Australian directors, take note: From 1 April 2020, Australian company directors can be held personally liable for their company’s outstanding goods and services tax (GST), along with the Luxury Car Tax and Wine Equalisation Tax. GST liabilities will now be subject to the existing director penalty notice (DPN) system that already applies for PAYG withholding amounts and superannuation guarantee charges. The shift in liability of debts over the years represents a significant move away from the concept of limited liability of individuals associated with companies that all relevant players should be aware of.
What does this mean?
Directors of companies may face personal liability have to pay for unpaid GST out of their own pockets. This means that in the event that the company cannot meet its obligations, directors’ personal assets will be pursued by the ATO. In extreme cases, this could lead to scenarios such as directors having to declare bankruptcy or losing their home.
How will the DPN system work?
Each time the ATO assesses a payable amount for each tax period, a director will have the obligation to do one of the following things:
- Have the company pay the obligation to the ATO by the due date;
- Appoint an administrator; or
- Start the winding-up process.
In the event that none of these things happens and the due date expires, the obligation and penalty will fall to the director at a personal level by being issued with a notice by the ATO.
Three months after the due date for BAS, if the assessed net amount has not been paid nor the BAS lodged, the penalty will be “locked down” to each company director. This means that they will continue to be held personally liable for the debt.
Are there any defences available?
There are limited defences available. The most straightforward way to extinguish the penalty is to have the company pay the assessed net amount to the ATO. If this is not possible, the director should appoint an administrator or begin the wind-up process before the lockdown date.
If the director is ill and because of that illness it would have been unreasonable for them to have taken part in the management of the company while they were a director, this will be considered a defence.
Alternatively, the other defence is that the director took all reasonable steps (or where there were no reasonable steps that could have been taken) to ensure that one of the following happened:
- The company pays for the liability;
- An administrator is appointed; or
- The winding-up process is commenced.
New directors of a company will have a 30 day grace period from the date of their appointment to ensure that the company pays its liabilities, appoints an administrator or that the wind-up process begins.
How can directors limit their risk?
While these changes have been viewed somewhat controversially given that it is thought they will have a disproportionate impact on small to medium businesses and startups, given that these types of companies are more likely to experience cash flow issues.
This being said, all directors should take some key steps to minimise their risk exposure.
- Be involved in GST compliance: All directors need to ensure they are taking an active role in confirming that their company is adequately reporting and complying with its GST obligations. This means regularly reviewing and auditing accounting systems to confirm everything has been correctly entered, and receiving specialist tax advice if you are unsure about how GST applies on certain purchases or sales. In doing this, you will be able to demonstrate to the ATO that reasonable care was taken.
- Immediately disclose any current unpaid GST to the ATO: Prior to 1 April 2020, if you identify that your company has unpaid GST liabilities, you should contact the ATO and arrange payment by entering into a payment plan. While such an arrangement is in place, the ATO will not move to recover from a director personally. Alternatively, if repayment is not possible, directors should consider whether an administrator or winding- up is necessary.
- Ensure ongoing compliance with BAS lodgement: This means ensuring that BAS is always lodged on time, even if you are not able to immediately pay the debt. By ensuring that this occurs, you will prevent the company from being “locked down”, whereby the only option to satisfy personal liability is to pay the ATO’s penalty, removing the option to wind-up the company or appoint an administrator.
What should I do if I am issued a DPN?
If this does occur, it is extremely important that directors move quickly to get professional advice. A DPN is issued by the ATO so that it can collect a debt from a director personally. This will be done 21 days after it has been issued.
The newly expanded DPN regime will mean directors will need to closely monitor their company’s GST reporting system and ensure that BAS lodgement deadlines are met. Being actively involved in the company is the best way to mitigate the risk of triggering personal liability for unpaid GST debts.
For people considering assuming a new directorship role, a very cautious approach should be adopted, including thorough due diligence on the company’s history of tax compliance.
Harris Gomez Group is a Common Law firm, with offices in Santiago, Bogotá, and Sydney. We also have legal teams in Peru, Bolivia, Ecuador, Brazil, and Argentina. Over the last 18 years, we have been supporting foreign companies with their growth in Australia and Latin America. Many of our clients are technology companies, service providers and engineering companies that focus on the mining, energy and infrastructure markets.
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