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Directors Personal Liability Extended
As per the Federal Budget handed down by the Honorable Wayne Swan MP on 10 May 2011, certain changes have flown “under the radar” with regards to the treatment of Director Penalty Notices (“DPN”). In regards to ‘Tax compliance — countering fraudulent phoenix activities by company directors the budget outlines

“The Government will strengthen the tax law to counter fraudulent phoenix activity, which involves a company intentionally accumulating debts to improve cash flow or wealth and then liquidating to avoid paying the debt. The business is then continued as another corporate entity, controlled by the same person or group and free of their previous debts and liabilities.”
 

As a result, it has been proposed that where a company does not report their outstanding liabilities which fall under the current DPN regime within three months of falling due, the grace period of 21 days with which directors are currently afforded to act on an issued DPN will be abolished. In effect this makes the director personally liable in respect of unpaid company liabilities falling within the DPN regime, without the need of a DPN being issued. Companies that report their liabilities in the ordinary course will be subject to the current regime requiring a DPN to be issued before personal liability may be enforced. This provides the director with the opportunity to avoid personal liability by taking the requisite action.
 
The budget further extends the DPN regime to not only include withholding taxes not remitted to the ATO (such as PAYG), but also to include superannuation guarantee amounts not remitted to the employees’ funds within the prescribed period. The rationale behind such change is that the withholding amount caught by the current DPN regime are effectively held on trust by a company for the Commissioner, and should therefore at no stage be included in a company’s cash flow. With regard to superannuation guarantee amounts, such payments are required to be made by an employer for the benefit of their employees. In effect, such payments are held on trust by the employer for the employee and should also therefore not be included in a company’s cash flow.
 
It must also be noted that in certain circumstances, directors and associates of directors will be prevented from obtaining personal tax credits for withheld amounts where the company has failed to pay those withheld amounts to the Commissioner.
 
In effect this will allow the ATO to deny PAYG credits to directors (and their families) of companies which have not remitted, rather than not withheld PAYG amounts.
Given that the intended legislation is still pending, there is some degree of uncertainty about:
  1. When such changes will be brought into effect and what will be their final terms; and
  2. Whether the changes when enacted will operate retrospectively or from some other particular date.

It is important that directors act now and review their company’s reporting and lodgment obligations associated with withholding amounts and superannuation payments in order to avoid substantial personal risks which may leave them exposed given the new proposed amendments. One must ponder the thought as to the extent to which director personal liability could eventually be extended. Possible future amendments to the proposed regime may even extend to include other withholding taxes such as GST liabilities. This would significantly increase director’s personal exposure. The tax man has stated that these funds are not part of a company’s funds and consequently should not be available for its cash flow. Such a position fails to recognise timing differences in working capital and may lead to many more cash flow issues than presently being experienced by the small to medium business sector. Questions also arise as to the implications for financiers and security holders as their ‘backup security’ in the form of personal guarantees may be eroded by more aggressive recovery activity by the Commissioner.

How we can help?

de Vries Tayeh has an exceptional working knowledge of the DPN regime as well as the proposed amendments outlined in the recent Federal Budget. de Vries Tayeh shall be able to provide you with accurate, timely and practical advice so as to obtain the best outcome for all involved.

For a private consultation, please contact our office reception on (02) 9633 3333 and ask to speak to any of the three partners Antony de Vries, Riad Tayeh or David Solomons.