August 21, 2012

Changes to the Director Penalty Regime

On 29 June 2012, the Federal Government passed changes to the director penalty regime.   The amendments widen directors’ personal liability in relation to company liabilities, particularly tax and superannuation liabilities.   The legislative changes target directors participating in “phoenix activity.”*

THE EXTRA RISKS FOR DIRECTORS

  1. Under previous law, directors were personally liable for PAYG withholding tax.   Under the new laws, directors will also be personally liable for unpaid employee superannuation.
  2. Under previous laws, when the Tax commissioner filed to enforce personal liability for tax liabilities against a director (Director Penalty Notice), the director could achieve remission of that personal liability by appointing an administrator or beginning to wind up the company within 21 days.   Under the new law, if PAYG or superannuation contributions remain unpaid and unreported for 3 months after the due date, the director cannot achieve remission of the personal liability.
  3. Associates of directors (including spouses) are captured by the regime if a company has failed to remit tax amounts withheld.  The consequences impact upon the director and their associate’s personal tax return in that they will not be entitled to claim PAYG credits.
  4. Failures by associates of a director to take action where tax failings and oversights have occurred will be held personally liable if they:
    1. do not influence the director to pay the outstanding tax to the ATO; or
    2. report the director’s activities to the relevant regulator.

GST LIABILITY OMITTED FROM REGIME CHANGES

When a company is in financial distress, GST often represents the largest component of its unpaid tax liability.  Under the new regime, directors remain free from personal liability where companies have outstanding GST.

IMPACT OF THE CHANGES

As with any new regime, the full extent of these changes remains unclear.  Directors and their associates will have further clarity on their impact when the changes are tested before a court.

*Phoenix activity typically involves activity by company officers that seeks to avoid debts by transferring assets from an indebted company into a new company that they control.  The director then places the initial company into administration or liquidation with no assets to pay creditors, while continuing the business using the new company structure.