GST: A new personal risk for directors
One of the main features associated with managing a company is the concept of “limited liability” for its directors. In that regard, third parties are not permitted to “lift the corporate veil” and approach a company’s directors personally for liabilities or wrongdoings by the company, unless of course there has been some explicit breach of a director’s duty to the company in the way the director has acted.
There are however certain instances where this “corporate veil” can be pierced and directors can be issued with a “Director Penalty Notice” (DPN) holding them personally liable for the affairs of the company. Specifically, under the DPN regime which is administered by the ATO, a director can be held personally liable in situations where a company has failed to meet its obligations in relation to Pay as You Go liabilities and superannuation guarantee charges.
From 1 April 2020, following the Treasury Laws Amendment (Combatting Illegal Phoenixing) Bill 2019 which received royal assent on 20 February 2020, directors can now also be issued with a DPN in relation to a company’s GST and other indirect tax liabilities (such as WET and LCT).
For corporate clients, this means that it will be necessary to educate directors that they now have increased obligations to ensure that the company meets its GST and other indirect tax liabilities. Failure to do so by the company’s due date of the assessment for tax will expose the director personally for the amount of the company’s unpaid tax liability as a “penalty”.
There are limited opportunities for the remission of the penalty however. Specifically, the penalty may be remitted where the director complies with their obligation to pay the outstanding tax liability:
(a) before the DPN is issued; or
(b) within 21 days of the day the DPN is issued.
Many clients may seek to put the company into liquidation or initiate a wind up action in order to absolve themselves of the liability arising under the DPN. This can be effective however, there are strict timing rules around when this will be accepted. Consequently, it is important to be aware that the amount of the penalty will only be remitted where the director takes such action within three months of the company’s assessment due date. Please also note that resignation of a director will not prevent the Commissioner from issuing a DPN in relation to a tax liability that has arisen during the time that the individual was a director. This is because resignation does not release an individual from their prior obligations to the company.
In the event that a company is not liquidated or wound up within the requisite period of time, the Commissioner has an additional power to issue the director with a “lockdown DPN”. This holds the director as personally liable for the unpaid net amount, notwithstanding that the company is in liquidation.
We recommend that if one of your clients receives a DPN, they should seek immediate advice to understand their options. A failure to act within certain time periods may jeopardise the client’s ability to seek a remission of the penalty with the result that the director is held personally liable for the tax obligation in full under a “lockdown DPN”. This can have catastrophic financial implications.
We have extensive experience in handling DPNs. Please contact us anytime if you or your clients have any queries or concerns.
We’re here to help.
Ann-Maree Ventura, Special Counsel