The current director penalty regime allows the Commissioner to recover unpaid superannuation guarantee (SG) charge, PAYG withholding for directors of a company.
From 1 April 2020, this regime has been extended to allow the Commissioner to recover from directors unpaid amounts of;
- a company’s liability to pay net amounts of GST for a tax period (assessed GST);
- estimated GST;
- Instalments of GST; and
- Luxury car tax (LCT) & wine equalisation tax (WET).
The changes allow the Commissioner to make an estimate of the company’s net GST liability on their BAS. If this is done and a Director Penalty Notice (DPN) is issued, the director has 21 days to ensure the amount is dealt with, otherwise, the director will become personally liable.
The penalty can be remitted where the director complies with the obligation either before the DPN is issued or within 21 days of the notice being issued. However, where a company fails to lodge a BAS within three months of the lodgement due date the directors of this company may receive a lockdown DPN penalty notice requesting that the estimated GST liability to be paid by the directors personally. In these circumstances, the Commissioner has no discretion to remit the penalty and it is “locked down” in whole or part.
This means the directors are automatically liable to the ATO for the unpaid GST and will not be entitled to remittance of a DPN penalty if the company then goes into liquidation.
The following is a condensed view of the impact and possible actions directors can take to mitigate their personal risk:
- Be able demonstrate that the company has documented risk mitigation procedures and that these are followed – e.g. ensure the company’s Tax Risk Management & Governance (TRMG) policy is signed off and regularly reviewed;
- Directors to ensure that the companies they run pay their GST debts;
- Directors need to ensure ongoing compliance through appropriate internal controls and procedures; e.g. regularly review and check either internally or engage external reviews; and
- Ensure external GST advice is sought on significant and new business transactions – in particular transactions which no GST is payable (e.g. the sale of a business or property as a GST-free going concern). For these transactions, it would be prudent to ensure that a RAP opinion is on file to act as a defence. For certainty, obtaining a GST private ruling from the ATO confirming that the transaction is GST-free will protect a Director.
Company directors are obligated to ensure that the companies they run pay their tax debts or, if that is not possible, to promptly appoint a voluntary administrator / liquidator to the company.
With the extension of the DPN regime making directors personally liable for unpaid superannuation, PAYG, GST, LCT and WET, directors need to ensure the companies they operate have robust compliance systems in place – particularly for material /abnormal transactions.
If you would like assistance in conducting a GST systems health check on your client’s company, please contact Mimi Ngo. We also have considerable experience in documenting ATO compliant GST risk mitigation procedures and testing against those procedures.