The ATO have extremely wide powers, and right now the ATO is increasing its use of Director Penalty Notices (DPNs) for unpaid PAYG tax and superannuation debts. This is part of an overall strategy adopted by the ATO since the new laws were passed in July 2012.
Irish Bentley Lawyers predict that DPNs will become one of the ATO’s main collection tools.
The ATO is training their staff and automating their processes to issue the notices right now.
Directors of companies with arrears need to take prompt action to avoid or mitigate personal liability.
- 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, taking steps to minimise your personal liability, or rescue he company. Timeliness is everything in this area.
- 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. For example:
- Lets say a director states to the ATO: “We just cannot afford to pay it right now as business has been down this month”. Effect: This is then noted on the company tax records with the ATO, and can be used as evidence that the director knew the company could not pay its debts (ergo it is insolvent), yet the director is allowing the company to trade insolvently. In effect, the director is admitting that they are allowing their company to trade insolvently which in turn exposes the director to liability for all company debts from that date, and also to a prosecution by ASIC for insolvent trading seeking fines and penalties.
- Directors can be called on to repay the ATO for payments clawed back by liquidators for unfair preferences. Please note that advisors are at risk of a claim from their clients if they don’t inform them of the director’s statutory indemnity to the ATO under section 588FGA of the Corporations Act.
- Directors are automatically personally liable for PAYG and superannuation contribution liabilities that are unpaid and unreported for three months. The personal liability accrues irrespective of the ATO issuing a DPN. The DPN just crystallises the date the personal liability is to be paid. You may be able to avoid personal liability if you act quickly so you must seek advice on the DAY that you receive the DPN.
If in doubt, get advice because the consequences of delay can be irreversible.
- 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. The more layers of protection that you implement, the stronger your protection is and you should 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 in your assets. 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.