It is now four months since expansive new powers were given to
the ATO under the recently enacted Tax Laws Amendment (2012
Measures No.2) Act 2012 (Cth). These provisions, which came
into force as part of the Taxation Administration Act 1953
(Cth), significantly increase the effect of Director Penalty
Notices (DPNs) issued to directors by the
Commissioner in respect of a company's unpaid tax
These changes underpin a policy objective of increasing the
Commonwealth's power to collect taxes and safeguarding against
fraudulent 'phoenix' activity. In its simplest form, this
involves the practice of purposefully placing companies into
liquidation to avoid accrued liabilities for tax and employee
entitlements, before having a new corporate entity acquire the
liquidated entity's assets, free of liabilities, and continuing
the former business under the guise of a new entity. Essentially,
the 'phoenix' entity rises from the ashes of its former
self, free the burden of accrued liabilities.
DPNs were first introduced in 1993 as an incentive for directors
to cause their companies to comply their relevant PAYG withholding
obligations. A DPN could make a director personally liable for a
company's accrued PAYG contributions, where the company failed
to pay them. Liability under a DPN was triggered when the ATO
issued a notice to a director in respect of an unpaid PAYG
liability; the director had 14 days to either cause the company to
pay, or to place it into voluntary administration, failing which he
or she became personally liable.
The deadline for compliance with DPNs has been extended to 21
days, but the other changes are generally not as favourable. While
DPNs had previously operated to catch all unpaid PAYG contributions
(including deemed contributions which had been 'estimated'
by the ATO, where those contributions had been either unreported or
under-reported by the company), the new provisions will extend
these powers in three significant ways:
The DPN regime will be extended to make directors personally
liable for Superannuation Guarantee Charge (SGC)
contributions (including ATO-'estimated' SGC contributions)
in addition to PAYG contributions.
The loophole for avoiding liability under a DPN where a company
is placed into external administration will be removed where that
liability has been due and unreported for 3 months (however, the
exception will continue to apply where a company has validly
reported those outstanding contributions by the relevant quarterly
due date, ie 21 days after the end of a quarter).
They will make directors and their 'associates' (in
other words, family member employees of directors), liable to pay
PAYG withholding tax, where a company fails to withhold sufficient
amounts for PAYG. The ATO can recoup any unpaid liabilities
directly from directors and their associates by deducting any tax
credits those individuals may be entitled to. Associates can be
liable where the associate should reasonably have known that the
company was failing to pay PAYG withholding tax, because of their
relationship with a director. In each case, however, the ATO will
need to be satisfied that it is reasonable to issue a penalty for
Perhaps the most significant change, at least for those
individuals who are not deliberately engaged in phoenix
arrangements, is that it was previously a defence for directors to
show where a DPN had been issued, that the director had, before the
14 -day deadline, either appointed a voluntary administrator to a
company or commenced the its winding up.
While this defence will continue to apply, it will no longer
apply in the case of PAYG contributions that have not been
reported within three months after the relevant due dates.
In many circumstances, this will mean that a failure to report an
accrued liability will make the director (along with any others)
liable to repay those sums.
Consequently, these changes are likely to significantly alter
the risk profile for many directors, perhaps most notably for those
who do not play an active role in the management of a
corporation's affairs or the oversight of its payroll. While
some safeguards exist to protect newly-appointed directors and
those who can prove through sickness or other good reason they were
not involved in the company's management, these exceptions
offer limited protection against the enhanced scope for potential
liability. Every director, and everyone who advises directors,
needs to be aware of these changes.
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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The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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