Indian Tax Solution

Company directors will soon be liable for unpaid GST: A guide to managing your obligations

From April 1, 2020, Australian company directors will be personally liable for their company's unpaid goods and services tax, including luxury car tax and wine equalisation tax.

This is a worrying extension to the director penalty notice (DPN) regime, the original intent of which was to protect employee entitlements (such as PAYG withholding and superannuation guarantee) rather than general revenue collection.

Under the new measures, if you were a company director on the last day of a tax period or GST instalment quarter, you will become personally liable for any GST that remains unpaid by the date the net amount or GST instalment is payable.

New directors will have a 30-day grace period from the date of their appointment to ensure the company pays the debt, or appoints an administrator or liquidator.

The extension of the DPN regime to GST liabilities will affect many small and medium businesses, and particularly startups that may have cashflow issues.

However, there are steps that you can take to in order to minimise your risk to exposure as a company director.

Step 1: Review your GST compliance

As a director, you need to be actively involved in ensuring that your company is correctly reporting and complying with its GST obligations, including retaining tax invoices.

It is recommended you review your company's accounting systems to ensure all transactions are being accurately coded and recorded; one simple coding error may trigger a substantial GST liability. Similarly, you should ensure transactions are being correctly classified, as incorrect classifications may result in systemic errors.

If you are unsure as to how GST applies to an arrangement, consider obtaining specialist tax advice. Even if the Australian Taxation Office disagrees with the position taken, the fact you obtained advice will work to establish the defence that you applied the law in a way that is reasonably arguable, and in doing so, you took reasonable care.

Step 2: Disclose any unpaid GST to the ATO

If, prior to April 1, 2020, you identify your company has unpaid GST liabilities, you should arrange for the payment of those liabilities with the ATO. While a payment arrangement is in place, the ATO will not seek to recover the penalty from you personally.

If the funds to pay the GST are not available, you may consider appointing an administrator or a liquidator in order to avoid triggering your personal liability.

Step 3: Lodge all Business Activity Statements on time

The most important takeaway is to ensure that all BAS are lodged with the ATO on time - even if payment of the net amount is not made. This will ensure that you can achieve remission of the penalty by subsequently appointing an administrator or liquidator to the company.

If your company's GST liability is not reported to the ATO within three months after the due day, your penalty is 'locked down' and the only way you can satisfy your personal liability is by paying the penalty - a position you do not want to be in.

What if I get issued with a DPN?

The statutory defences to a DPN are extremely narrow and rarely successful. However, if your company has a GST debt and you believe one of the defences applies, you may consider raising this defence with the ATO through its early engagement process.

The defences are briefly as follows:

Because of illness or for some other good reason, it would have been unreasonable to expect the director to take part in the management of the company at any time. This requires that the director is incapacitated during the whole period of directorship; The director took all reasonable steps to ensure the company complied with its obligations, or was placed in administration or wound up (or no reasonable steps could have been taken). This defence will fail if the director has relied on others to manage the company's financial affairs, without making further inquiries; or The company treated the GST legislation as applying in a way that was reasonably arguable and took reasonable care in applying the legislation to that matter.

The way forward

The wider DPN regime will require you to have a strong grasp of your company's GST reporting regime and ensure you meet BAS lodgement deadlines. You must be actively involved in your company's overall GST compliance to mitigate the risk of triggering your personal liability to unpaid GST debts.

If you are considering taking on a new directorship, proceed with caution and conduct a thorough due diligence on the company's tax compliance history to avoid the potential situation of being hit with a DPN 30 days after your appointment.

If you are issued with a lock-down DPN under which you make payments to the ATO, ensure you give the ATO explicit instructions as to the allocation of each payment that is intended to offset your liability under the DPN. The ATO may otherwise allocate the payments to other unrelated debts of your company. Consequently, you may be left not only out-of-pocket, but also with your DPN still in place.

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