Thu 07 2018

A wide net to catch the Phoenix – extending the Director Penalty Regime to GST

As part of its 2018-19 Budget, on 8 May 2018 the Government announced a number of proposed measures to combat illegal phoenixing.

One of the most significant among these measures was a proposal to extend the Director Penalty Notice (DPN) Regime to GST, luxury car tax and wine equalisation.

Together with the recently legislated GST withholding regime (see our article), the Government is committed to combating the rise in phoenixing, particularly by property developers. However, unlike the GST withholding regime, the extension of the DPN Regime to GST would have a much broader impact on the way that directors address their companies’ GST liability.

As the Budget announcement was limited in detail, it is unclear whether the ‘reasonably arguable’ defence will be available to directors for their companies’ GST liability. A question also arises as to the circumstances in which the ATO will be able to issue a DPN in relation to GST beyond the ordinary 4 year time limit.

Nevertheless, the recommendation, for the time being, is that directors take particular care to ensure that the tax and GST affairs of their companies are in order.

Phoenixing and the current DPN regime

Phoenix activity is a significant enforcement issue for both the ATO and ASIC and occurs where a company deliberately liquidates to avoid paying creditors, taxes and employee entitlements. Phoenix activity is estimated to cost the Australian economy more than $3 billion a year.

The DPN Regime can help to reduce phoenixing by making directors personally liable for certain company debts; therefore acting both as a tool for recovery of debt, and also as a deterrent for fraudulent behaviour.

Currently, the ATO has the capacity to issue DPNs to directors of companies where those companies do not meet their Pay As You Go (PAYG) withholding or superannuation guarantee charge (SGC) obligations. A DPN can render directors personally liable to pay these outstanding amounts to the ATO as a penalty.

There are two types of DPN’s, and the timing of when PAYG withholding and SGC amounts are notified to the ATO will determine what actions are available to obtain remission of a DPN:

Non-lockdown DPN

If the unpaid amount of PAYG withholding or SGC obligation is reported (ie through the lodgement of a BAS or SGC statement) within three months of the original due date (or, in the case of new directors, three months after the date of their appointment), the penalty can be remitted by:

  • having the company, or another party, pay the outstanding amount stated in the DPN;
  • appointing an administrator under section 436A, 436B or 436C of the Corporations Act 2001; or
  • placing the company into liquidation.

One of these options must be implemented within 21 days from the date of the DPN to obtain a remission of the director penalty that is stated on the DPN.

Lockdown DPN

If the unpaid amount of PAYG withholding or SGC obligation is reported more than three months after the due date (or, in the case of new directors, three months or more after the date of their appointment), the only way to remit the penalty is to pay the debt – within 21 days from the date of the notice.

For any portion of the underlying liability that is reported outside of the three month period, or remains unreported, the director penalty for that portion can only be remitted by payment.

Remission can also be achieved by making payment of the debt at any time prior to a DPN being issued.

Defence to a DPN

There are a number of statutory defences under the DPN Regime which can protect directors of companies that have not met their PAYG withholding or SGC obligations.

A director will have a defence to a director penalty under section 269-35 of Schedule 1 to the Taxation Administration Act 1953 where:

  • they did not take part (and it would have been unreasonable to expect them to take part) in the management of the company during the relevant period because of illness or for some other good reason or
  • they took all reasonable steps, unless there were no reasonable steps they could have taken, to ensure that the directors of the company caused one of the following three things to happen
    • the company to comply with its obligation to pay
    • an administrator of the company to be appointed, or
    • the company to begin to be wound up.
  • in respect of a SGC liability specifically – to the extent the company treated the Superannuation Guarantee (Administration) Act 1992 as applying in a way that could be reasonably argued was in accordance with the law, and took reasonable care in applying that Act.

Where an indebted company has multiple directors, the director penalties owed by the directors may be parallel liabilities, such that the Commissioner of Taxation may commence action against any or all of the directors in an attempt to recover an amount.

Extension of the DPN Regime to GST

As noted above, the Budget announcement was limited in detail in respect of how and when the DPN Regime would extend to GST. It is possible that any new measures would be limited, for example to GST withholding amounts. Alternatively, any new measure may apply to all unpaid GST liabilities of all companies.

However, given that the announcement was proposed as a measure to combat illegal phoenixing it is hoped that the ‘reasonably arguable’ defence available in respect of SGC liabilities would be available for a companies’ GST liability. That is, if any new measure is aimed at targeting illegal phoenixing it should not have any impact on directors who reasonably attempt to comply with the tax law.

A question also arises as to the circumstances in which the ATO will be able to issue a DPN in relation to GST beyond the ordinary four year time limit. It would be expected that in order for the ATO to do so, a finding of fraud or evasion would be necessary.

What to do if you are impacted?

As it is possible that any extension of the DPN Regime to GST would have retrospective application to 8 May 2018, being the date of the Budget announcement, directors should start taking steps now to ensure that the tax and GST affairs of their companies are in order.

New directors should also take sufficient steps to ensure that their companies’ PAYG, SGC and GST affairs are in order within 3 months of their appointment.

Directors are reminded that where their companies have not met their current PAYG withholding or SGC obligations, it is not necessary to wait for a DPN to be issued in order to raise a statutory defence. That is, through early engagement with the ATO it may be possible to prevent a DPN from being issued where a statutory defence applies.

Finally, if you are a director of a company with a PAYG, SGC or GST liability that cannot be paid, you may need to take steps to have an administrator appointed to the company or otherwise begin a winding-up process.

Contact

Andrew provides advice on the application of a wide range of taxation.

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Adam is an experienced tax lawyer, and advises clients on a range of matters including tax planning and structuring, Division 7A, the small business CGT concessions, corporate restructuring, professional firm structures, trust taxation, the taxation of settlements and cryptocurrency taxation.

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