Another Tear in the Corporate Veil

The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2019, received Royal Assent on 17 February 2020 and extends the director penalty regime in Schedule 1 of the Taxation Administration Act 1953 (TAA) to make the directors of a company personally liable for the company’s unpaid GST, for GST instalment quarters that start after 1 April 2020.

The Act also deals with unpaid amounts relating to liabilities on luxury car tax (LCT) and wine equalisation tax (WET).

The Explanatory Memorandum released with the Act provides a helpful summary of the four (4) measures introduced to combat illegal phoenix activity.

The Memorandum identifies that typical of illegal phoenix activity is the stripping and disposition of assets from one company to another entity, with the objective and purpose of defeating the company’s creditors.

Such a transaction may be voidable if it is found to be a creditor defeating disposition and is made when the company is insolvent or because of the disposition the company becomes insolvent or enters external administration within the following 12 months.

Generally speaking, company directors have a statutory obligation to ensure that the company pays PAYG withholding amounts, Superannuation Guarantee Contribution liabilities, and GST liabilities to the Commissioner. If a company is unable to meet any of those obligations there is a positive duty on the directors to promptly place the company into voluntary administration or liquidation, so as to protect the interests of creditors.

Directors who fail to discharge their duty by not ensuring that the company meets its tax liabilities become personally liable for an amount equal to the company’s unpaid liability. The Commissioner for Taxation can only seek to recover as against those directors after the Commissioner has issued and served a Director Penalty Notice.

New directors that are appointed after the due date of liability become liable for the penalty if the obligation remains unsatisfied for 30 days after their appointment. Where a company has multiple directors, the Commissioner may commence action against any or all of the directors to recover the unpaid amounts.

Further, a former director remains liable for director penalties equal to the company’s unpaid GST liabilities that fell due either on or before the date of resignation or after the date of resignation in circumstances where the relevant tax period ended before their resignation.

Section 269-35 of the TAA sets out some possible defences that a director may seek to claim and rely on.