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Can your company still protect you?

Can your company still protect you?

James Tng

Why do we use companies?
There are a number of reasons we use companies including:

  • Company tax rate
  • Perpetuity
  • Business profile in the market place
  • Asset protection
Asset protection is one of the primary reasons companies are used. A company is a separate legal entity and the corporate veil provides protection to the directors, however, in limited circumstances the protection afforded to directors is lost. The traditional instances where director protection is lost were breach of fiduciary duties (i.e. doing what’s in the best interests of the company) and trading whilst insolvent (i.e. continuing to trade whilst being unable to pay company debts as and when they fall due).
In addition to what the Corporations Law (the act that governs company conduct and director responsibilities) provides as exclusions from protection of directors, the Australian Taxation Office (ATO) has always had the weapon of the dreaded Director Penalty Notice (DPN).
The ATO uses DPN’s in combatting non-payment of employee obligations of superannuation and PAYG withholding. The intent of these powers are clear; the ATO takes employee liabilities seriously and will use DPN’s to obtain payment directly from the company directors where superannuation and PAYG withholding obligations are not met.
Once DPN’s are issued the ATO has powers to pursue the directors personally, garnishee their assets and place a “black mark” against their name when it comes to credit ratings. DPN’s are rarely withdrawn before the unpaid liability to which they relate is fully paid.
In May 2018 the Government announced in the budget that it would extend the DPN regime to unpaid GST (Goods and Services Tax), LCT (Luxury Car Tax) and WET (Wine Equalisation Tax) liabilities of a company. This represented a major shift in “intent” from one that was focussed on the welfare of employees, to one of the government being concerned about its collections.
As anticipated, the Bill affecting this change received little opposition from either ends of the political spectrum and passed through both Houses on 6 February 2020. Royal Accent to the bill is now the only remaining formality.
What are the implications of this significant change?
The Bill effectively provides the ATO with powers to estimate outstanding GST, LCT and WET and issue a DPN to directors for the amount. This represents a major paradigm shift in the regime and grants significant powers to the ATO. The origin of this change has been the spate of failed companies that “rise from the ashes” like the mythical phoenix. The Bill is appropriately named the “Combatting Illegal Phoenixing” Bill. The Bill does provide some protections for directors; it has to be demonstrated that actions to defeat creditors have occurred for the ATO to exercise these powers. However, in practice demonstrating actions to defeat creditors has occurred in not difficult. Often when liquidators are appointed there are inadequate assets to settle all liabilities and the liquidators are forced to consider whether any preferential payments have been made, any transactions that may not have occurred at arms-length and any periods of insolvent trading, amongst other things. To demonstrate creditor defeating actions occurred may not be difficult for the ATO in practice.
The ATO are now empowered to make estimates of taxes payable when issuing DPN’s. Whilst this also existed in the case of superannuation and PAYG withholding of employees, quantifying amounts of GST, LCT and WET payable is a far less precise science. The ATO has issued a draft Practical Compliance Guideline (PCG) on how they will apply the law (which is broad and grants them wide powers), but the issue is a PCG is merely guidance on how the ATO will exercise these powers. These are not law and the ATO can make changes to PCG’s at their discretion in the future.
What does this mean for directors?
Now more than ever directors need to very careful when considering taking up directorships. For directors who are actively involved in a business there may be no choice, but we would strongly advise against a spouse unnecessarily being a director of a company, or appointments for non-executive directors. Directors are also often forced to sign personal guarantees. When you combine this with the penalties that are now expanded even further under the Tax Act, directors should be reviewing their asset protection strategies now, more than ever.
Asset protection extends beyond mere asset ownership, including:
  • Guarantees or covenants
  • Securing loans to entities
  • Rationalising inter-entity loans in group structures
  • Changes in the way you have funded businesses and operations
  • Serious considering of the use of superannuation as an asset protection vehicle
  • Wills, estate planning and control of entities
  • Insurances and who owns policies

The recent expansion of ATO powers means asset protection is now more relevant than ever before.

Please contact us if you need to understand the ATO’s new powers and more deeply consider how well protected your assets are.