There has been a lot of press recently on the Phoenixing of companies, and dodgy directors rebirthing companies to avoiding taxes.
Remember the old days, when you incorporated a company and were safe in the knowledge that your personal assets were less at risk. Well that has just changed, with the introduction of the Combatting illegal phoenixing bill.
Key Insights
According to ASIC, Illegal phoenix activity is where a new company is created to continue the business of an existing company that has been deliberately liquidated to avoid paying outstanding debts, including taxes, creditors and employee entitlements.
The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 received assent on 17 February 2020. The legislation includes a range of measures targeting illegal phoenixing including penalties for directors related to GST liabilities (making directors personally liable for unpaid GST if the unpaid liability is not paid within 21 days of a director penalty notice being issued) and retaining tax refunds.
The bill’s aim is to combat phoenixing by opportunistic, systematic directors where the directors are involved in such activities as moving assets from one company to another. However there is a risk that it goes beyond its intended target and may capture companies that are legitimately wound-up because of trading difficulties. Whilst 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 when their business is genuinely failing.
What it means for you
– all taxes, can be the subject of a director penalty notice — in other words, shifting those tax liabilities from a company to an individual.
– the ATO can now collect estimates of anticipated GST liabilities and make company directors personally liable for their company’s GST liabilities in certain circumstances
– as well as directors possibly facing personal liability, the options available to the ATO under its director penalty regime includes garnishee proceedings to recover amounts owed, offsetting amounts owed against any other tax credits, and initiating legal recovery proceedings. Before any of such actions are taken, the ATO is obliged to issue a “director penalty notice” outlining the unpaid amounts and remission options open to the concerned directors.
– the ATO will be able to issue notices of estimated net amounts of GST to businesses that have not lodged a return. The estimation will then be due at the GST lodgement due date unless this is over-ridden by an actual GST amount through the lodgement of the overdue return. Estimates may be reduced if sworn statements are provided, although there may be some discretion in this area.
As with the other categories of director penalties, the penalty arises when the director’s obligation is unsatisfied on the due date, in this case, the day the company is required to pay the assessed net amount or GST instalment. The legislation also adds an ability for the ATO to retain tax refunds if a return is not lodged or other relevant information is not provided.
This legislation highlights the need to plan early if you are having difficulties paying your ATO debts. Obtaining tax advice will play a critical role in these circumstances.
