Q&A: Understanding the proposed director liability for GST reforms
In this year’s budget, the then Treasurer Scott Morrison outlined a number of reforms to the corporation and tax laws, as part of Federal Government’s clamp down on illegal phoenix activity. One of these reforms was to make company directors personally liable for unpaid Goods & Services Tax (GST).
To help clarify exactly what this proposed change would involve and why it’s being recommended, we’ve answered the key questions for you, so you can better advise clients.
What’s the status quo?
Currently, if a company repeatedly defaults on GST payment, by deliberately avoiding the payment, or appears to be engaging in phoenix activity eg. using liquidation to avoid financial obligations then starting a new business, the ATO can bring a number of actions against it.
This includes garnishee notices and legal action such as:
- Claim or summons
- Bankruptcy notice
- Creditor petition
- Statutory demand
- Wind-up action
However, even with all these measures in place, more needs to be done.
What are the proposed changes?
Under these proposed changes, the government intends to extend possible actions for GST non-payment to include the director penalty regime – currently only applicable to PAYG withholding and super. It will also extend to luxury car tax and wine equalisation tax avoidance.
This means that under certain circumstances, the ATO will be able to issue a penalty notice to a director of a company that has failed to remit its GST. They can then start legal proceedings to recover a penalty equal to the unpaid amount.
Even without a notice, the ATO would have the power to collect the penalty by other means, such as withholding a tax refund.
Why is this change being proposed?
The simple answer: So government can claw back unpaid taxes and ensure those who commit tax fraud and phoenix activity don’t benefit from unfair financial advantage.
It makes sense. Of all the taxes, GST is likely the most significant liability. The only reason it’s not already included is because the director penalty regime preceded its introduction.
In the case of phoenix activity, as the law stands, companies are not paying their GST then putting themselves into liquidation and moving on before the government cottons on. In some cases they may also have received refunds of GST.
The outcome is they can undercut prices and keep repeating the process – leaving the government with no ability to recover the cash.
When will it come into effect?
Consultation for the introduction of this and other anti phoenix reforms ended on 27 October 2017.
The other reforms include preventing directors from improperly backdating resignations to escape liability or prosecution, limiting the ability of directors to resign from a company that would otherwise have no directors and the introduction of director identification numbers.
Whilst the government has committed $40 million to tackling phoenix activity, at this stage it’s unclear when legislation for the proposed Director Liability for GST Reforms will be drafted.
What does this mean for you and your clients?
In order to ensure your clients aren’t penalised under these proposed changes to GST taxation law, it’s important that you advise them of these possible upcoming legal changes and clarify the new, steeper repercussions for non-payment.
If you’re an accountant, you should also be advising them to be stricter in complying with their GST reporting and payment obligations. Help them ensure they have the right systems in place.
In addition to the proposed director penalties, the government has also revealed it’s considering increasing penalties for financial and corporate misconduct, including accessorial liability – making it even more imperative you provide the right advice.
Hopefully we’ve made the proposed director liability for GST reforms a little clearer.
It’s definitely a smart move by the government and it will be interesting to see it in action.