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In recent months, corporate insolvencies have steadily
increased. Media reports provide news of near all-time record
numbers of external administrations in Queensland during May 2012,
and the list of insolvent construction and building supply
companies only seems to grow.
Corporate insolvency should always cause concern for directors.
Not only does insolvency typically end a business, it can also
create significant personal liability through insolvent trading,
contractual guarantees or having to indemnify certain creditors for
preference payments.
Recent amendments to the Taxation Administration Act
1953 (Cth) (the Act) have significantly
increased the risk that a director may become personally liable to
the Australian Taxation Office (the ATO) for a
company's unpaid PAYG withholding liabilities.
Prior to the amendments, where a company had unpaid PAYG
withholding, a director became personally liable to pay that amount
to the ATO. However, the personal liability would be
"remitted" (or extinguished) if the company paid the debt
(obviously) or if it was placed into voluntary administration or
liquidation before the ATO commenced proceedings against the
director for the liability. However, and favourably for directors,
the Act prohibited the ATO from commencing proceedings for the
recovery of PAYG withholding until 21 days had passed from the
service on the director of a penalty notice. This meant that a
director could always escape liability by placing the company into
administration or liquidation within 21 days of receiving a
notice.
The recent amendments to the Act change all of this. Under the
newly amended Act, a director will become personally liable for
unpaid PAYG withholding in any circumstance where:
the PAYG withholding liability is more than 3 months old;
and
prior to those 3 months passing, the director did not notify
the ATO of the liability.
Put another way, liability can only be avoided
(outside of the company actually paying) if:
the company is either placed into liquidation or administration
within 3 months of the PAYG withholding liability becoming owing;
or
within those 3 months, the ATO is notified of the PAYG
withholding liability becoming owing. In this case, the director
will escape liability if the company (including after the 3 month
period) is ultimately placed into administration or
liquidation.
The changes also impact certain superannuation payments and
expand the number of people who may be liable for unpaid PAYG
withholding.
Companies should now ensure that procedures are in place to
promptly identify any PAYG withholding liability to enable
directors to either notify the ATO or appoint external
administration - there are likely to be few things less satisfying
than losing a company only to be bankrupted for personal liability
for the company's unpaid PAYG withholding which could have been
avoided.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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