GST is now a personal liability
The Federal Government’s package of reforms aimed at addressing illegal phoenix activity is now law. The Director Penalty Notice (DPN) regime has been extended to now include GST, Luxury Car Tax and Wine Equalisation Tax.
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.
What is Illegal Phoenix Activity and who does it affect?
Illegal Phoenix Activity occurs when assets of a company are stripped and transferred to a new entity that is controlled by the same director(s), 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.
There are many people affected by this, including employees who are owed entitlements like superannuation, other businesses, contractors and the ATO. In addition to this, companies that participate in this illegal activity gain an unfair competitive advantage over their competitors, leading to financial stress for many of the legitimate businesses who have had to cut their margins to survive.
The ATO is often a significant creditor who is affected by this activity and it is not uncommon for the to be owed large amounts in unpaid GST, PAYG and Superannuation. The government is also concerned about unpaid superannuation which you may hear in the media being described as ‘wage theft’.
During the 2018 federal budget, the government advised that the direct annual cost to business, employees and the government as a result of illegal phoenix activity is between $2.85 billion and $5.13 billion each year.
The Director Penalty Notice (DPN) Regime – How will it work?
If a company does not meet its tax obligations, the ATO can issue a DPN against the directors of that company and impose a penalty that is equal to the amount of the company’s unpaid liability. These DPN’s are issued to the directors home address as listed on ASICs database.
There are two types of DPN, 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 director of the company can avoid personal liability for the penalty if they:
- Pay the debt; or
- Place the company into liquidation; or
- Place the company into voluntary administration
The DPN penalty can be remitted or removed if the director takes one of the above options within 21 days from the date of the DPN issue. Failure to take any of the above options will result in the director being personally liable for the penalty.
Where there are outstanding superannuation obligations, the company must report the SCG obligation by the due date of the SCG Statement. If that is done, then the ATO can issue a non-lockdown DPN against the directors. The DPN can be remitted if the directors take one of the above potions 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 if SGC with outstanding superannuation due are not lodged by the due date, then the ATO can issue a lockdown DPN against the directors. Under this specific scenario, the director’s 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.
The ATO can make reasonable estimates of 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.
If you have questions or concerns regarding these updates to the DPN regime, please contact us to discuss how we can assist you.