What goes up, must keep going up: director liabilities to increase
The recently passed Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (the Bill) could make directors personally liable for their company’s unpaid taxes or for their company engaging in a creditor-defeating disposition, and can prevent a director’s resignation if the resignation were to leave their company without a director.
See our summary of a previous version of the Bill here.
Of interest to directors (including directors of not-for-profits and charities), will be the extension of the director penalty regime to cover unpaid GST liabilities, which represents a significant change to the liability exposure of directors. The Bill also contains a package of measures aimed at countering illegal phoenix activity (i.e. creating a new company to continue the business of a company that has been deliberately liquidated to avoid paying the original company’s debts) and builds on previous government insolvency law reforms.
The Bill introduces four measures to combat illegal phoenix activity.
New phoenix offences have been created, to prohibit creditor-defeating dispositions of company property, penalize those who engage in or facilitate such dispositions, and allow liquidators and ASIC to recover such property.
A ‘creditor-defeating disposition’ is a transfer of company assets for less than market value (or the best price reasonably obtainable) that would prevent, hinder or significantly delay creditors’ access to a company’s assets in a liquidation.
The Bill introduces new criminal offences and civil penalty provisions for:
company officers that fail to prevent the company from making creditor-defeating dispositions; and
other persons that facilitate a company making a creditor defeating disposition,
with these offences being subject to several important safeguards to ensure that they do not affect legitimate business and commercial transactions.
Measures are being put in place so that directors are held accountable for misconduct by preventing directors from improperly backdating resignations or ceasing to be a director when this would leave the company with no directors.
The Bill prevents the backdating of a resignation by requiring that any resignation of a director that is reported to ASIC more than 28 days after the purported resignation instead takes effect from the date it is reported to ASIC. An ex-director or the company may apply to ASIC or the Court to backdate a resignation that falls outside this 28-day period, provided they can satisfy ASIC or the Court that the change actually took place on the purported date, and that they make their application within 56 days (for ASIC) or 12 months (for the Court) of the purported resignation.
Abandonment of a company by a resigning director or directors (or the removal of directors by resolution of a proprietary company), which would leave the company without any directors, is also prevented (unless the company is being wound up).
The Australian Taxation Office (ATO) may collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities in certain circumstances.
There are already estimates and director penalty regimes in respect of pay as you go (PAYG) and superannuation liabilities, which allow the ATO to estimate unpaid amounts and recover the amount of such estimates from taxpayers (estimates regime) and make directors of a company personally liable for specific taxation liabilities of the company (director penalties regime). Under the director penalties regime, there is a general obligation to ensure that the company either satisfies those liabilities or, recognising the company may be insolvent, goes into administration or is wound up. The Bill extends these regimes to cover GST liabilities, including Luxury Car Tax and Wine Equalisation Tax. This will be a significant change to the liability exposure of directors.
The ATO may retain tax refunds where a taxpayer has failed to lodge a return or provide other information that may affect the amount the ATO refunds. This ability has been given to the ATO to ensure that companies satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.
Previously, the ATO could only retain a taxpayer’s refund where that taxpayer had an outstanding notification under the Business Activity Statement or Petroleum Resource Rent Tax provisions. The Bill extends this power to where the taxpayer has other outstanding lodgments (such as a tax return) or has information that needs to be provided to the ATO.
The Bill was passed by the Senate last week (on Wednesday 5 February 2020) and now awaits royal assent. The provisions of the Bill will take effect on the day of, or the day after, the Bill receiving royal assent or, in the case of the tax obligations, on the first day of the first quarter after the Bill receives royal assent (for example if royal assent is received on 18 February, the amended tax obligations in section 3 and 4 above will commence on 1 April 2020).
Directors should be aware that their obligations and potential liabilities will increase as a result of the changes made by this Bill.
Directors, along with their management teams, should ensure that they review their systems and procedures to reduce and limit their risk; ensuring that their company has and will continue to meet its various tax obligations.
Directors should also carefully consider the prohibition on creditor-defeating dispositions where their company is proposing to transfer or dispose of company assets.
In the event you have any queries in relation to director’s liabilities, the new anti-phoenix legislation or your company’s tax obligations, please contact our Corporate Advisory and Governance or Taxation teams.