Under the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Phoenixing Act), directors of a company may become personally liable for goods and services tax(GST), wine equalisation tax (WET) and luxury car tax (LCT)that is not paid by the company to the ATO by the due date.
The liability will arise with effect from 1 April 2020 as a result of the inclusion of those taxes under the director penalty provisions of Schedule 1 to the Taxation Administration Act 1953.
They form part of a suite of recently enacted ‘anti-phoenixing’ legislative provisions to address companies that go into liquidation owing money to creditors, only to re-emerge from the ashes in the form of a new company controlled by the same directors and effectively carrying on the same business as the previous company did, but free of debt.
The Phoenixing Act will apply not only to directors of a company who are registered with ASIC, but also to any person who effectively acts as a director of that company but is not formally appointed.
The three taxes are all effectively assessed together under the A New Tax System (Goods and Services Tax) Act 1999 as a single net amount and are brought into the director penalty regime collectively. The tax of broad concern will be GST.
That regime currently imposes personal liability on directors of a company for amounts owing by the company to the ATO for:
- PAYG withholding (PAYG); and
- superannuation guarantee charges (SGC).
The addition of GST will significantly increase the number of persons who will now potentially fall within the operation of the director penalty regime and also the amounts that are now potentially recoverable personally from directors.
As with the PAYG withholding provisions, in addition to an assessment arising from a return lodged by the taxpayer, the Commissioner has the statutory power to make an estimate of unpaid GST, WET and/or LCT – and to treat that estimate as are coverable amount upon notification to the company concerned.
The operation of the director penalty regime is based on the premise that directors have an obligation to ensure that the correct amounts of PAYG, SGC (and now GST, WET and LCT) are duly paid to the ATO.
The Commissioner is prevented from commencing recovery action against a director unless he gives 21 days’ written notice to the director concerned.
The director will not become personally liable if the company is put into liquidation or voluntary administration before the 21 day period expires.
However, that protection from liability will not be available if the liability has become ‘locked down’.
In the case of GST, WET and LCT, the liability will become ‘locked down’ once three months have elapsed from:
- where an amount has been assessed to the company for the period in question – the due day for payment (or, if a GST return is lodged within that period, any amount by which the amount payable in accordance with that return is less than the amount actually assessed);
- where the Commissioner has made an estimate – the day by which the company was required to lodge its GST return for the period to which the estimate relates.
A significant difference between the operation of the director penalty regime provisions for PAYG and SGC amounts and the operation of those provisions for GST, WET and LCT amounts is that, whereas the existing measures have been broadly justified on the basis of ‘wage theft’ (ie the directors were in charge of a company that was misappropriating money that was withheld to be paid on behalf of its employees), the new additions benefit only the Commissioner of Taxation as the injured party – and in a manner that puts the Commissioner in an advantaged position over any commercial creditors who may also be victims of the phoenixing in question.
This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.