Ten Tips to Minimise Risk for Directors
Ten Tips for all Directors on how to minimise your risk of being personally liable for company debts The ATO have ever increasing powers and right now the they are increasing its use of Director Penalty Notices (DPNs) for unpaid PAYG tax and superannuation debts. The ATO have adopted this strategy since the new laws were passed in July 2012. It is predicted by Irish Bentley Lawyers that DPNs will become one of the ATO’s main collection tools. Directors of companies with arrears need to take prompt action to avoid or mitigate personal liability and should:
1. Be Proactive, not reactive
2. Conduct due diligence to ascertain the PAYG and superannuation liability position before accepting the office of Director. New directors can be deemed liable for debts incurred before their appointment after as little as 14 days (according to a decision handed down by the Supreme Court).
3. As the consequences of delay can be irreversible, act quickly and proactively. The legislation surrounding taxation law and insolvency law contains many “deeming” provisions. Do not delay in getting advice to take steps to minimise your personal liability, or rescue the company.
4. Ensure your ASIC details are up to date to provide an address for service that is monitored by a professional. DPNs and other notices only need to be posted to the address listed with ASIC and it is not enough to prove you did not receive it.
5. Get Director’s Insurance. Insurance is available to limit the exposure. Talk to your lawyer or insurance broker about your insurance options. In doing so, consider getting a second opinion.
6. Consider a payment plan and get advice on whether you should seek for the remission of GIC and penalties.
7. Seek advice as soon as possible. Taxpayers and directors seek advice when it is too late because they do not understand the consequences that flow from late reporting, delay, or the fact that statements made to the ATO can be used as evidence against them. The ATO do not take notes of every discussion you have with them, so always be very careful if tax and superannuation debts cannot be paid then specialist advice should be sought immediately and can save you significant money and avoid prosecutions. Disclosures made to the ATO should be carefully framed so as to avoid potential exposures for insolvent trading. Directors are automatically personally liable for PAYG and superannuation contribution liabilities that are unpaid and unreported for three months. The personal liability accrues irrespective of the ATO issuing a DPN. The DPN just crystallises the date the personal liability is to be paid. You may be able to avoid personal liability if you act quickly so you must seek advice on the DAY that you receive the DPN. If in doubt, get advice because the consequences of delay can be irreversible. Directors can be called on to repay the ATO for payments clawed back by liquidators for unfair preferences. Please note that advisors are at risk of a claim from their clients if they don’t inform them of the director’s statutory indemnity to the ATO under section 588FGA of the Corporations Act.
8. Borrow money to pay the tax debts via a loan dedicated to paying the tax debt. It is (generally) better to borrow money elsewhere to pay tax debt, than to pay the general interest charge. Any interest paid on a loan taken to pay tax, is also deductible, so ensure the loan is stand alone to simplify the deduction.
9. Report on time. Ensure that you lodge the company BAS forms and Superannuation Guarantee Charge Statements on time. Do this even if you cannot pay them. This protects the directors from personal liability.
10. Consider your other options under the insolvency sections of the Corporations Act. If your cash flow situation seems hopeless because the debts have climbed too high, then there are provisions set out in the Corporations Act which can be utilised to rescue your business and company by reaching a suitable arrangement with creditors. There are options other than liquidation. You should seek help from an insolvency practitioner who also has experience in tax matters as they understand how to negotiate with the ATO during any creditors’ meeting, and they understand the policy considerations that need to be satisfied. The Australian insolvency laws are built around the theory that it is better to rescue a business, then to destroy it, due to the investment in goodwill, business systems and the desire to keep the company employees employed. Where possible these provisions should be utilised and you should seek advice from an experienced insolvency practitioner about your options.