Contributed by Michelle Eastwell, Partner and Chris Wright, Associate, HopgoodGanim Lawyers
The recently enacted Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (the Act) could make directors personally liable for their company’s unpaid taxes, or for their company engaging in a creditor-defeating disposition and can prevent a director’s resignation, if the resignation were to leave their company without a director.
Of interest to directors, will be the extension of the director penalty regime to cover unpaid GST liabilities, which represents a significant change to the liability exposure of directors. The Act also contains a package of measures aimed at countering illegal phoenix activity (ie creating a new company to continue the business of a company that has been deliberately liquidated to avoid paying the original company’s debts) and builds on previous government insolvency law reforms.
So, what is new?
The Act introduces four measures to combat illegal phoenix activity.
1. New phoenix offences
New phoenix offences have been created to prohibit creditor-defeating dispositions of company property, penalise those who engage in or facilitate such dispositions and allow liquidators and ASIC to recover such property.
A “creditor-defeating disposition” is a transfer of company assets for less than market value (or the best price reasonably obtainable) that would prevent, hinder or significantly delay creditors’ access to a company’s assets in a liquidation.
The Act introduces new criminal offences and civil penalty provisions for
- company officers that fail to prevent the company from making creditor-defeating dispositions, and
- other persons that facilitate a company, making a creditor-defeating disposition,
with these offences being subject to several important safeguards to ensure that they do not affect legitimate business and commercial transactions.
2. Improving the accountability of resigning directors
Measures are being put in place so that directors are held accountable for misconduct by preventing directors from improperly backdating resignations or ceasing to be a director, when this would leave the company with no directors.
The Act prevents the backdating of a resignation by requiring that any resignation of a director that is reported to ASIC more than 28 days after the purported resignation instead, takes effect from the date it is reported to ASIC. An ex-director or the company may apply to ASIC or the Court to backdate a resignation that falls outside this 28-day period, provided they can satisfy ASIC or the Court that the change actually took place on the purported date, and that they make their application within 56 days (for ASIC) or 12 months (for the Court) of the purported resignation.
Abandonment of a company by a resigning director or directors (or the removal of directors by resolution of a proprietary company), which would leave the company without any directors, is also prevented (unless the company is being wound up).
3. Making company directors personally liable for the company’s GST liabilities
The ATO may collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities in certain circumstances.
There are already estimates and director penalty regimes in respect of pay-as-you-go and superannuation liabilities, which allow the ATO to estimate unpaid amounts and recover the amount of such estimates from taxpayers (the estimates regime) and make directors of a company personally liable for specific taxation liabilities of the company (the director penalties regime). Under the director penalties regime, there is a general obligation to ensure that the company either satisfies those liabilities or, recognising the company may be insolvent, goes into administration or is wound up. The Act extends these regimes to cover GST liabilities, including Luxury Car Tax and Wine Equalisation Tax. This will be a significant change to the liability exposure of directors.
4. Allowing the ATO to retain tax refunds in certain circumstances
The ATO may retain tax refunds where a taxpayer has failed to lodge a return or provide other information that may affect the amount the ATO refunds. This ability has been given to the ATO to ensure that companies satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.
Previously, the ATO could only retain a taxpayer’s refund where that taxpayer had an outstanding notification under the Business Activity Statement or Petroleum Resource Rent Tax provisions. The Act extends this power to where the taxpayer has other outstanding lodgments (such as a tax return) or has information that needs to be provided to the ATO.
When do the provisions take effect?
The Act was enacted on 17 February 2020. Schedules 1 (new phoenixing offences) and 2 (accountability of resigning directors) took effect on 18 February. Schedules 3 (GST estimates and director penalties) and 4 (retention of tax refunds) will commence on 1 April 2020.
What should directors do?
Directors should be aware that their obligations and potential liabilities will increase as a result of the changes made by this Bill.
Directors, along with their management teams, should ensure that they review their systems and procedures to reduce and limit their risk; ensuring that their company has and will continue to meet its various tax obligations.
Directors should also carefully consider the prohibition on creditor-defeating dispositions where their company is proposing to transfer or dispose of company assets.
[This article was published in CCH Tax Week on 28 February 2020. Tax Week is included in various tax subscription services such as The Australian Federal Tax Reporter and CCH iKnow. CCH Tax Week is available for subscription in its own right. This article is an example of many practitioner articles published in Tax Week.]