The Federal Government’s package of reforms aimed at addressing illegal phoenix activity is now law. One of the more significant measures under the reforms is the extension of the director penalty regime to include GST and other indirect tax liabilities of a company.
What is the director penalty regime?
The director penalty regime allows the Commissioner of Taxation to make directors of a company personally liable for specified taxation liabilities of the companies they represent through the issue of a Director Penalty Notice (DPN). Previously the regime was limited to PAYG withholding and superannuation guarantee charge liabilities, but has now been extended to include GST, wine equalisation tax (WET) and luxury car tax (LCT).
The expanded regime will commence from 1 April 2020, being the start of the first quarter after Royal Assent.
How will it work?
The changes allow the Commissioner to make an estimate of a company’s net amount payable of GST, WET and/or LCT in its business activity statement (BAS). If the Commissioner makes an estimate, the company is liable to pay that amount to the Commissioner and the directors have 21 days to ensure the amount is dealt with to avoid becoming personally liable.
An entity may reduce the amount of an estimate by making a sworn statement that the entity’s net amount for the tax period is less than the estimate. The legislation sets out the information that must be included in the statement.
What’s the impact on directors?
Company directors are now under an obligation to ensure their company pays an assessed net amount of GST, WET and/or LCT (including an estimate made by the Commissioner) or, recognising the company is insolvent and cannot pay the liability, put the company into administration or begin wind up action. That obligation begins on the day the relevant tax period ends. Directors that cease to be directors after this date are still subject to this obligation even if they cease to be directors before the due date of the assessment.
A director’s penalty arises when the director’s obligation is unsatisfied on the due date of the assessment. However, the penalty is only recoverable following a period of 21 days beginning when the Commissioner issues a director penalty notice to the director(s). The amount of the penalty is the amount of the company’s unpaid liability.
The penalty may be remitted if the director complies with the obligation to pay the outstanding assessment either before the director penalty notice is issued or within 21 days of the day the notice is issued. However, if the director complies with their obligation by placing the company into administration or beginning to wind up the company, the full amount of the penalty will only be remitted if this is done within 3 months of the assessment’s due date. Directors who fail to place the company into administration within 3 months of the assessment’s due date are likely to receive a lockdown DPN. This means the directors become personally liable to the ATO for the unpaid net amount and will not be entitled to remittance of the penalty even if the company then goes into liquidation.
