The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (the Act) received royal assent on 17 February 2020 enacting new laws in relation to illegal phoenix activities, with the most notable change being director’s liabilities in relation to Goods and Services Tax (GST).
The aim of this new legislation is to hold accountable company directors who take advantage of existing laws in an attempt to avoid company debts and liabilities, leaving creditors, employees and other stakeholders out of pocket.
Directors can now be liable for unpaid GST, in addition to PAYG and Superannuation, where the company cannot meet its tax liabilities.
Illegal Phoenix Activities
Phoenix activity occurs when a director transfers asset from a failing company to a new company operating the same business (usually without paying true or market value). This often leaves the old company with significant unfulfilled debts. Not all phoenix activity is necessarily illegal. Whether this kind of business restructure is considered illegal is dependent on the director’s intent and several other factors.
It is not uncommon that one of the largest creditors of an insolvent company is the ATO in respect of unpaid GST.
The current regime
Before the Act, company directors could already be personally liable for the company’s failure to comply with its PAYG withholding and Superannuation guarantee charge obligations. This personal liability takes the form of a penalty equal to the unpaid amount due in respect of the company’s obligations. The Commissioner of Taxation may issue a director penalty notice (DPN) that outlines the unpaid amount and the remission options available. These options include paying the debt, appointing an administrator under section 436A, 436B or 436C of the Corporations Act 2001 or winding up of the company. Failing to act in time resulted in personal liability of the director for PAYG and the superannuation guarantee.
Extension to GST
Under the new laws, from 1 April 2020 directors may now also be liable for the company’s GST remittance obligations if they are registered for GST purposes
Under an extension of the current laws, the Commissioner of Taxation is able to issue an estimate of the GST liability where Business Activity Statements are not lodged on time. The estimateby the Commissioner may also be for the unpaid and overdue amount of liability under PAYG withholding, superannuation guarantee charges in addition to GST for the relevant tax period.
A tax period in respect of GST depends on the size of the company or enterprise. If the company has a GST turnover of $20 million or more, this is on a monthly basis. For those companies with less than $20 million in GST turnover, the tax periods are quarterly.
Director’s liability for unpaid GST arises at the end of the day the GST liability is due. At this time, the Commissioner can issue a DPN for a penalty equal to the unpaid liability.
If the director does not take any measures to offset their liability within three months of the due day for payment, the director’s personal liability for payment continues even if the company is later placed into administration or wound up at a later time. Accordingly, directors of companies which have unpaid GST liabilities, or have not lodged Business Activity Statements on time, must seek urgent advice during this window.
It is important that directors seek appropriate legal advice to ensure that they understand and are familiar with their liabilities and are in compliance with the new obligations.
Our Commercial team are happy to provide an obligation free consultation to discuss concerns around any obligations under the new laws on 07 3876 5111.
Daniel Dash and Zahra Rashedi are part of the commercial law team at NB Lawyers, the lawyers for employers working with individuals and business owners on a range of matters including business sales, property disputes, estate disputes, shareholder agreements, intellectual property, litigation and taxation matters.