Directors facing personal liability for company GST liabilities; a summary of proposed reforms to Corporations and Tax Laws

As part of its 2018-19 Budget, the Federal Government proposes to battle illegal phoenix activity through reforms to the corporations and tax laws. Part of the Government's proposals may also improve its collection of companies' GST liabilities via directors potentially becoming personally liable to pay their companies' GST liabilities.

If the Government's proposals become law, accountants will need to be cautious when advising their corporate clients on strict compliance with GST reporting and payment obligations. It is certainly getting tougher and tougher to be a company director.

Current director penalty regime

Very simply put, the current director penalty regime allows the Commissioner of Taxation to make directors of companies, in certain circumstances, personally liable to pay the Commissioner:

(a) PAYG withholding amounts;
(b) superannuation guarantee charges; and
(c) estimates of (a) and (b) above.

The Commissioner has a concern that companies that are not complying with their GST reporting obligations are able to undercut prices in their respective markets knowing that they do not intend to pay the GST collected to the Commissioner. The companies are then liquidated with the scheme participants moving on to new companies to repeat the process.

Excessive input tax credit refunds

Further, the Commissioner is concerned that illegal phoenix activity schemes are allowing companies to claim excessive input tax credit refunds. By the time the Commissioner amends the relevant GST assessments and pursues the debts, the scheme participants have illegally moved the businesses and assets of the companies to new companies, leaving the liabilities of the original companies behind and the GST debts uncollectable.

Director penalties

Among other changes designed to defeat such illegal phoenix activity, the Government proposes to expand the director penalty regime to allow the Commissioner to impose director penalties in relation to a companies' unsatisfied liabilities to pay assessed net amounts under the GST legislation. If a company cannot pay the GST itself by the due date, its directors will be left with the choice of placing the company into administration or beginning a winding up of the company, or otherwise face the prospect of having personal liability for the GST imposed on them by the Commissioner. A stark choice!

Company directors are well advised to monitor the development of the Government's agenda to combat illegal phoenix activity and, if the proposed changes become law, ensure that systems are in place for their companies to strictly comply with GST reporting and payment obligations.

For the sake of brevity, the Government's proposed changes are only summarised here. This article is not a complete account of those changes. This article is not a substitute for fully informed legal and accounting advice, and readers should consult with their accountants and/or lawyers for a more fulsome outline of the Government's proposed law changes to deal with illegal phoenix activity.