3 tax traps and tips to avoid overpaying tax
Readers of our On The Pulse newsletter are likely familiar with the liabilities under the Director Penalty Notice (DPN) regime and their impact on company directors (see here for a refresher). However, when addressing DPN-related debt, there are several areas where directors and companies may inadvertently pay more tax than required. This article highlights common pitfalls and offers practical tips to avoid them.
Trap 1: Lodging BAS with understated debt
In an attempt to avoid automatic liability under a lockdown DPN, some distressed companies may lodge a nil or low BAS, hoping to reduce their tax obligations. However, this is a risky strategy.
If the BAS is amended outside the 3-month reporting period (see this article), the Australian Taxation Office (ATO) may issue a lockdown DPN deeming the date of amendment to be the reporting date, not the initial date of submission. If any shortfall amount is identified during an ATO audit (which is common), then likely it will be outside the three-month period and because the company failed to report and pay the relevant tax for the BAS period. The directors are personally liable for the unreported amounts, and may receive a Lockdown DPN for those amount
Note that a liquidation does not automatically suspend the ATO’s ability to audit a company. The ATO can continue or even commence audits during the liquidation process, if needed.
Tips: Always ensure tax reporting is accurate and up-to-date.
Trap 2: Paying SGC before appointing an SBR practitioner
One of the key eligibility requirements for a Small Business Restructuring (SBR) proposal is that all due and payable employee entitlements, including superannuation, must be paid before a restructuring plan can be put to creditors. However, the payment should not be made before appointing an SBR practitioner.
Only the priority portion of the Superannuation Guarantee Charge (SGC) - typically the SG shortfall, SG nominal interest, and administration fees - needs to be paid for SBR eligibility. Non-priority portions such as SG Shortfall GIC, SG Part 7 GIC, and penalties can be addressed through the SBR process.
It is important to differentiate between the priority portion and non-priority portion of the SGC debt and pay the right amount at the right time.
A common mistake is making payments before appointing an SBR practitioner. Even if the payment was intended to repay the priority portion, the ATO may allocate the payment to the oldest debt on their ledger, which may not align with the priority payments needed for SBR eligibility. As a result, the Company may be required to pay more after appointing the SBR practitioner, to be eligible for SBR.
Tips: Confirm the exact amount of the priority SGC debt with the ATO and the bank details before making any payments. If unsure, consult your SBR practitioner, such as Worrells.
Trap 3: Paying a DPN to the company’s account
As explained in previous articles, (see article: "Navigating lockdown Director Penalty Notices: key considerations"), when a company fails to remit its taxes on time, directors become personally liable for the unpaid tax under a DPN. However, payments made to a company's tax account may not always reduce the director's personal liability under the DPN, as the ATO applies payments to the oldest debts first i.e principal, interest and penalties.
To minimise personal liability, directors should ensure their payments are applied correctly.
Tip: To reduce both the company's tax debt and the director’s personal liability:
If paying from personal funds, first pay the company, and then ensure the company directs the funds to the director’s DPN account (see BPay information on the DPN). This ensures the company’s tax debt, director’s DPN balance and director’s liability to the company (for example a loan from the company) are all reduced promptly.
If the company is paying the DPN, it should pay directly to the director’s DPN account.
By understanding these common “traps” and following the suggested tips, directors can avoid overpaying tax and reduce the risk of personal liability. Proper planning and timely action are key to navigating these challenges effectively.
Worrells can help
For more information on the SBR process, click here to download our complimentary guide to small business restructuring.
If you’re concerned about the personal liabilities of yourself or your client, have a chat to your friendly Worrells principals sooner than later. We’re here to help and can take you through the practical solutions available.
