As usual the Federal Budget contains many changes to the tax law and to its compliance regime. This year the changes which relate to the Government strengthening the laws to counter fraudulent phoenix company activity.
These particular changes are aimed at activities undertaken by some directors who have their company intentionally accumulate tax debts over a period, then liquidate the company before personal liability attaches to them so that neither the company nor the director has to pay the debt. The directors usually get the benefit of this process either in money taken from the company by way of fees, or (in one case we are currently examining) by way of lower costs charged to associated companies.
The business of the company is then continued through another corporate entity which is usually controlled by the same director or a close relative, but is free of the debts of the previous company. Sometimes this transfer of business will be done in the form of a sale of the existing business at a price well below the amount of the debts that the director is trying to avoid. This usually occurs in low capital asset businesses where a fair value of the assets transferred is minimal.
The budget highlights certain changes to the legislation that are designed to give the ATO more power and opportunity to combat such activity and to collect taxes from the company or its directors. From 1 July 2011the following provisions should become active.
1. The debts that form part of a claim against a director under the director penalty regime will be extended to include superannuation guarantee amounts. This has the effect of making directors personally liable on the expiration of the time limit contained in the director’s penalty notice for their company’s failure to pay employee superannuation on time and provides one mechanism for collection of those debts.
Interestingly, outstanding GST debts were originally to be included in the amendments, but were removed.
2. Currently the Australian Taxation Office (ATO) has to issue a director’s penalty notice (DPN) before it can ‘commence proceedings’ against directors personally to collect the penalty amounts. The DPN provides a 21 day period for directors to take some action to avoid liability. We have mentioned these provisions in recent articles.
The amendments will give the ATO the power to commence recovery against directors for a penalty without providing the 21 day grace period under the DPN. This will apply for unpaid company liabilities (that would normally be included in the DPN) and that remain unreported after three months of becoming due. Given that these are amounts that have specifically been deducted from employees wages etc, directors should be aware that the amount is reportable and payable to the ATO and when.
We realize that our article on ‘Deemed Insolvency’ in our March 2011 newsletter has no direct correlation with this provision, but it is interesting that other people also see the non-payment (and in this case, non-reporting) of tax over a period of months should be a trigger for collection activity beyond what needs to be proved.
Effectively directors will have to keep tax debts reported and paid or be proactive in solving a company’s debt issues – their tax debts problems at least – within the first three months or face potential collection proceedings.
3. In some cases directors (and some other parties) will not be able to obtain credits for tax withheld in their individual tax returns where the company has not paid the withheld amounts to the ATO. This effectively puts the director and the company onto a cash basis in relation to these amounts at least. It is a ‘don’t pay can’t deduct’ policy.
We will have to wait to see the wording of the legislation when it is passed to determine exactly how these provisions will apply.