Budget 2011 – Directors beware!! More personal liability coming.

Directors of insolvent or potentially insolvent companies may have seen the announcement in the Federal Budget that extra cash and powers have been allocated to countering “Phoenix Activity”.  Sounds like a good idea but a review of the detailed budget papers reveals a different agenda and target.

The budget does provide a definition of fraudulent phoenix activity: “which involves a company intentionally accumulating debts to improve cash flow or wealth and then liquidating to avoid paying the debts”. Agreed, that’s a bad thing and any measures to counteract it are welcome.

So there are two main proposed new measures:

1. the Director Penalty Notice regime  is expanded from mainly Group Tax deductions to also unpaid Superannuation deductions.  This significantly widens the scope of DPNs
2. ATO will be given powers to commence DPN recoveries (i.e. personal liability) without giving 21 days notice if the liability was unreported for 3 months.  This again widens the scope of director personal liability.

But have you noticed – both measures significantly broaden the potential personal liability of company directors for company debts.  But neither measure has anything to do with phoenix company activity.

So any director of a company that is struggling to pay its tax debts needs to be wary.

At Dissolve we have been advising directors of companies that cease to trade that they need to deal with the company itself – usually by putting it into liquidation using a CVL.  The new laws make it essential for a director to do so or face a significantly higher possibility of personal liability for the company’s tax debt.