Directors beware – changes to the Director Penalty Notice have arrived

In previous articles we mentioned that as part of the Federal Government’s crackdown on phoenix operators, bills were introduced to provide for automatic personal liability of directors in certain circumstances and seek to extend the personal liability to unpaid superannuation guarantee charge.

The Bills have now passed at both Houses of Parliament and Royal Assent given on 29 June 2012.

Previously, a director of a company had a fallback position before the Commissioner of Taxation could enforce personal liability in circumstances that the company has an unpaid Pay As You Go (“PAYG”) liability, ie the Commissioner of Taxation must send a Director Penalty Notice. The Notice provides that the penalty will be remitted if:

- the company’s liability has been discharged; or

- the company is under Administration; or

- the company is being wound up

within 21 days from the date of issue of the Notice.

The law has now significantly changed.

The Tax Administration Act 1953 has now been amended to extend the director penalty regime to include outstanding superannuation guarantee charge liabilities

The legislation has now changed as it now extends a director’s liability to unpaid superannuation guarantee charge whereby a director is liable to a penalty if the company has not lodged its superannuation guarantee statement and paid the superannuation guarantee charge by the end of the lodgement date. The Commissioner will enforce liability by way of a Director Penalty Notice, providing a period of 21 days before commencing proceedings. The liability will be remitted if the directors take one of the three actions described above (subject to the actions occuring within the new timeframe as further discussed below).

Directors in certain circumstances will no longer be able to avoid personal liability

However, the legislation provides that where 3 months has lapsed after the due date and the liability remains unpaid and unreported, the penalty will not be remitted as a result of placing the company into administration or liquidation.

This change will apply retrospectively

An important consideration to note is that the changes will apply retrospectively at the commencement of the new legislation and a director may no longer be able  have their director penalty remitted by appointing an Administrator or by winding up the company, and will be personally liable regardless, if they are outside the 3 month timeframe.

Other notable amendments include:

- The Commissioner may also serve a copy of a Director Penalty Notice on the director at his or her tax agent’s address;

- A new director is not liable to a director penalty for company debts until 30 days after they become a director;

- The introduction of a PAYG withholding non-compliance tax for directors and their associates in circumstances that the director and/or their associates claim a PAYG credit in their personal income tax returns for amounts withheld by the failed company. The tax is not recoverable unless the Commissioner issues a Notice to the individual director or associate. It also seems that the Commissioner will have discretion whether to issue the notice or not.

Our view of the new legislation

In our experience, at the time of the appointment of an Administrator / Liquidator it is common for a company to have many unreported and unpaid Business Activity Statements outstanding. However now if the respective BAS or SGC Statements have not been lodged and paid within 3 months of their due dates (extending to those statements that were due prior to 29 June 2012), the appointment of an Administrator/Liquidator will not remit the penalty.

The above law will have a major impact,  such as the following;

- A higher personal bankruptcy rate. It will be more common for Directors to place their company in Liquidation and at the same time enter into bankruptcy knowing they are outside the 21 day grace period for receiving a DPN meaning they are automatically liable

- A larger rate of insolvency appointment turnarounds. Companies and Directors can no longer afford to delay an insolvency appointment if they automatically become personally liable – the maximum they will be afforded from the first day the company begins incurring PAYG tax and super until they need to make an appointment will be approximately 7 months i.e if they report PAYG on a quarterly basis, superannuation and PAYG tax becomes due and payable on around the 28th day after the quarter ends (meaning the fourth month from the date the liability commenced accruing), and Directors will then have 3 months to lodge and pay their obligations from this date or make an appointment of an external administrator to avoid personal liability

- The Voluntary Administration process may become a more common lifeline for companies and may be utilized by a company on more than one occasion during the company’s lifetime (a company can go in and out of Voluntary Administration as many times as it wants if allowed by creditors). Directors may opt to go through the Voluntary Administration within the 3 month reporting period rather than risking automatic personal exposure. Furthermore, the Voluntary Administration process may become more acceptable by creditors in consideration of the strict regime Directors are now bound by due to the new legislation

- Company structures strictly for paying wages and superannuation obligations will become more common – with the purpose of these companies to cease trading immediately if the company cannot remit its PAYG tax and superannuation on time

- The ATO will now receive a higher preference from Directors for payment, as Directors will opt to pay the ATO and avoid personal liability rather than other creditors who do not hold similar personal ‘guarantees’

- Preference claims against the ATO by Liquidators will increase

- Accountants will have strict deadlines and will need stringent quality control mechanisms to ensure Directors provide the necessary information to enable the accountant to report the outstanding obligations on time. Accountants need to be wary of potential negligence claims if lodgments are not made on time and the Directors do become personally liable as a result of the accountant’s delay in reporting. For example Directors may argue they would have placed the company in Administration/Liquidation within the 3 month reporting period to avoid personal exposure had they known the position

- Directors will become more diligent in asset protection to avoid losing their wealth

- Tax agents will need to be diligent in forwarding Director Penalty Notices promptly to Directors;

- Entrepreneurship and risk taking will diminish as Directors may not be so bold in entering into ventures which may cause them to lose their personal wealth due to the new strict regime

The next few months will be interesting once the severity and potential impact the new legislation may have on Directors is recognised in the general business community.  Losses to the ATO and employees for superannuation may decrease as a result of the changes – but at what cost? The future will tell.