cardan said.
“Right now, I would be recommending all directors review the accounting systems their businesses are using to identify any systemic or processing errors which may lead to GST liabilities.”
Ms Cardan explained that directors can’t escape a liability by resigning, as the ATO takes the position that if you resign as a director before the due date, you will still be liable.
“Furthermore, if you haven’t notified the ATO by the lockdown date, the only way to remove the liability is to pay the outstanding amount,” Ms Cardan said.
“To anyone considering a directorship, these powers mean it is really important to do your due diligence on the financial position of the company.”
She concluded: “These changes are complex, so I would recommend directors seek legal advice in order to ensure that they understand their responsibilities and protect themselves as much as possible.”