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 liabilities.

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 the non-compliance.

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.

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