Directors of struggling companies need to keep a tight rein on payments to the Australian Tax Office because of personal liability for the debt if the company does not pay or becomes insolvent.
The recent introduction of new laws to fight Phoenix activity has strengthened the power of the Tax Office to fight payment avoidance.
Directors of companies can be personally liable for tax payments –“existing and future tax liabilities” which could also cover other amounts such as GST, company income tax and superannuation. And while these new laws will curb Phoenix activity, there are still legitimate businesses struggling to pay their taxes.
Contrary to commentary that all sectors survived well during the global financial crisis, many medium and small businesses have suffered and are still suffering. The ATO allowed businesses to enter into payment arrangements during the global financial crisis.
And they have.
But the amount currently owed to the ATO as of December 31, 2009 by businesses and households is a staggering $12.27 billion – up by $1.3 billion in just 18 months, of which $10.18 billion is owed by business, according to the ATO’s annual report. And total debt (debt holdings) owed by all taxpayers – including businesses, disputed debt, tax owed by insolvent businesses and bankrupt individuals was $24.5 billion. Cases (businesses and non-businesses that could not pay) increased from 1.31 million to 1.34 million to June 30, 2009.
While the ATO has been lenient towards struggling businesses, particularly during the height of the financial crisis, this will not always be the case.
The Commissioner of Taxation Michael D’Ascenzo recently told the Council of Small Business Organisations of Australia summit in Brisbane that firmer action will be taken with those who have escalating tax debts or are unable to meet their outstanding tax or Superannuation Guarantees.
As of December 31 2009, there were 147,599 payment arrangements in place for businesses. The ATO was only responsible for 5.6 percent of wind-ups and bankruptcies in 2008, and two per cent in 2009, he said. While much of this can be attributed to the global financial crisis, Mr D’Ascenzo explained, the danger is a further worsening of the economic outlook, which would increase debts to the ATO and put directors under more pressure.
The ATO will also be under pressure from Treasury to chase tax debts owed. And this is not good news for companies already in financial trouble.
ATO Deputy Commissioner Steve Vesperman affirmed this by stating “in balancing our assistance and support for those who are willing to engage with us, we are taking firmer action with those businesses who demonstrate an unwillingness to work with us, have escalating debts or who are unable to meet their outstanding tax or superannuation guarantee debts”.
[Next: What if I have a payment plan with the ATO?]
So for struggling companies that have entered into a payment plan for PAYG, and GST, this isn’t the end of the story. Even though companies may be wound up and placed in liquidation, the ATO now has more power to stop Phoenix activities – shutting down the company one day and opening a new company the next with no debt. These Phoenix activities have cost the ATO hundreds of millions of dollars.
Previously, the ATO has had the discretionary power to issue a Directors Penalty Notice (DPN) under section 222 AOE of the Income Tax Assessment Act, making a director personally liable for the debt. This was fine, but to stop Phoenix activity there are now powers to limit the options available to directors to avoid personal liability.
Directors have to pay the liability under a DPN or discuss payment arrangements with the ATO, appoint an administrator or seek to have the company wound up. And a director only has 21 days to respond.
But under new legislative proposals the DPN may now prevent the director winding up the company to avoid the debt. These proposed discretionary powers cover all other taxation liabilities, including indirect taxes, company income tax and superannuation. Resigning is not an option for these directors, and the powers also capture new directors, who may have been appointed just hours before the payment was due. They will also have 21 days from the date the DPN is posted to comply.
Winding up a company can also provide headaches. Any payment arrangement entered into with the ATO by the directors can be clawed back by the liquidator if it’s deemed a preference payment. But the catch is, if the ATO pays the tax back to the liquidator, it can sue the directors for that payment.
Under section 588 FGA of the Corporations Act, directors indemnify the ATO if tax debts are returned to the company from actions of the liquidator. The ATO can also impose ‘security deposits’ on directors of companies that have a bad track record of paying their tax to cover a future income tax liability. The security deposits, says Assistant Treasurer Nick Sherry, act like a bond for existing or future tax liabilities. But the Tax Commissioner also has power to accept security of a mortgage over a property or guarantee.
And while the Government has introduced safeguards, it is only incumbent upon the Commissioner to write to the taxpayer explaining the reasons why the security deposit has been asked for and the rights of the taxpayer to seek a review, presumably after they have lodged the deposit. Refusal to comply with a request for a security from the ATO is a criminal offence.
While the new powers will curb Phoenix activity, they will also give the ATO unbridled power against directors, who have entered into arrangements to pay taxes. The difficulty for new directors who have been appointed to companies is the need to be aware of these arrangements for which they will also be liable.
And the only defence they have is to plead “serious illness” at the time the payments were supposed to have been made. But in the end non-payment will only aggravate the director’s headache.
Directors of companies must now be more hands-on than ever, and vigilant in the affairs of the company, particularly when it comes to the tax affairs.
Bradley Tonks is partner, Business Recovery & Insolvency, of Lawler Partners.
