Imminent changes to director liabilities - Understanding your exposure

By Craig Whatman - June 29, 2018

The Federal government recently introduced tougher personal liability measures as part of the Director Penalty Regime in the latest Federal Budget, sending a strong message to company directors about expectations related to organisations’ tax affairs. Below is a closer examination of the ramifications for boardrooms around Australia.

Read: Contact Magazine Winter 2018

In the 2018-19 Federal Budget, the Turnbull Government confirmed it would be broadening the reach of the Director Penalty Regime to include GST, the luxury car tax and the wine equalisation tax – making company directors personally liable to the Australian Taxation Office in certain circumstances for their organisation’s debts in those areas.

First flagged by the government as an incoming potential measure some 18 months ago, the changes will be in addition to existing Pay As You Go (PAYG) and Superannuation Guarantee Charge liabilities that directors currently face if their companies hit tax trouble.

Given the broader scope, the new measures will force directors around the country to sit up and take notice of the GST systems and compliance framework their companies employ.

That means paying close attention to how the data is collected, how their business activity statement is prepared, and understanding the general health of their company’s GST system.

While, at time of writing, there is no start date for these new measures, it’s recommended directors take early steps to understand their potential exposure, and establish internal controls and measures to provide a level of comfort that there are appropriate systems within their organisations to manage and maintain GST compliance.

The focus on director responsibilities and liabilities also saw new amendments to both the corporations and tax laws in the recent Budget, to help combat illegal phoenixing activity.

In the past, the ATO has fallen victim to directors who deliberately put companies into liquidation prior to remitting their tax liability. In cases like this, the ATO becomes an unsecured creditor with associated entitlements – that is, it ranks behind secured creditors in the distribution of proceeds, and subsequently often fails to obtain what it is fully owed.

The proposed new measures include targeting those who conduct or facilitate illegal phoenixing to prevent directors from improperly backdating resignations to avoid liability or prosecution, and to limit the ability of directors to resign if this would leave the company with no directors. Measures will also restrict the ability of related creditors to vote on the appointment, removal or replacement of an external administrator.

The government has also flagged the introduction of a new “director identification number” system, which will see directors given a unique identification number that will allow government agencies, such as the ATO and Australian Securities and Investments Commission, to keep a watchful eye on directors’ movements.

While only a small percentage of directors deliberately set out to defraud the tax system, the impact on the economy, on investors and on trust in the corporate sector is significant. The Federal Government is turning up the heat – so it’s prudent to ensure your affairs are in order.

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