Legislation that comes into effect on 1 April will make it easier for the Australian Taxation Office (ATO) to penalise the directors of companies who have not paid their GST obligations.
These new powers of the ATO are being seen as efforts to lift the “corporate veil”, but they are likely to heap more pressure on small-business owners as many of those in the sector struggle with getting their GST reporting right – not out of negligence, but out of confusion over the red tape surrounding it.
“This change will come as a surprise for many small-businesses as it gives the ATO significant power with respect to GST liabilities,” Rigby Cooke Lawyers’ Tax Counsel, Tamara Cardan, said, “It is a pretty extreme change, a fact that is supported by the Senate’s amendments to the legislation requiring an independent review of the measures after five years.”
The changes to the Treasury Laws Amendment (Combatting Illegal Phoenixing) Act 2020, give the ATO powers to hold directors personally liable for unpaid GST, expanding the Director Penalty Notice (DPN) regime which had previously principally applied to a company’s unpaid pay-as-you-go (PAYG) withholding and superannuation guarantee liabilities.
Cardan said that ATO’s new powers pose significant risks for company directors, even if the violations were inadvertent or due to system issues.
“It is common for businesses, particularly small and medium-sized businesses, to struggle with GST liabilities due to cashflow issues,” Cardan said. “It is also fairly common for passive directors to not be actively involved in their businesses. In light of these new powers to penalise directors and hold them personally liable for unpaid GST, I think it will be very risky to be a passive director.”
Directors who are aware of outstanding liabilities must ensure that their companies notify the ATO before the “lockdown date”, three months after tax instalments are due, in order to be able to achieve remission by placing the company into administration or liquidation.
Cardan urged small-business owners ramp up their knowledge of how the GST system operates, and be actively involved in their companies to ensure that GST liabilities are being properly reported to the ATO.
“Right now, I would be recommending all directors review the accounting systems their businesses are using to identify any systemic or processing errors which may lead to GST liabilities,” Cardan said.
Cardan also warned that directors can’t escape liability by resigning, as the ATO considers a director who resigns before the due date is still considered liable.
“To anyone considering a directorship, these powers mean it is really important to do your due diligence on the financial position of the company,” Cardan warned. “These changes are complex, so I would recommend directors seek legal advice in order to ensure that they understand their responsibilities and protect themselves as much as possible.”
