Changes to the Director Penalty Notice regime – Accountants take note
Subscribers may have caught my previous blog that pointed out that buried in the May Federal Budget were some proposed changes to the Director Penalty Notice regime. The changes are under the guise of countering fraudulent phoenix company activity, but the measures are so wide that they will catch thousands of directors and make them automatically personally liable for company tax debts in certain, very common, situations. I think the changes are dramatic and they become effective as at 1 July 2011.
What are the changes to the DPN laws ?
Well we haven’t seen the actual legislation yet (but its effective in 2 weeks!) but the budget papers state that “the ATO will be given the power to commence recovery against directors under the director penalty regime, without providing a 21 day grace period, for certain unpaid company liabilities that remain unreported after three months of becoming due”. Also “the director penalty notice regime will be extended to superannuation guarantee amounts…”
Where is the problem?
It’s the first of those two changes that should ring alarm bells for directors and tax advisers. The DPN regime is a little cumbersome in its wording and implementation but, until now, directors were always personally liable for unremitted group tax deductions but the ATO could not enforce that without first giving a director 21 days notice. When notice was given, the director could avoid personal liability by having the company pay the debt or by putting the company into liquidation or Voluntary Administration within the 21 days.
The problem, by way of example, is that as at 1 July 2011 if a company has “unreported” tax liabilities (presumably that means it hasn’t done a BAS) then the directors are automatically personally liable for that debt even though no notice is given to them by the ATO. Therefore, the ATO could enforce the recovery of those debts against the directors personally at some future time.
Who is at risk and when?
At risk are all directors of any company that has failed to lodge a BAS within 3 months of it being due. When doe it kick in? I see two possibilities:
- Come 1 July if a company has a return outstanding for more than 3 months then the director is personally liable for that company tax (a disaster scenario); or
- Any returns that are due after 1 July that are not then lodged within 3 months, then the directors will be personally liable for the company’s tax debt (this seems more reasonable but is still a major change).
What to advise directors?
Don’t dither about liquidation if there are outstanding tax debts or returns. Previously directors were given notice of impending personal liability by the service of a DPN. Directors had the relative luxury of leaving an insolvent company to languish and wait for a creditor to wind it up. But now the notice will disappear in many cases. So rather than leaving an insolvent company to languish directors need to put it into liquidation or voluntary administration or risk personal liability.
What’s the easiest – liquidation or voluntary administration
In the vast majority of cases we recommend Creditors Voluntary Liquidation (CVL). Appointment is by way of resolution of directors and shareholders and so is relatively simple. In some cases, mainly for actively trading businesses with good prospects of success, a VA is appropriate. Dissolve specialises in fast appointments and our mantra is “low cost”