November 12, 2013

Attack on Phoenix activities affects ordinary business

The classical form of Phoenix activity involves a person, behind the shield of a limited liability company, incurring debts (such as payments due to subcontractors, PAYG deducted from employee’s wages, superannuation guarantee amounts due in respect of employee’s wages) without any intention of paying those debts, at a suitable time winding up or placing that company in voluntary administration and establishing a new company for the conduct of essentially the same business and again incurring the same type of liabilities without the intention of them being paid.

Ordinary businesses never intend adopting that kind of behaviour.

The previous government proposed a four pronged attack on Phoenix activities:

  1. Making directors personally liable for debts incurred in Phoenix companies (proposed in Corporations Amendment (Similar Names) Bill 2012);
  2. Strengthening the directors penalty notice regime which applied to PAYG wihheld;
  3. Extending the directors penalty notice regime to superannuation guarantee amounts;
  4. Denying director’s credits for PAYG not remitted to the ATO.

The first important point to note is that liability under any of these proposals is not limited to Phoenix activity. For example, the strengthened directors penalty notice regime applies whenever there is PAYG or superannuation guarantee amounts that are unpaid for 3 months after the due date. It is not necessary that one company has been closed down and a new company with a similar name carrying on essentially the same business has been established.

The closest any of the proposals comes to a specific attack on Phoenix activities is under the Similar Names Bill. Under that Bill, a person would be made personally liable for any debts of a company where the person was a director of a failed company in the 12 months leading up to liquidation, the debt was incurred in the period of five years after the commencement of liquidation of the failed company, and the new company has a substantially similar name to the failed company.

The issue of a director penalty notice has the effect of making the director personally liable for tax covered by the notice. Where a client is subject to a director penalty notice, the question arises whether there are any avenues for the client to avoid the personal liability.

Prior law

Previously, where a client receives a director penalty notice, personal liability could be avoided if within 14 days of the notice one of four actions is taken by the Company:

  1. Pays the amount of PAYG owing;
  2. Enters into a payment arrangement with the ATO;
  3. Commences to be wound up;
  4. Enters voluntary administration under the Corporations Act.

The announcements made by the prior government indicated that avoiding liability by being wound up or entering voluntary administration would no longer be available. In particular, they proposed that a directors penalty notice will be treated as automatically issued once PAYG was outstanding for more than three months.

New Law

The question arises whether a client with outstanding tax liabilities has any option to avoid the liability under a directors penalty notice.

Under the new law, it remains possible to avoid the liability under a directors of penalty notice with one of the four options:

  1. Pay the amount of PAYG owing;
  2. Enter into a payment arrangement with the ATO;
  3. Commence to be wound up;
  4. Enter voluntary administration under the Corporations Act.

However, there are some key changes. Firstly, one of the options must be entered into within 21 days of issue of the directors penalty notice (previously 14 days). Secondly, the option of winding up or entering voluntary administration only applies for liabilities that are disclosed to the ATO within three months of the due date. If liability is not disclosed, those options are not available. Third, liability under a directors penalty notice applies to PAYG withheld as well as superannuation guarantee amounts, but not other taxes such as GST, FBT and income tax. The amendments in the Corporations Amendment (Similar Names) Bill 2012) would have covered these other taxes, but that Bill has not been introduced to Parliament to date.

Key Points

  1. A client may avoid a directors penalty notice in appropriate circumstances;
  2. A qualification is that the PAYG and superannuation guarantee liability must be notified to the ATO within three months of the due date; and
  3. When in receipt of a directors penalty notice, action must be taken quickly.