Be aware of the expanded powers of the ATO to recover debts under the Director Penalty Notice (DPN) regime.
The ATO have taken their time to assert their new powers, noting the tax laws were fundamentally changed to reduce the scope for directors to permit companies to engage in fraudulent phoenix activity or to escape liabilities and payment of employee entitlements.
For some time now, Irish Bentley Lawyers have been warning their clients that the ATO will ramp up the use of these powers during the latter half of 2013.
Last month, the ATO confirmed this was correct and announced that it is about to increase its use of DPNs (Director Penalty Notices) to directors of companies that have unpaid pay-as-you-go (PAYG) withholding tax (and, presumably, SGC, or superannuation guarantee charge) amounts. This is awful news for any companies that have failed to keep these payments up to date.
As spelled out previously, the new DPN powers mean that:
- Directors can be held personally liable under a DPN for unpaid SGC in addition to unpaid PAYG charges.
- Directors cannot discharge their DPN by placing their company into administration or liquidation when PAYG or SGC remains unpaid and unreported three months after the due date.
- Directors and their associates (including spouses, parents, siblings and children) can be liable for PAYG non-compliance tax.
The ATO’s new Firmer Action (FA) approach?
The ATO have implemented the “Firmer Action (FA) approach” to target taxpayers:
- Where the taxpayers is not working with the ATO despite the ATO making multiple attempts to contact the taxpayer.
- Where the taxpayer repeatedly defaults on payment arrangements.
- Where the taxpayer’s debt is increasing (and there is no evidence that the taxpayer will be able to meet future tax obligations).
- Where taxpayer has been audited and the ATO identified deliberate and continuing payment avoidance.
- where there is evidence that liquidation is being used to avoid financial obligations, without risking assets and with the full intention of resuming business operations through a new entity (known as ‘phoenix’ activity).
Firmer action means:
- Issuing garnishee notices to third parties (for example a bank, or someone who owes money to the taxpayer) requiring them to pay all or part of that money to the ATO.
- Initiating bankruptcy or wind-up proceedings, beginning with the issuing of a summons / statutory demand.
- Pursuing company Directors personally for the unpaid SGC and PAYG components of the outstanding debt (director penalties).
- Issuing a writ / warrant of execution authorising the seizure and sale of your property to pay a judgment debt plus costs.
- requiring you to pay a bond or provide security in respect of any tax-related liability the ATO believes may be at risk of not being paid.
What should directors do?
Irish Bentley Lawyers posted an advice detailing the top ten tips to adopt to deal with the new powers.
- Do not delay – early action can save you and your company – be proactive, not reactive. The consequences of delay can be irreversible so you should act quickly and proactively. The legislation surrounding taxation law, and insolvency law contains many “deeming” provisions and it is extremely risky to delay getting advice.
- Conduct due diligence to ascertain the PAYG and superannuation liability position before accepting the office of Director. New directors can be deemed liable for debts incurred before their appointment after as little as 14 days (according to a decision handed down by the Supreme Court).
- Get Director’s insurance: Insurance is available to limit the exposure – talk to one of our lawyers or insurance brokers about your insurance options.
- Ensure your ASIC details are up to date and ideally provide an address for service that is monitored by a professional: DPNs and other notices only need to be posted to the address listed with ASIC and it is not enough to prove you did not receive it. Accordingly it is imperative that you list an address that has a proper letter register to ensure you are aware ASAP, and can take steps ASAP. We recommend that you list your lawyer or accountant for this purpose (provided that lawyer or accountant has insolvency law experience and understands the law surrounding these issues).
- Report on time: Ensure that you lodge the company BAS forms and Superannuation Guarantee Charge Statements on time.
Do this EVEN IF YOU CANNOT PAY THEM. This protects the directors from personal liability.
- Consider a payment plan, and get advice on whether you should seek for the remission of GIC and penalties. If you cannot pay, then propose a realistic payment plan, ideally presented by an experienced insolvency lawyer to ensure that you are not making any admissions of insolvency or other liability. Irish Bentley Lawyers are experienced at presenting persuasive submission to the ATO, and we are familiar with the many policy considerations which are taken into account. This directly effects what deals can be negotiated, what remissions can be secured, and how long you will have to pay same.
- Borrow money to pay the tax debts via a loan dedicated to paying the tax debt: It is (generally) better to borrow money elsewhere to pay tax debt, than to pay the general interest charge. Any interest paid on a loan taken to pay tax, is also deductible, so ensure the loan is stand alone to simplify the deduction.
- Seek Advice ASAP. Taxpayers and directors usually seek advice when it is too late, because they do not understand the consequences that flow from late reporting, delay, or the fact that statements made to the ATO can be used as evidence against them. The ATO do take notes of every discussion you have with them, so you need to be CAREFUL! If tax and superannuation debts cannot be paid then specialist advice should be sought immediately, and can save you significant money, and avoid prosecutions.
- Protect your assets ASAP – ideally before any liability has arisen: Asset protection is never absolute, however the strength of your asset protection is directly related to how early it is implemented, and how effectively it has been set up. Discuss your options with an experienced insolvency lawyer to decide upon the most cost effective structure. It is never too late to protect your assets, and at the very least it sets up a negotiating position for your lawyer should a creditor seek to unravel the protection. Irish Bentley Lawyers charge as little as $3000 for the most basic asset protection, and this structure can then be updated every few years to take into account capital gains. This is cheaper than most insurance options for your house.
- Consider your other options under the insolvency sections of the Corporations Act: If your cash flow situation seems hopeless because he debts have climbed too high, then there are provisions set out in the Corporations Act which can be utilised to rescue your business and company by reaching a suitable arrangement with creditors. There are options other than liquidation. You should seek help from an insolvency lawyer who also has experience in tax matters as they understand how to negotiate with the ATO during any creditors meeting, and they understand the policy considerations that need to be satisfied. The Australian insolvency laws are (in part) built around the theory that it is better to rescue a business, then to destroy it, due to the investment in goodwill, business systems, and the desire to keep the company employees employed. These provisions should be utilised where possible and you should seek advice from an experienced insolvency lawyer on your options. Irish Bentley lawyers provide advice in both taxation matters and insolvency lawyers, and we act for many administrators and liquidators. Our initial consultation price is fixed at $330 and we discuss all of the above issues and apply them to your personal or corporate scenario.