The ATO has stepped up its enforcement activities and has stated that it is now taking firmer action, focusing on outstanding company tax debts.
The corporate veil has been pierced. There is an increase in the ATO’s powers. Directors,past and present can be held liable for unpaid company debts including Pay as You Go Withholding (PAYGW) and Superannuation Guarantee Contributions (SGC).
Prior to the 2012 changes to ATO enforcement powers,directors with companies that were financially struggling would not lodge tax returns. On account of this,the ATO could not chase or issue notices for they didn’t know what was outstanding. Tax debts were down the priority list of creditors and could be held at bay. Not any more.
The concentration now is the lodgement of tax returns. If directors fail to lodge returns, Directors Penalty notices are issued. Upon the issue of these notices,company directors are held personally liable for unpaid tax debts if a company fails to lodge returns by the due dates.
Moreover, the company is monitored . The other problem with these notices is that when the company is applying for a payment arrangement in the future,the ATO sometimes think they are too great a risk and either severely restrict the time period for the arrangement, or don’t allow it .
Personal liability cannot be avoided by the appointment of a voluntary administrator or liquidator.
Non Lodgement of Tax Returns
Not lodging a tax return cannot be a part of any strategy.
The ATO can and does make reasonable estimates of the company’s income and therefore the tax liability. Interest and penalty impositions can double any tax liability. The ATO’s estimate then becomes the amount that directors will be held personally liable for.
Automatic personal directors’ liability can be avoided by lodging returns within 3 months of the due date.
If the company fails to pay its tax debts after filing its tax returns, the ATO can still issue penalty notices against the directors.
The Directors Penalty Notice will give directors 21 days from the date of the notice to take action.
- Pay the Oustanding Debt
- Appoint a voluntary administrator or liquidator
- Negotiate a payment arrangement
- Dispute the issue of the notice
New Directors Personally Liable For Old Debts
New Directors can be held personally liable for PAYG and SGC liabilities of the company incurred before their appointment.
New Directors will be held liable even if they resign as director shortly after their appointment.
It is essential to conduct a thorough due diligence of a company’s tax liabilities for any company a client is proposing to be a director of.
What Not To Do
- Directors set up a payment arrangement and default on it.
- If a default of an arrangement is likely,not contact the ATO first.
- Avoid ATO contact.
- Have a history of non compliance in tax with failed companies.
- Not keep ASIC corporate details up to date. Notices can go to old addresses and still bind the client. Times starts ticking from the time of the notice being posted.
- Not taking action against a notice upon receipt. Only 21 days is given for compliance.
What To Do
- Don’t become a director without due diligence of tax position of a company and libilities being met.
- Lodge all returns on time
- If a tax debt cant be met,organise a payment arrangement.
- Call the ATO prior to any potential default of an arrangement. . this helps in buying time.
- Don’t ignore the ATO contact. Contact a professional advisor. The ATO logs all non contact.
- Keep all addresses with ASIC up to date.
- Act immediately upon receipt of Director notice. Contact your accountant immediately.
- If debts are spiralling out of contact,seek professional advice.