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Changes to Director Penalty Notice legislation – warn your clients now!

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I’ve now reviewed the proposed changes to the Director Penalty Notice  legislation.  It is not law yet, but it is likely to be law in the not too distant future.  And make no mistake:  this is a very significant move towards automatic director personal liability for company PAYG and Superannuation Deduction liabilities.  I haven’t seen a change of this significance since Noah was in Sea Scouts.

I’ve provided a summary below.  There is a lot to cover so, in the next week or so, Dissolve will be publish an Advice Guide so that Accountants and Lawyers can inform their clients of the new world of director personal liability for tax debts.

The Key Changes

The wording of the changes still leaves some things somewhat open to interpretation.  My reading identifies the following key points:

  • the legislation applies “to all companies, not only fraudulent phoenix companies”.  So, as I blogged after the budget announcement, saying it was strengthening anti-phoenix legislation was entirely misleading.
  • all current Director Penalty Notice provisions remain – these changes are additions.
  • In addition to liability for PAYG withholding amounts, directors can be personally liable for their company’s Superannuation Guarantee amounts.
  • Where a PAYG or Super debt remains unreported and unpaid for three months after the Lodgment Day for a return, a director becomes automatically personally liable for that debt. I’ll call that the Personal Liability Day.  The mechanism is that a Penalty is automatically applied to the director on Personal Liability Day for the same amount as the company’s tax debt.
  • The ATO can proceed to recover that debt/penalty from the director(s).  There is no need for the ATO to give any Notice, such as the 21 day Notice currently required, and there is no way to avoid it, other than to pay the debt.
  • Therefore, putting a company into Liquidation or Voluntary Administration after Personal Liability Day doesn’t avoid the personal liability.  Under current legislation the penalty could be avoided if the company was placed into liquidation within the 21 day notice period.
  • If no return is ever done by the company then the ATO can issue a Default Assessment.

The bottom line – if a company were to miss its Lodgment Day by three months then a director is automatically personally liable for the company’s PAYG and Super debts.  The ATO could wait days, weeks or even years before assessing the amount of that liability and, in the fullness of time, pursue the director(s) personally.

What advice should you give to Directors?

Accountants and lawyers should now be advising their clients:

  • get your BAS returns up to date now; and
  • never fail to lodge your BAS returns within three months of their due date.

Even if the company can’t pay a debt arising from the return, lodge it anyway!!   In the situation where a company can’t pay the tax debt then that is a problem that needs to be addressed.  But at least by lodging the return it avoids a starting position of director personal liability.

There will be more on this topic in the next few weeks and Dissolve will provide you with some resources to encourage your clients to get their tax affairs up to date.

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