What has happened?
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 Notice (DPN) regime to include GST, luxury car tax and wine equalisation tax. The new DPN regime will commence from 1 April 2020.
This means that directors can now be personally liable to the ATO when a company fails to remit PAYG, Superannuation, GST, luxury car tax and wine equalisation tax.
Why did this happen?
In 2018, as part of the federal budget, the government introduced a package of reforms aimed at addressing illegal phoenix activity. Illegal phoenix activity occurs when assets of a company are stripped and transferred to another entity that is controlled by the same director, for little or no consideration. The main purpose of these transactions is to defeat the interests of the creditors of the first company and are often facilitated by unscrupulous pre-insolvency advisors, accountants, lawyers and liquidators.
The government was advised that the direct annual cost to businesses, employees, and the government as a result of illegal phoenix activity is between $2.85 billion and $5.13 billion each year.
There are many people who are affected by illegal phoenix activity. They include employees who are owed entitlements like superannuation, other businesses, contractors, and the ATO. In addition, companies that routinely engage in illegal phoenix activities have an unfair competitive advantage over their competitors leading to financial stress for many legitimate businesses who have to cut their margins to attempt to survive.
The ATO is often a significant creditor in most liquidations and it is not uncommon for it to be owed large amounts in unpaid GST, PAYG and Superannuation. The government is also concerned about unpaid superannuation which is being described in the media as “wage theft”.
While the DPN regime is meant to primarily deal with illegal phoenix activity, unpaid taxes and superannuation, many legitimate businesses that are having solvency issues will also be caught up in this regime.
How will the DPN regime work?
If the company does not meet its tax obligations, the ATO can issue a DPN against the directors of a company and impose a penalty that is equal to the amount of the company’s unpaid liability. The DPNs are issued to the directors’ home address that is recorded on ASIC’s database.
There are two kinds of DPN, which are commonly known as “non-lockdown DPNs” or “lockdown DPNs”. The type of DPN issued will depend on when the company’s BAS or Superannuation Guarantee Charge (SGC) Statement is lodged with the ATO.
If a company lodges its BAS within 3 months of the original due date, and reports the unpaid amounts for GST, PAYG, luxury car tax and wine equalisation tax to the ATO, the ATO can issue a non-lockdown DPN against the directors. The directors can avoid personal liability for the penalty if they:Pay the debt; orPlace the company into liquidation; orPlace the company into voluntary administration
The DPN penalty can only be remitted or removed if the director takes one of the above options within 21 days from the date of the DPN. If the director fails to take any of those options within that timeframe, then the director will be personally liable for the penalty.
Where there are outstanding superannuation obligations, the company must report the SCG obligation by the due date of the SGC Statement. If that is done, then the ATO can issue a non-lockdown DPN against the directors. The DPN penalty can be remitted if the directors take one of the above options within 21 days from the date of the DPN.
There are times where companies do not lodge their BAS’s and SGC Statements on time. If these BAS’s are not lodged within 3 months from their original due dates, or in the case of outstanding superannuation, where SGC Statements are not lodged by the due dates, then the ATO can issue a lockdown DPN against the directors.
Under this scenario, the directors’ personal liability can only be prevented if the penalty is paid within 21 days of the DPN.
The lockdown DPN does not allow the directors to avoid personal liability by placing the company into liquidation or voluntary administration. A lockdown DPN can also be issued after a company goes into liquidation or voluntary administration.
How will the ATO know what are the amounts of outstanding tax and superannuation liabilities?
The ATO can make reasonable estimates of the unpaid and overdue amounts for unpaid taxes and superannuation even if a company does not lodge their BAS or SGC Statement. The DPN regime will apply to the estimated liabilities.
What should you do?
We recommend the following:
- You should immediately advise your clients about the new changes to the DPN regime and the consequences to them personally.
- Conduct a business health check on your client’s affairs to determine whether there is any exposure on unreported or under-reported GST, PAYG, indirect tax liabilities and superannuation. We can assist by conducting an independent and confidential business health check, if you wish.
- Ensure that your clients’ businesses lodge their BAS’s and SGC statements on time. If this occurs, your clients can have the ability to avoid personal liability if a non-lockdown DPN is issued, by appointing a liquidator or administrator on time.
- Review the statutory information on ASIC’s database to ensure that a director’s home address is correct. If a director has moved and a DPN is issued to the former home address as disclosed with ASIC, the DPN is still deemed to be valid.
- If your client is concerned about his or her company’s tax and superannuation debt and the likely impact on them personally, please feel free to contact any member of the CPN team below. We will be able to help you, and help your clients.