The last few months have had far reaching implications for many businesses across Australia. Whilst some businesses are starting to show signs of recovery, there are a few ‘ticking’ timebombs you need to be aware of as a company director.
Directors may be personally liable for certain actions by the company including situations of insolvent trading and failure to meet employee (PAYG and superannuation guarantee), or GST obligations (in certain scenarios). The Government has provided some relief for directors in relation to insolvent trading due to the impact of COVID-19, but it is important to look out for issues not necessarily covered by the relief.
Insolvent Trading – COVID-19 temporary relief
Directors have been provided with additional protection and are not personally liable for debts incurred while a company is trading insolvent between 25 March 2020 and 24 September 2020. We covered the temporary measures along with director duties in one of our previous articles ‘Insolvent trading, safe harbour and directors’ duties’. Unless extended, the COVID-19 temporary relief will end on 24 September 2020.
A company is trading insolvent if it cannot pay its debts when they fall due and, as a director you may be personally liable if the COVID-19 temporary relief or safe harbor exceptions do not apply. With the temporary relief period coming to an end in September, as a director it is crucial you consider the solvency position of the company to ensure you are not exposed once the measures are lifted.
Business owners may not be aware that they are falling foul, here are a few indicators of insolvent trading:
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History of continuing trading losses, cash flow problems, difficulties in selling stock or collecting outstanding debts.
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Not complying with creditor payment terms leading to legal action entered against the company in relation to outstanding debts.
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Not paying Commonwealth and state taxes when due (e.g. PAYG, GST or superannuation guarantee contributions).
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Inability to produce accurate financial information on a timely basis that shows the company’s trading performance and financial position or that can be used to prepare reliable financial forecasts.
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Employees or financial advisors have raised concerns about the company’s ability to meet, and continue to meet, its financial obligations.
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Not having sufficient illiquid assets that can be disposed in a relatively short period of time to provide funds to help meet debts owed without affecting the company’s ongoing ability to continue to trade profitably.
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Unable to obtain appropriate further finance to fund operations.
Director penalty notices (DPN) – Unpaid GST, PAYG or Superannuation Guarantee
A DPN is generally issued by the Australian Taxation Office (ATO) prior to recovering debts from the director personally.
A DPN can only be remitted under limited circumstances and here is a general summary if the necessary actions are taken within 21 days of the ATO posting out the DPN:
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Timing of notification of debt to ATO
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DPN can be remitted by the following actions within 21 days of ATO issuing DPN:
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PAYG & GST
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You reported the GST and PAYG amounts to the ATO within three months of the due date of the activity statement
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You reported the GST and PAYG amounts to the ATO after three months of the due date of the activity statement
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Superannuation Guarantee (SG)
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You reported the unpaid amount of the SG obligation by the due date of the SGC statement
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You reported the unpaid amount of the SG obligation after the due date of the SGC statement
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If a company is struggling to keep up with its tax and superannuation payment obligations, it is essential to continue meeting reporting obligations with the ATO and entering into payment plans if necessary.
If a company fails to meet the reporting deadlines by the required dates mentioned in the table above, the problem is further compounded because the only avenue for remitting the DPN is by making a payment in full or by entering in payment arrangements to pay these amounts in full. Failure to do so would make the director personally liable for the unpaid amounts, and the ATO would start recovery action which could include issuing garnishee notices.
Example – not disclosing
Frodo and Bilbo are directors of ABC Pty Ltd. During the January – March 2020 quarter, the company withheld $5,000 and the lodgment date of the company’s March 2020 BAS was 28 April 2020. On 20 August, the ATO issues Frodo and Bilbo with a DPN. The only avenue for getting the penalties remitted would be by full payment within 21 days of the ATO issuing the DPN. If this is not complied with, the ATO may hold the directors personally liable. |
In situations where you have met your compliance obligations, there may be other avenues available which may protect you from personal liability such as the company going into administration/liquidation.
Example –disclosing but unable to pay
Frodo and Bilbo are directors of ABC Pty Ltd. During the January – March 2020 quarter, the company withheld $5,000 and the lodgment date of the company’s March 2020 BAS was 28 April 2020. The company lodged its BAS by 15 May 2020 (within three months of due date) and enters into a payment arrangement. As a result of not complying with the payment arrangement, the ATO issues them with a DPN on 20 August 2020.
Assuming the company has no funds to make the payment in full, the directors could get the DPN remitted if the company is put under voluntary administration or enters liquidation within 21 days of the ATO issuing the DPN. |
Director identification numbers
Recently, the Government passed legislation to introduce Director identification numbers (DIN) and it is intended that the Government will implement these measures in June 2022 unless the Governor-General proclaims an earlier date.
Once implemented, directors will be required to meet identification requirements and apply for a unique identification number – the DIN. This will help the Government regulate directors and come down hard on directors who engage in illegal phoenixing activities. Failure to comply with these measures following their implementation in June 2022 may result in civil or criminal penalties.
In summary, there is substantial risk associated with being a company director. If you have any queries or would like to discuss these issues further, contact your local Moore Australia advisor today.