Companies often trade by utilizing either funds collected for Goods and Services Tax (“GST”) or by not remitting group tax (“PAYG”) or Prescribed Payments. Directors entering into such behaviour, even under necessity, must be acutely aware of the personal liability that may arise. The ATO has recently been cracking down on such practices by issuing notices under Section 222AOE of the Income Tax Assessment Act (“ITAA”) which may confer a personal liability on directors for unremitted taxes.
Even though, a company may be seen as a separate legal entity to the individual, there are circumstances where directors can be made liable for the company’s tax debts (including penalties). Prior to 1993, the ATO in a liquidation scenario held some priority over certain creditors in relation to outstanding group tax. However, legislation was amended to reduce the priority status of the ATO, but at the same time provisions were made which allowed the ATO to gain the power of creating a personal liability by way of penalty for directors.
The ATO has various legislation at its disposal for the recovery of outstanding tax liabilities. These include normal commercial debt recovery procedures together with special legislative powers afforded to it via the ITAA. These collection procedures have the ability to greatly impact upon the:
Directors’ personal liability may arise where the Commissioner of Taxation issues a Director Liability Notice (“DLN”) under Section 222AOE of the ITAA to the directors at a time when the company has failed to remit tax. This notice instructs the company’s directors to act within fourteen (14) days of receipt of the DLN to cause the company to enter into one of four stipulated events. These events are:
There are very few ways or means for directors to avoid this type of exposure. Two defences are prescribed under the legislation, but they may provide little benefit or assistance. The defences are:
In such instances, we have seen the ATO seek personal indemnity by way of security over, either the company’s or the director’s property to safeguard its position and ease ny future recovery process.
If a company is not able to meet the repayment arrangement, any director, between the entering into the arrangement and the subsequent default, may become liable to pay a penalty that equates to the company’s outstanding tax liability. The ITAA automatically imposes a penalty and the ATO is not required to send notices indicating any breach. This failure may also assist any future liquidator in presenting insolvent trading claims against directors.
If a repayment arrangement has been entered into with the ATO and the company subsequently is wound up (for whatever reason), the ATO may be pursued under Section 588FGA of the Corporations Act by the liquidator as these payments may have been received in priority to other creditors. Such payments could be deemed preference payments and the impact of a liquidator successfully recovering same is that the company’s directors may be liable to indemnify the ATO for any losses/damages incurred from having to disgorge some of the monies previously paid.
Further, Gould v FCT (98ATC4946) suggest that even full compliance with the requirements of Section 222AOE may not automatically absolve directors of liability for unpaid tax.
In Gould it was held that notwithstanding compliance by the director with the requirements of Section 222AOE that he was still liable to pay a penalty equal to the amount of the outstanding tax in accordance with Section 8Y of the Taxation Administration Act and a reparation order may be sought under Section 21B of the Crimes Act 1914.
With the ATO’s ever increasing focus on collection and the build up of resources of the area to implement those collections, there is the strong likelihood that over the next twelve (12) months there will be increases in the number of directors that will have direct exposure to Director Liability Notices and the inherent personal liability that could attach to same, if not handled in the correct manner.
The moral to take away with you is:
By David Petrina