The Budget war on phoenix activity – DPN liability of directors will extend to unpaid GST liabilities of their companies (but which GST liabilities?)

Phoenixing property developers, were a sufficient problem, that Parliament recently legislated a regime that requires purchasers, of certain types of real property, to withhold a GST amount, from the purchase price, and remit it to the ATO. (This applies to certain problem areas: ‘new residential premises’ and ‘potential residential land’ – under new s14-250 of the TAA1.)

In a similar vein, the Government announced, in the Budget, last week, that the corporations, and tax, laws will be reformed, to provide regulators with additional tools, to assist them, deter and disrupt, illegal phoenix activity (see related TT ‘Budget (Phoenix) Measures‘ article).

The Budget package includes the following matters, that impact GST:

• extending the Director Penalty Regime (DPR) to GST (and luxury car tax and wine equalisation tax) – making directors personally liable for the company’s debts;
• expanding the ATO’s power to retain refunds where there are outstanding tax lodgements.

The Budget is short on detail, but these reforms will likely have a significant impact on the way directors view their company’s GST liabilities.

The scope of GST liabilities to be covered by the expanded DPN regime

The scope of the GST liabilities, to be covered by the expanded DPN regime, is not clear.

1. For instance, it may only apply to GST withholding amounts, that purchaser companies should have paid, to the ATO, but have failed to pay (see the s14-250 withholding regime described above).
2. It might apply to the equivalent range of property sales (covered by purchaser withholding) but on the vendor company’s own GST liability. The idea might be to make sure that collection, on this rage of property transactions, is buttressed on both vendor and purchaser sides of the transactions.
3. It may also apply to all unpaid GST liability, of all companies (which would be a breathtaking expansion, of directors’ liability, for their companies tax debts).

The DPN regime 

The DPN regime makes directors, of companies, liable for various of their companies’ tax liabilities (see Div 269 of the TAA1).

• This started off applying only to amounts withheld from the wages of a company’s employees, under the PAYG system, or purportedly withheld (under s12-35 of the TAA1), that were not remitted to the Commissioner. This was relatively simple, as the  director was only liable, when the company had withheld from wages, and then failed to remit these amounts.
• Directors also became liable for similar PAYG obligations, that their company had not paid (that is, for ‘alienated services income’, for ‘non-cash benefits’ and for recoverable estimates of these PAYGw amounts, under Div 268 of the TAA1).
• But things got more complicated, when the DPN regime was extended, to Superannuation Guarantee Charge amounts, that the company hadn’t paid (which was in 2012, under Act No. 99 of 2012 – items 48 to 57). I say complicated, as this extended directors’ liability, to amounts that depended on the complexities of SGC law (and not simply whether PAYG had been withheld from wages, and was unremitted). There was some amelioration, of this new exposure, by the legislature giving directors a new defence (for this SGC liability). Directors would have a defence (and not be liable), if it was ‘reasonably arguable’ that the SGC laws applied, in such a way, that the Company did not have the SGC liability (s269-35(3A) of the TAA1). For these purposes, ‘reasonably arguable’ has the same meaning, as in s284-15 of the TAA1:  that is, the SGC law applied, in a way that was about ‘as likely as not’, to be correct.

Extension of the DPN regime to GST (an SGC style defence, at least…)

I would hope that a similar ‘reasonably arguable’ defence, will be available to directors, for their companies’ GST liability. Otherwise, the directors’ exposure would be little more than asking directors to guarantee their company’s GST liability (which is not the way DPNs have ever worked).

The position in other countries