By Keerti Sharma*
Proposals to make company directors personally liable for GST go beyond the aim of combating illegal phoenixing, and instead put SMEs with legitimate trading difficulties at risk.
Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 proposes making directors personally liable for unpaid GST if the unpaid liability is not paid within 21 days of a director penalty notice (DPN) being issued.
The proposed legislation raises concerns about piercing the corporate veil.
Options are available for SME directors when their business is in trouble. But the amount of tax owing under a DPN will greatly increase, as will the risk of bankruptcy for SME directors who have little or no assets.
The bill was introduced to combat phoenixing by opportunistic, systematic directors where the directors are involved in moving assets from one company to another. However it goes beyond its intended target and captures companies that are legitimately wound-up because of trading difficulties.
Furthermore, the bill does not define a phoenix activity. This raises added concerns and gives an idea to the business community that there are no restrictions on government piercing the corporate veil.
The fear is that although this legislation may weed out those taxpayers who drive GST losses through illegal phoenix activity, it will also target otherwise honest directors who get caught in a spiral when their business goes into meltdown.
Small business is a vital ingredient of a thriving Australian business community. Given that GST is often one of the largest liabilities for business, the impact for SMEs that are already struggling could be significant.
The fear is that although this legislation may weed out those taxpayers who drive
GST losses through illegal phoenix activity, it will also target otherwise honest directors who
get caught in a spiral when their business goes into meltdown
The proposed legislation will act as a stick to be used against dishonest directors. But even those who have done their best, yet come unstuck, will be hit hard because establishing statutory defences have already been difficult to prove for unpaid PAYG and super guarantee, as has been demonstrated in case law.
Recognising the economic landscape of Australia, once this regime passes the Senate, the least government can do to support SME directors is provide some free requisite training on director obligations and personal risks associated with non-compliance. This will not only allow the government to have covered the field but will also help a SME director who is in it for all good reasons and who is not forecasting a “phoenix activity”.
In addition, the proposed legislation poses a risk in family law matters. For example, where a spouse, generally a wife, may have been an unwitting director with no knowledge of how the business was run. There could also be significant exposure for a non-financial spouse if they are a director, particularly if they are not actively involved in the business and cannot access the business’s financial information. Independent taxation advice will play a critical role in these circumstances.
In anticipation of the legislation becoming effective, directors must mitigate the risk of non-compliance. It is important they also understand their obligations and re-educate their personnel so they understand their obligations. Directors need to reconsider the corporate governance structure and if an SME doesn’t have a set structure, they should put one in place. Practitioners can draw on this possibility to proactively support their clients to ensure the clients understand their obligations and understand compliance.
Although various industry practitioners share the sentiment that the measures within the combating illegal phoenixing bill are stringent, directors should still be aware of the proposed legislation’s potential effects.
*Keerti Sharma is a tax lawyer and assists taxpayers with Private Binding Ruling applications, share buy-back schemes, GIC remissions and a range of other ATO taxation disputes. She holds a Juris Doctor from Macquarie University and an undergraduate degree in Business. Prior to joining Waterhouse Lawyers, Keerti worked for a mid-tier law firm and has extensive litigation experience.