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Financial management: Directors fear crackdown

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Cite as: Cite as: March 2012 86 (03) LIJ, p.74

Draft legislation curbing phoenix activity and extending director penalty notices has been put on hold.

The federal government announced measures as part of its 2011 Budget to counter and deter what it deemed “fraudulent phoenix activities”.

These activities relate to directors intentionally accumulating debts with creditors and then, at some point, transferring the company’s assets and business, often at less than market value, to a related entity. The directors then liquidate the “old” company. By the time a liquidator is appointed there are often no assets left to pay those debts. The most common debts avoided relate to tax and superannuation entitlements. By creating a new company, the same business continues free from the existing debt burden to statutory authorities.

The Australian Taxation Office (ATO) has estimated there are approximately 6000 companies in Australia which have been through a phoenix process. The government estimates the proposed legislative changes would result in an increase in revenue in excess of $200 million.

The government introduced the Tax Laws Amendment (2011 Measures No. 8) Bill into Parliament on 13 October 2011.

The proposed legislation (in part) aims to achieve the following:

  • Extend the director penalty notice (DPN) regime to make directors personally liable for their company’s failure to meet employee superannuation entitlements. At this stage, the DPN regime covers, in the main, outstanding PAYG withholding tax but excludes GST, superannuation entitlements and income tax.
  • Allow the ATO to pursue directors personally without issuing a DPN, where the company’s unpaid PAYG withholding or superannuation guarantee liability remains unpaid and unreported for three months after the due date. (This is a significant change as it will impose a personal liability on a director even if they have not been served with a notice requesting payment. The onus of responsibility is effectively shifted to a director rather than on the ATO. The Taxation Administration Act currently requires the issue and expiration of a 21-day DPN before a crystallisation of a personal liability on a director. It is anticipated that the proposed changes would not necessarily negate the use of a DPN as it is likely to remain the primary mechanism in crystallising a director’s personal liability.)
  • Deny directors (and their associates) their entitlement to PAYG withholding credits where their company has failed to remit PAYG withholding amounts to the ATO.

On the introduction of the Bill, Parliament resolved to have a House Economics Standing Committee review the Bill and seek submissions regarding any perceived impact of the proposed legislation.

The committee started its inquiry into the Bill on 19 October 2011 and held a public hearing on 27 October 2011. There were a number of submissions lodged and concerns raised as part of the public hearing. Predominant was the concern whether the proposed changes would prejudice innocent company directors who do not deliberately rort the system.

As a consequence of the raised concerns, the Bill has been put on hold. The committee has reported that while it generally supports the “phoenix amendments” in the proposed Bill, it also accepts that:

“. . . directors who act in good faith should have some comfort that they will not be subject to the provisions. The committee recommended that the government investigate whether the Bills should specifically target phoenix operators and whether the defences in the Bill should be expanded. Because of the work involved the committee has recommended that schedule 3 of the Tax Laws Amendment (2011 Measures No. 8) Bill 2011, which contains the phoenixing provisions, should be deleted so that the remainder of the Bill may pass. The Pay As You Go Withholding Non-Compliance Tax Bill 2011 should remain pending while the Government completes its investigations”.

The committee is expected to release its report in early 2012.




DAVID VASUDEVAN is a partner in Pitcher Partners Business Recovery and Insolvency Services division in Melbourne. He can be contacted at ph 8610 5542 or david.vasudevan@pitcher.com.au.

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